IDBI capital says buy Simplex Infrastructures

Simplex Infrastructures Ltd. (SINF) is expected to report 15% revenue growth in FY11 (-5% in
FY10), led by revival in domestic order inflows. With operating and financial leverage kicking in,
earnings growth is expected to come higher at 26%. We expect foreign order flows to pick-up in
H2FY11, resulting in a higher 23%/28% growth in revenue/earnings for FY12. Focused approach on
construction business and highest earnings CAGR (27%) over FY10-12E, makes SINF our top pick
in the construction sector. Initiate coverage with a BUY rating.
Investment Highlights
􀂄 Order inflow back on track; we expect 19% CAGR in revenue over FY10-12E
Due to muted order inflows, SINF's order backlog remained stagnant at ~Rs100 bn for 7 quarters till
Q3FY10. However, SINF witnessed an average order inflow of Rs20 bn in the last two quarters, taking the
order backlog position to Rs123 bn at Q1FY11-end or 2.7x TTM revenue. We expect SINF to report 19%
revenue CAGR on the back of 18% CAGR in order backlog over the next 2 years.
􀂄 EBITDA margins stable at 9.8% in FY11/12; PAT CAGR of 27%
We have assumed an EBITDA margin of 9.8% in FY11/12E, compared to 9.7% in FY10. As a result, we
expect an EBITDA CAGR of over 19% in next 2 years. However, earnings growth is expected to come
higher at 26% CAGR led by higher asset utilization (lower depreciation).
􀂄 Conservative approach to BOT; pure construction player with diversified presence
Unlike peers who have taken substantial exposure to BOT projects in the last 5 years, SINF continues to
remain a pure play on the civil construction business. Instead of following the BOT bandwagon, SINF has
diversified its operations to 9 verticals currently, compared to just 3 verticals in 2001. In FY10, the maximum
contribution to the topline/order backlog came from power segment at 23%/27%.
􀂄 Superior working capital management; positive operational cash flows
Over the last five years (FY06-FY10), SINF's net working capital has averaged 28% of sales, compared
to 36-47% for its peers. Due to superior working capital management, the company has been able to
generate positive operating cash flow in the last three years, a trend we expect to continue over our
forecast horizon.
􀂄 Premium to sustain; Recommend BUY
At the CMP of Rs470, SINF is trading at 15.0x/11.7x our estimated FY11/12 EPS. SINF has historically
traded at a premium to other construction companies like HCC, NJCC and IVRCL due to its (1) focused
approach on construction business (2) diversified order book (3) superior working capital management
and (4) higher return ratios. In the last 4 years, SINF has traded at a median P/E multiple of 18x. We value
the company at 15x FY12E to arrive at a target price of Rs602 per share. SINF is our top-pick in the
construction sector.