Simplex Infra􀂃 Interest drags down profits 􀂃 BNP Paribas

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Interest drags down profits
􀂃 Revenue increases 7% y-y, EBITDA flat y-y
􀂃 EBITDA margin 70bps lower y-y due to revenue mix
􀂃 Interest costs hurt profitability, working capital concerns remain
􀂃 Revisit TP and estimates after incorporating 1QFY12 results
1QFY12 results
Revenue increased 7% y-y in 1QFY12
while EBITDA was flat due to a 70bps
decline in EBITDA margin. The lower
margin was due to a timing issue; certain
projects that began during the quarter did
not reach the margin contribution stage.
Interest expense (excluding finance
charges) increased 91% y-y and 43% q-q,
driven primarily by an increase in interest
rates, as debt increased only 4% q-q.
Consequently, net profit of INR241m was
down by 33% y-y and was 27% below our
estimate.
Outlook
The domestic franchise remained strong. Domestic sales increased 16%
y-y and contributed 90% to overall revenue. However, the international
business continued to drag down growth and reported a decline this
quarter. Management has guided for 10% revenue growth in FY12 with
EBITDA margin in the 10.0-10.5% range based on the current order
book. Management indicated that around 85% of all projects in the order
book are protected by price escalation clauses. The power segment was
the largest contributor to revenue (34%). We expect interest rates to be a
key determinant of profitability for FY12.
Valuation
We will revisit our TP and estimates after incorporating 1QFY12 results.
We arrive at our fair-value estimate of INR481 based on a SoTP
methodology. The core construction company contributes INR472 to our
fair value, based on 5.6x rolling 1-year forward EV/EBITDA (which is the
historically traded mean for the stock ex-peak cycle). Simplex’s 26%
stake in highway BOT contributes INR9 (on a DCF valuation) to our fair
value. Risks to our recommendation include: a slowdown in order inflows,
poor execution, further hardening of interest rates and an increase in
raw-material prices.