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SIMPLEX INFRASTRUCTURES
PRICE: RS.403
RECOMMENDATION: BUY
TARGET PRICE: RS.487
FY12E P/E: 9.9X
q Company is optimistic about the future order inflow scenario.
q Order booking from the domestic segment is likely to improve in coming
quarters while for international segment, things may remain subdued for
one more quarter
q We revise our FY11 estimates downwards to factor in lower than expected execution in FY11 while we upgrade our estimates for FY12 to
take into account improvement in order inflow and execution.
q We expect company to benefit from upcoming opportunities in both domestic and international segments. Due to decent upside from the current levels, we change our recommendation to BUY from ACCUMULATE
earlier with an unchanged price target of Rs 487 on FY12 estimates
We recently spoke to the management of Simplex Infra and present below
the key highlights about the company.
Order inflow scenario
Order inflow for Simplex Infra during H1FY11 stood at Rs 40.6 bn and L1 status of
the company stands at nearly Rs 12 bn. Though order inflow in the domestic segment has improved significantly, but traction has not been witnessed in the international order inflows. During Q2FY11, order inflow from the international segment
stood at just Rs 260 mn. Company expects one more lackluster quarter for the order
inflows from international segment. However it may improve from Q4FY11 onwards
which would be reflected more in the order book and revenues for FY12.
On domestic front, Simplex Infra has also recently bagged Rs 3 bn worth transmission project in consortium with Patel engineering and BS Transcomm. This project
would enhance company’s presence in power transmission space going forward.
Current order book of the company stands at nearly Rs 129.6 bn diversified across
buildings and housing (20%), bridges (10%), industrial (17%), marine (3%), piling
(5%), power (25%), railways and roads (6%), and urban infrastructure (14%). Out
of the total order book, overseas order book stands at Rs 22.9 bn and Rs 106.7 bn
from the domestic markets.
Thus due to lower than expected order inflows from the international segment and
delays in domestic order book execution, we reduce our estimates for FY11. We
now expect an order inflow of Rs 72 bn for FY11 as against earlier expectation of Rs
84 bn for FY11. This translates into a revenue growth of 15% for FY11. However,
we expect an improvement in FY12 and expect revenues to grow by 20% in FY12.
Status of key large projects
Bhubaneshwar to Chandikol road BOT project - Srei-Simplex-Gulfar consortium
has been awarded a project for 6 laning of existing 4-lane toll stretch of 67 km from
Bhubaneshwar to Chandikol on NH-5 with a project cost of nearly Rs 13 bn. Simplex
Infra would have a 26% stake in this project and EPC work of nearly Rs 11 bn would
be done by Simplex Infra. Financial closure for this project is expected by end of this
month.
Revenue growth in Q2FY11 was impacted due to lower than expected revenue
booking in couple of projects. Company expects to overcome this shortfall in the
coming quarters. For Mumbai Metro project worth nearly Rs 4 bn, nearly 50% of the
project has already been executed, remaining is expected to get over in next 4 quarters. Lalbaug project is nearing completion while scope of work for Eastern freeway
project has been extended so completion time has been increased by 6 months.
Execution from power projects in Chattisgarh and Madhya Pradesh, which was impacted by extended monsoon, is expected to increase going forward.
Working capital cycle to improve going forward but may remain
higher than the FY10 levels
Working capital cycle of the company had witnessed an increase during Q2FY11 as
compared to Q2FY10 primarily due to higher order inflows in the domestic segment
as compared to overseas where customer advances are typically lower. Along with
this, inventories have witnessed an increase due to commencement of projects in
Bangladesh and Ethiopia where billing is yet to be done. Going forward, we expect
working capital cycle to come down with reduction in inventories and improvement
in billing from the clients. However, with higher proportion of domestic order inflows, we believe that working capital cycle may remain higher than the FY10 levels.
Financial outlook
n We reduce our order inflow and execution estimates for FY11. Current order
book and expected order inflows in the coming quarters are likely to aid revenue
growth for FY12 and going forward.
n Simplex infra has a diversified order book mix and has variable pricing contracts
in place. We thus continue to maintain our estimates and expect margins to be
9.8% going forward.
n Post fine tuning our estimates, we expect net profits to grow at a CAGR of 28%
between FY10-FY12.
Valuation and recommendation
n At current price of Rs 403, stock is trading at 13.3x and 9.9x P/E and 6.4x and
5.4x EV/EBITDA multiples for FY11 and FY12 estimates respectively.
n We expect company to benefit from expected improvement in the order inflow
as well as revenue execution going forward. Revenue growth is expected to witness an improvement in FY12.
n Due to decent upside from the current levels, we change our recommendation to
BUY from ACCUMULATE earlier.
n Key risks to our recommendation would be lower than expected order inflow or
execution, sharp increase in commodity prices or higher than expected working
capital requirements.
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