Supreme Infrastructure - Initiation - Centrum

Initiating Coverage

Supreme Infrastructure

Buy

Target Price: Rs373

CMP: Rs198

Upside: 87.9%

Growth in the offing

Supreme Infrastructure (Supreme) is an integrated and diversified EPC player present across segments and geographies. It has established itself as a leading BOT player with total projects worth Rs43.7bn spanning over 1,810 lane km (currently 4 operating projects spanning over 720 lane km and project investment of Rs10.6bn). Further inroads into the BOT segment has become easier with equity commitment from private equity 3i Capital which is committed to invest over Rs3.06bn in Supreme’s four BOT projects. In the Union Budget 2013-14 it was announced that during H1FY14 over 3,000km of new road projects will be awarded and Supreme, with its freed up capital is well placed to capitalise on this opportunity. The EPC segment which enjoys above industry margins due to backward integration is likely to support earnings with order book of over Rs54.4bn catering to segments like buildings, bridges, roads (both BOT and cash contracts), water and power (earnings CAGR of 39.8% over FY12-15E). Additionally, toll revenues are expected to rise with five BOT projects likely to be operational during FY14-15E. We like Supreme due to its integrated business model in EPC, diversified order book, BOT concentration in high traffic density states (Maharashtra, Punjab) and availability of growth capital with equity infusion by 3i Capital. We initiate coverage on the stock with a ‘Buy’ rating and target price of Rs373.

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m  Superior margin profile: Supreme’s operating margins in the EPC business have been superior to the industry average due to backward integration (own quarries) and robust project management bandwidth. The company’s cluster led execution leads to garnering of more projects in the vicinity of its own quarries which helps it earn EBITDA margins of about 16-18% across segments vs. peer EBITDA margins of about 8-10%.

m  3i fund infusion frees up growth capital: Recently 3i Capital committed equity infusion of over Rs3.06bn in four of Supreme’s BOT projects valuing the portfolio at 1.2x P/BV. This equity infusion will free up Supreme’s capital which can be eventually utilised for bidding of upcoming projects.

m  Diversified EPC order book: Supreme’s current order book at Rs54.4bn is diversified across geographies with a mix of NHAI and state government orders. The existing order book, executable over the next couple of years provides strong revenue visibility.

m  Strong BOT portfolio: Of the total 10 BOT projects, four are currently operational and five under execution which will be operational in FY14-15E thus providing visibility on toll revenues.

m  Valuations: The company is set to clock a revenue CAGR of 24.3% over FY12-15E and with additional liquidity at hand (due to 3i Capital infusion), it will be able to bid for more BOT projects. Additionally, toll revenues will start contributing meaningfully from FY14E from the recently started Manor-Wada-Bhiwandi BOT. We have valued Supreme on SOTP basis with the EPC segment at 4.0x EV/EBITDA, BOT operational with NPV and non-operational & investments at P/BV resp. Based on our estimates, we have arrived at a value of Rs373/share and recommend ‘Buy’ on the stock.

Thanks & Regards, 

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