India | Infrastructure 15 February 2011

Quartrely Update/Target price/Rating changed 

 

Simplex Infrastructures
Closer to turn around Rating : Buy
Execution in line, but lower OPMs drag profitability Target Price : INR416
SIL reported an encouraging 9.4% rise in YoY revenues to INR11.7bn in Upside : 24%
Q3FY11. The YoY decline in revenues from overseas projects was CMP : INR335 (as on 14 February 2011)
Global Markets Research

further curtailed down to ~46% to INR1.4bn. Even though the OPMs

Key data*
expanded marginally by 14bps YoY, they were below our expectations
Bloomberg /Reuters Code SINF IN/SINF.BO
of 9.9% owing majorly to ~11% rise in cost of materials. Consequently,
Current /Dil. Shares O/S (mn) 49.5/49.5
operating profits for the period rose only by 11% YoY to ~INR1.1bn. Mkt Cap (INRbn/US$mn) 16.6/365
Despite a reasonable operating performance, net profits were flat at Daily Vol. (3M NSE Avg.) 43,674
INR232mn due to higher interest charges at INR362mn, +38.2% YoY Face Value (INR) 2
(rise in borrowing cost by 110bps during Q3FY11). 1 US$= INR45.4
Source: Bloomberg ; * As on 14 February 2011
Order backlog improves further, bags fresh jobs worth INR30bn
The order backlog as of Jan’11 stood at ~INR148bn (3.1x FY11E Price & volumes
revenues) excluding the potential L1 positions across new jobs worth
550 2,500
INR19.4bn. The company has a bid pipeline for works worth INR440bn
500 2,000
(including overseas bids) - clarity on which should emerge in
450 1,500
subsequent quarters. With the private sector capex gaining
400 1,000
momentum, we expect SIL to easily meet our FY11 order inflow target
350 500
of INR80.9bn (bagged INR67bn worth new jobs YTD).
300 0
Upgrade to ‘Buy’ buoyed by execution pick up, growth prospects Feb-10 Jun-10 Oct-10 Feb-11
Vol. in '000 (RHS) SIL (LHS)
Despite the disappointment on the earnings front, we derive a higher
Source: Bloomberg
level of comfort from the marked pick up in execution across SIL’s
operations in the domestic (+28% YoY) and fast recovering foreign Share holding (%) Q4FY10 Q1FY11 Q2FY11 Q3FY11

arena (YoY revenue decline at 46% from 53%). We, however, maintain Promoter 54.7 54.7 54.7 54.7

our conservative earnings estimates for FY11 and FY12 despite the Institutional Investors 31.7 32.6 32.7 33.0

management’s guidance of 20-25% YoY growth for FY12. Other Investors 7.4 7.4 7.4 7.3
General Public 6.2 5.2 5.2 5.0
We strongly believe that SIL's present stock price is largely undervalued Source: BSE
and does not capture the fair value of its extensive execution
Price performance (%) 3M 6M 12M
capabilities and new business initiatives. A well diversified order book,
Sensex (9.7) 0.2 12.7
state of the art equipment base and a dedicated employee base offer Simplex Infra (28.1) (30.6) (23.2)
clear predictability of revenues over the next couple of years. Upgrade Era Infra (16.0) (15.6) (6.1)
to ‘Buy’. CCCL (25.4) (37.3) (39.6)
Source: Bloomberg

Y/E Mar (INR mn) Q3FY11 Q2FY11 Q3FY10 QoQ (%) YoY(%) 9MFY11
Net Sales 11,667 10,515 10,668 11.0 9.4 33,949
Operating Expenses 10,591 9,458 9,699 12.0 9.2 30,616
% of Sales 90.8 89.9 90.9 90.2
EBITDA 1,076 1,057 969 1.7 11.0 3,334
EBITDA Margins (%) 9.2 10.1 9.1 (84)bps 14bps 9.8
Other Income (Net) 31 34 44 (8.7) (29.8) 73
Interest 362 295 262 22.6 38.2 939
Depreciation 402 400 391 0.6 2.8 1,192
PBT 342 396 359 (13.6) (4.8) 1,276
Tax 110 127 129 (13.4) (14.4) 414
Effective Tax Rate (%) 32.2 32.1 35.8 32.4
Adjusted PAT 232 269 231 (13.7) 0.5 863
NPM (%) 2.0 2.6 2.2 (57)bps (18)bps 2.5
Extra ordinary items - - - -
Reported PAT 232 269 231 (13.7) 0.5 863
Source: Company, Elara Securities Estimate 

Key Financials
Y/E Mar (INR mn) Rev YoY (%) EBITDA EBITDA (%) Adj PAT YoY (%) Fully DEPS RoE (%) RoCE (%) Adj. P/E (x) EV/EBITDA (x)
FY09 46,948 66.9 4,337 9.2 1,208 34.1 24.3 14.6 17.2 12.5 6.2
FY10 44,538 (5.1) 4,440 10.0 1,226 1.5 24.7 13.1 13.4 12.4 6.3
FY11E 48,290 8.4 4,789 9.9 1,306 6.5 26.3 12.7 13.0 11.6 6.3
FY12E 57,570 19.2 5,618 9.8 1,742 33.4 35.1 14.9 14.6 8.7 5.3
FY13E 68,249 18.5 6,656 9.8 2,136 22.6 43.0 15.8 15.9 7.1 4.7
Source: Company, Elara Securities Estimate 
   Abhinav Bhandari • abhinav.bhandari@elaracapital.com • +91 22 4062 6807
Pooja Sharma • pooja.sharma@elaracapital.com • +91 22 4062 6819
Elara Securities (India) Private Limited
 Simplex Infrastructures

Standalone Financials (Y/E Mar)

Income Statement FY10 FY11E FY12E FY13E Revenue & margins growth trend
Net Revenues 44,538 48,290 57,570 68,249 10.0
10.0 80,000
EBITDA 4,440 4,789 5,618 6,656 9.9
Add:- Non operating Income 116 131 334 380 9.9 60,000

(%)

(INR mn)
OPBIDTA 4,556 4,920 5,952 7,035
9.8 9.8 9.8 40,000
Less :- Depreciation & Amortization 1,534 1,655 1,888 2,154
EBIT 3,023 3,264 4,064 4,881 9.7 20,000
Less:- Interest Expenses 1,112 1,286 1,424 1,646 44,538 48,290 57,570 68,249
PBT 1,911 1,979 2,640 3,236 9.6 0
FY10 FY11E FY12E FY13E
Less :- Taxes 685 673 898 1,100
Net Revenues (RHS) EBITDA Margin (LHS)
Adjusted PAT 1,226 1,306 1,742 2,136
Add/Less: - Extra-ordinaries - - - - Source: Company, Elara Securities Estimates

Reported PAT 1,226 1,306 1,742 2,136  

Balance Sheet FY10 FY11E FY12E FY13E
Share Capital 99 99 99 99
Adjusted net profits growth trend
Reserves 9,597 10,787 12,413 14,433 40 33.4 2,500
2,136
Borrowings 13,024 15,124 15,824 17,324
2,000
30

(INR mn)
Deferred Tax (Net) 883 883 883 883 22.6
1,306 1,742

(%)
1,226 1,500
Total Liabilities 23,604 26,893 29,220 32,739 20
Gross Block 12,509 13,796 15,346 17,096 1,000
10 6.5
Less:- Accumulated Depreciation 2,832 4,488 6,375 8,529 1.5 500
Net Block 9,677 9,308 8,971 8,567 0 0
Add:- Capital work in progress 187 250 250 250 FY10 FY11E FY12E FY13E
Investments 277 577 1,077 1,577 Adj PAT (RHS) PAT Growth (LHS)
Net Working Capital 13,463 16,758 18,922 22,345
Source: Company, Elara Securities Estimates
Other Assets - - - -
Total Assets 23,604 26,893 29,220 32,739  
Cash Flow Statement FY10 FY11E FY12E FY13E
Return ratios
Cash profit adjusted for non cash items 4,114 4,116 4,720 5,556
20
Add/Less : Working Capital Changes (3,007) (3,289) (2,252) (3,520)
Operating Cash Flow 1,107 826 2,468 2,036 18
15.9
Less:- Capex (1,134) (1,350) (1,550) (1,750) 16 14.9
Free Cash Flow (28) (524) 918 286 13.4 13.0 15.8
14 14.6
Financing Cash Flow (90) 698 (840) (262)
12 13.1
Investing Cash Flow 20 (169) (166) (120) 12.7
Net change in Cash (99) 6 (88) (97) 10
Ratio Analysis FY10 FY11E FY12E FY13E FY10 FY11E FY12E FY13E
Income Statement Ratios (%) ROE (%) ROCE (%)

Revenue Growth (5.1) 8.4 19.2 18.5 Source: Company, Elara Securities Estimates
EBITDA Growth 2.4 7.8 17.3 18.5
PAT Growth 1.5 6.5 33.4 22.6  
EBITDA Margin 10.0 9.9 9.8 9.8  
Net Margin 2.8 2.7 3.0 3.1 Free cash flow position
Return & Liquidity Ratios expected to improve further 
Net Debt/Equity (x) 1.3 1.3 1.2 1.1  
ROE (%) 13.1 12.7 14.9 15.8
ROCE (%) 13.4 13.0 14.6 15.9
Per Share data & Valuation Ratios Superior return ratios vis-à-vis
Diluted EPS (INR/Share) 24.7 26.3 35.1 43.0 similar sized industry peers
EPS Growth (%) 1.5 6.5 33.4 22.6
DPS (INR/Share) 2.0 2.0 2.0 2.0
Adj. P/E Ratio (x) 12.4 11.6 8.7 7.1
EV/EBITDA (x) 6.3 6.3 5.3 4.7
EV/Sales (x) 0.6 0.6 0.6 0.5
Price/Book (x) 1.7 1.5 1.3 1.1
Dividend Yield (%) 0.6 0.6 0.6 0.6
Source: Company, Elara Securities Estimate
  
2 Elara Securities (India) Private Limited
 Simplex Infrastructures

Exhibit 1: Order book analysis

Valuation & Recommendation
Urban Piling &
Utilities Ground Backed by a well diversified order book, providing
14% Engineering earnings visibility till FY13, we expect SIL’s revenues to
4%
Bridges grow at a CAGR of ~19% over the period FY11-FY13. The
8% Industrial
16% same should propel its revenues from INR48.2bn in
Railways
2% FY11E to INR68.2bn by FY13. On the operating front, we
expect the company’s margins to hover in the range of
Building &
Housing 9.8%. Despite higher depreciation charges (capex of
Roads 19% INR4.7bn during FY11-13), net profits should register a
8% Power
24% strong CAGR of 27.9%, from ~INR1.3bn in FY11E to
Marine

Infrastructure
5% INR2.1bn by FY13.
Source: Company Exhibit 4: SIL’s performance snapshot
Exhibit 2: Order book trend (INR bn) 80 12
9.5 10.0 9.9 9.8 9.8
160 9.2
139.1
140 60 9
114.9
120 100.6 (INR mn)
100 89.9

(%)
40 6
80 3.2
51.0 2.8 2.7 3.0 3.1
60 42.5 2.6
35.0 20 3
40 22.0 27.0
20 28.1 46.9 44.5 48.3 57.6 68.2
0 0 0
FY08 FY09 FY10 FY11E FY12E FY13E
FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

9MFY11

Revenues (LHS) OPM (RHS) NPM (RHS)

Source: Elara Securities Estimate

Source: Company We have valued the core construction business of the
Exhibit 3: Business revenue analysis (%) company on a P/E multiple basis. Owing to an attractive
Segments FY06 FY07 FY08 FY09 FY10 9MFY11 growth in earnings, high corporate governance and
Piling & Ground superior return ratios vis-à-vis similar sized peers, we have
10 13 10 16 9 11
Engineering assigned a 11x FY12 earnings multiple to SIL’s core
Industrial 16 24 34 24 20 14 construction business.
Building &
11 11 17 12 11 11
Housing We have used the DCF model for valuing the on-shore
Power 30 26 11 12 23 32 drilling rig business because of the relatively stable cash
Marine 9 6 4 8 9 3 flows associated with the same. WACC calculations are
Roads 9 3 3 3 2 2 done taking the cost of equity at 13% and cost of debt at
Railways 0 1 2 2 1 3 10%. The inherent potential in the real estate business of
Bridges 3 7 9 11 15 11
the company has not been incorporated in our
valuations owing to the distant earnings visibility.
Urban Utilities 12 9 10 12 10 13
Total (%) 100 100 100 100 100 100 SIL forayed into the road BOT in FY10 bagging an
Turnover INR14bn worth BOOT project in consortium with SREI
13,446 17,110 28,121 47,235 45,546 33,949
(INR mn) and Gulfar Engineering by NHAI. The project is located
Growth YoY (%) 34.6 27.2 64.4 68.0 (3.6) 6.0 on the Bhubaneswar – Chandikol stretch on NH5 and
Source: Company envisages conversion from the existing 4-lane road into a
6-lane corridor. By virtue of its 26% stake in the SPV, SIL
has an equity commitment of INR777mn towards the
project to be funded over the next two and half years.
The other key details relating to the venture are being
presented below.

 
Elara Securities (India) Private Limited  3
 Simplex Infrastructures

Exhibit 5: Road BOT Details We strongly believe that SIL's present stock price is
Details Bhubaneshwar - Chandikol largely undervalued and does not capture the fair value
Location Orissa of its extensive execution capabilities and new business
initiatives. A well diversified order book, state of the art
Type Toll based
equipment base and a dedicated employee base offer
JV partner SREI - 48%, Gulfar - 26%
clear predictability of revenues over the next couple of
SIL's share in JV 26%
years. Upgrade to ‘Buy’.
Project cost (INR mn) 14,000
D:E (x) 3.0
Exhibit 6: Value overview - SIL’s SOTP
Construction Business INR/Share
Equity + Grant (INR mn) 5,038
SIL's FY12E Net Profits (INR mn) 1,742
Debt 8,963
No. of Shares (SIL Cons.) 50
SIL's share in Equity 777
EPS FY12E 35.1
Concession period 26 years Assigned P/E multiple (x) 11
Construction period 30 months Fair Value per Share……..(A) 386
Completion date Jun'13
Gross Project NPV 3,468 Overseas Subsidiaries

Expected Equity IRR (%) 19.8% Book Value FY10 (INR mn) 160
Assigned P/B multiple (x) 1.5
Source: Company, Elara Securities Estimate
Fair Value per Share……..(B) 4.8
At the CMP of INR335, SIL trades at an adjusted P/E of
8.7x and an EV/EBITDA of 5.3x its FY12 earnings Bhubaneshwar Chandikol BOT
estimates. Despite continuing disappointment on the Net Present Value (INR mn) 3,468
earnings front, we derive an increased level of comfort SIL's equity stake (%) 26
from the marked pick up in execution across SIL’s Fair Value per Share……..(C) 18.2
operations in the domestic (+28% YoY) and fast
recovering foreign arena (YoY revenue decline at 46% Oil Rig Business
from 53%). We though maintain our conservative Net Present Value (INR mn) 525
earnings estimates for FY11 and FY12 despite the SIL's equity stake (%) 67
management’s guidance of 20-25% YoY growth over the Fair Value per Share……..(D) 7.1
next few quarters.
SOTP……..(A+B+C+D) 416

CMP (INR) 335

Potential upside (%) 24.2
Source: Elara Securities Research

 
4 Elara Securities (India) Private Limited
 Simplex Infrastructures

Coverage History
800

700

600 1
2 3 4 5
500

400

300

Infrastructure
6
200

100

0
Feb-08

Feb-09

Feb-10
Aug-08

Aug-09

Aug-10
Apr-08

Jun-08

Sep-08

Apr-09

Jun-09

Apr-10

Jun-10
Dec-07
Jan-08

Mar-08

Jul-08

Jan-11
May-08

Oct-08

Dec-08
Jan-09

Mar-09

Jul-09

Sep-09
May-09

Oct-09

Dec-09
Jan-10

Mar-10

Jul-10

Sep-10
May-10

Oct-10

Dec-10
Nov-08

Nov-09

Nov-10
Not Covered Covered

Date Rating Target Price Closing Price

1 12-Jan-10 Accumulate INR 617 INR 533
2 29-Jan-10 Reduce INR 488 INR 511
3 2-Jun-10 Reduce INR 487 INR 489
4 13-Aug-10 Accumulate INR 531 INR 478
5 12-Nov-10 Accumulate INR 488 INR461
6 14-Feb-11 Buy INR416 INR335

Guide to Research Rating

BUY Absolute Return >+20%
ACCUMULATE Absolute Return +5% to +20%
REDUCE Absolute Return -5% to +5%
SELL Absolute Return < -5%
   

 
Elara Securities (India) Private Limited  5
 Elara Securities (India) Private Limited

 
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