Sintex: Labour gains

In early 2000, when Sintex Industries made a small international acquisition in textiles, the management discovered that the huge labour-cost arbitrage advantage was working wonders. The Ahmedabad-headquartered company then decided to apply the same formula to its other business of specialised plastics (or composites). “Whatever applies to textiles should apply to composites as both are highly labour-intensive industries,” explains Amit Patel, Managing Director, Sintex Industries.

That logic has some merit, what with Sintex’s three international acquisitions and two back home in the composites space proving pretty successful. The only exception would be Geiger Technik of Germany in which Sintex picked up a minority stake—this transaction hasn’t yet been completed as the German firm has filed for bankruptcy. However, there’s little doubt that the contributions from the other acquisitions have been substantial.

Consider this: Till the mid-1990s, Sintex was mainly known for its overhead water tanks. The inorganic growth reflects well in the top-line, with almost a third of the consolidated revenues of Rs 2,200 crore in the first nine months of the current fiscal coming from international operations.

International acquisitions have helped the company in multiple ways. On the labour front, for instance, the company has been able to shave off 9-11 per cent in costs by shifting manufacturing to India—at the overseas locations these costs were in the 36-42 per cent range. Sintex is setting up a new facility in Chennai for Schneider Electric, a client of one of the acquired firms, Nief Plastics of France. The making of composite electrical accessories will be outsourced to this unit, courtesy of the Nief relationship.

Along with high-end customers, Sintex has also got a foothold into sectors it wasn’t present in before. With Nief in tow, for instance, Sintex now has a presence in electricals, automotives, aerospace and defence. Other benefits from the buyouts include access to ready technology and extensive distribution networks. 

The Buyout Edge Acquisitions: Wausaukee Composites, US (2007); Nief Plastics, France (2007); Nero Plastics (acquired by Wausaukee), US Price tag: $20.5 million, $58 million and $4.77 million, respectively Financing: Foreign currency convertible bonds and an equity issue Benefits derived: Low-cost outsourcing from India, access to OEMs for business Integration achieved: Part of manufacturing shifted to India

The glow of the overseas acquisitions is also beginning to show on profitability. Operating margins have increased to 12 per cent from 8-9 per cent that prevailed before Sintex bought these operations. “Our objective was to reach 16 per cent operating margin levels by 2009-end, but due to the downtrend in the US, this could not be done,” says Patel, referring to the purchase of Wausaukee Composites in the US. No such problems with Nief Pastics, though, what with operating margins expected to hit 12.5 per cent by December 2009, compared with 7.5-8 per cent at the time of acquisition.

The global recession, though, is leaving its mark on Sintex, particularly in the US. Patel doesn’t expect the situation to improve before 18 months. But with net profits rising by 55 per cent in the first nine months of the current fiscal and $300 million cash in the bank, Patel has less to worry than most other promoters.

— Virendra Verma