Supreme Infrastructure - In Deep Value Zone; Initiating Coverage :: Edelweiss

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Supreme Infrastructure (SPII IN, INR 266, Buy) Supreme Infrastructure (SPII), an integrated infrastructure player, has delivered robust revenue and PAT CAGR of 41% and 27%, respectively, over FY09-14, underpinned by its derisked business strategy. Prudent backward integration and a cluster-based execution model have been propelling the company’s profitability. Moreover, it also boasts of a robust portfolio of 11 BOT projects, majority of which are either operational or nearing completion. These projects’ strategic location and a long residual life ensure sustained value creation. Though the mounting debt has impacted profitability, we anticipate healthy order book, diversified operations and a robust BOT portfolio to facilitate sharp recovery in FY16. Initiate coverage with ‘BUY’ and a SOTP-based target price of INR502. EPC business well placed to overcome short-term hiccup SPII’s order book at Q2FY15 end (including L1 orders) stood at ~INR53bn, 2.5x TTM revenues, imparting healthy medium-term revenue visibility. The company’s backward integration along with cluster-based execution model will sustain the strong operating margin and return ratios. While working capital issues have impacted execution in the short term, we anticipate revenue and profitability to catapult going ahead with PAT surging 4x over FY15-17E. BOT portfolio gaining critical mass Of SPII’s 11 BOT projects, while 4 are already operational, 6 will be completed over the next year. These projects, situated on heavy traffic density stretches, ensure strong future growth. For e.g., while 2 projects are vital conduits for North-South traffic, 2 others connect major roads like NH-8 (Delhi-Mumbai) and NH-3 (Mumbai-Indore). Outlook and valuations: Strong value proposition; initiate with ‘BUY’ We have valued SPII’s EPC business at INR243 (5x FY17E P/E; at 30% discount to other construction companies). BOT assets, adjusted for debt for equity infusion, have been valued at INR259 based on DCF valuation. Our SOTP value comes to INR502. We believe completion of BOT projects will trigger rerating of the EPC business along with value discovery of BOT business. We initiate coverage with ‘BUY’ recommendation.

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