September 6, 2012
While the construction sector is going through a rough phase for the last two financial years, Simplex Infrastructure Ltd has done relatively better than its peers like IVRCL Infrastr-uctures and Projects Ltd, NCC and Hindustan Construction Co. Not only has the company exhibited consistently strong execution with topline growth of over 20 per cent, but it has also witnessed lesser pressure on the bottomline despite high interest costs. However, with increasing exposure to BOT (build-operate-transfer) projects, the company’s debt levels are on the rise, which is seen as the biggest risk.
Nevertheless, analysts remain positive on Simplex despite the challenges continuing for the construction sector. Says Parvez Akhtar Qazi, analyst at Edelweiss Securities: “Simplex is one of the few pure contracting plays available in the construction industry.” Adds Deepak Purswani, analyst at ICICI Direct: “Its strong well-diversified order book, relatively lower equity commitment towards subsidiary and execution capabilities make it a strong candidate for re-rating in multiples when the macro environment improves.” The stock, which has done better than its peers (except for IVRCL, which had gained on news of possible takeover Essel group) in the last one year, is likely to sustain its lead going ahead.
Consistently better performance
Simplex exceeded analysts’ expectations in the June quarter, wherein its performance was even better compared to FY12. The June quarter was the fourth consecutive quarter of revenues growing in excess of 25 per cent. The company has been able to report better performance (compared to its peers) partly due to its well-diversified and balanced order book in terms of sectors, clients and geographies.
|SIMPLEX: HEALTHY OUTLOOK|
|In Rs crore||FY13E||FY14E|
|% change y-o-y||13.1||11.9|
|% change y-o-y||29.0||12.1|
|% change y-o-y||16.4||13.6|
The top three sectors contribute 70 per cent of total order book with building and housing (25 per cent) having the biggest contribution followed by roads and power (each 23 per cent). Also, the company has lower presence in capital intensive and high gestation BOT projects. Says Nitin Arora, analyst at Angel Broking: “Simplex is a well-diversified player in terms of sectors, geographies and client mix and, unlike its peers, has limited exposure to road BOT assets.”
|HOW THEY STACK UP|
|In Rs crore||Simplex||IVRCL||NCC*||HCC|
|FY12||Q1′ FY13||FY12||Q1′ FY13||FY12||Q1′ FY13||FY12*||Q1′ FY13|
|% change y-o-y||23.8||25.7||-12.0||NA||7.0||11.9||14.1||-8.4|
|% change y-o-y||-2.5||5.7||-26.6||NA||25.5||-40.7||-26.0||-50.1|
|% change y-o-y||-27.6||-16.5||-77.2||NA||-75.0||-35.0||NA||PTL|
|* Consolidated; NA is not available; PTL is Profit to Loss Source: Companies|
But, some concerns emerging
Though the company’s order book of Rs 15,500 crore gives revenue visibility of 2.3 times (based on FY13 estimated sales), the same has grown only 5.5 per cent since FY11-end. Also, 55 per cent of total order inflow (Rs 1,870 crore) in the June quarter was from in-house road BOT project. With slowing economic growth, order inflows remain a concern across the sector, including for Simplex. The management expects order inflow and order book to remain flattish if the environment continues to remain challenging. Acco-rdingly, it has given a top line growth guidance of 10-15 per cent in FY13 despite good show on the topline front in the June quarter.
Further, the company’s debt at Rs 2,400 crore as on June 30 was higher than Rs 2,130 crore at FY12- end. Its debt to equity ratio at 1.8 times is also expected to rise due to its increasing BOT presence and growing working capital requirements. While it has added two road BOT projects to its existing three totalling to five road assets worth Rs 4,000-odd crore in the June quarter, its working capital cycle also worsened to 132 days as compared to 113 days in March 2012 quarter.
Says Abhinav Bhandari, analyst at Elara Securities: “The present net debt to equity ratio threatens to reach 2.5 times over next four-six quarters considering no major easing in the operating and financing environment, coupled with pending equity infusion across existing assets over the next 24-30 months.” Analysts feel rising leverage could negate the impact of strong topline growth and good operational performance.
August 13, 2012
Infrastructure major NCC is working on a plan to pay off part of its debt by monetising its build-own-transfer (BOT) and real estate assets by the year-end.
The company currently has a debt of about Rs2,500 crore and if its plans work out well, the debt would come down to below Rs2,000 crore, said YD Murthy, NCC’s executive vice-president (finance), in an earnings-related interaction with analysts on Thursday.
However, he did not share details of the assets to be put on the block. The debt-equity of the company is below the threshold of 1:1 and the total debt in books low compared to the peer group companies, he said.
For the first quarter to June, the company’s revenue was at Rs1,816.5 crore and Ebitda at Rs204.2 crore or 11.2% of the revenue. However, the net profit was at 1.12% or Rs20.4 crore.
The company currently has an order book of about Rs20,520 crore, including the fresh orders worth Rs2,000 crore received in the first quarter.
“Environment this fiscal has improved and we are confident of registering a growth of 10-15% for the full year. We will be also able to deliver margins of about 8-9%,” he said.
NCC is planning to participate in road projects with the government likely to award about 9,000 km of road projects for development during the year.
The company, however, is likely to see delay in declaring the commercial operations of its 1,320 mw power project coming up at Krishnapatnam.
As against scheduled commissioning by 2014, it would now happen in March 2015.
“We expect the commercial operations of 660 megawatts capacity by March 2015. There were issues due to shifting of the project from Sompeta to Krishnapatnam and fresh efforts to achieve financial closure of the project,” Murthy said.
The company was originally planning to set up its project at Sompeta in Srikakulam. However, it had run into rough weather as the villagers opposed the project in a violent protest that led to police firing and deaths of two farmers.
The project was then shifted to Krishnapatnam near Nellore and all the related contracts, including fuel supply agreements (FSAs), were adjusted in favour of the project at the new location.
While about 70% of the coal requirement for the project would be met through supplies from Mahanadi Coal Fields, the company is exploring the opportunities in Indonesia to meet the other 30% requirement.
“We are expecting an FSA with Mahanadi in the next six to nine months. When developed, the greenfield mines in Indonesia would supply about 1.77 million tonne per annum. About $2 million has been invested already. We are also in the process of identifying some more mines in Indonesia,” Murthy said.
August 23, 2011
NCC posted moderate set of numbers for 1QFY2012. The company is facing headwinds like 1) increasing debt levels; 2) overall slowdown in order booking; and 3) delays in financial closure for its power plant. However, owing to its attractive valuations and diversified order book with exposure to most growth sectors, we maintain our Buy view on NCC.
Disappointing numbers, as expected: The company reported top-line growth of 5.1% yoy to Rs.1,141.5cr (Rs.1,086.5cr), which was in-line with our expectation of Rs.1,169.5cr. On the operating front, the company’s margin was marginally ahead of our estimate at 10.2% (9.7%). The company continues to reel under pressure on the earnings front on account of subdued top-line growth and burgeoning interest costs. The bottom line came in at Rs.23.3cr (Rs.41.4cr), which was again pretty much in-line with our estimate of Rs.25.3cr.
Outlook and valuation: The current o/s order book of NCC stands at Rs.16,189cr, flat qoq, with order inflow of Rs.1,349cr for 1QFY2012. Going ahead, we believe the order inflow would be driven by EPC work of its own power plant. However, earnings would continue to reel under pressure due to higher interest cost on the back of higher debt requirements to fund its investments in the power project and on potential winning of road BOT projects. We have downgraded the P/E multiple for the stock (from 10x earlier to 8x currently) in light of increased debt levels, gloomy macro environment and pressure on earnings growth in the near to medium term. However, at the current price, the stock is trading at attractive valuations (3.9x FY2013E earnings adjusted for its investments and subsidiaries) and at 0.5x FY2013E on P/BV basis (standalone). Hence, we maintain our Buy view on the stock with a revised target price of Rs.82.
Execution slows down once again
For 1QFY2012, NCC’s numbers were in-line with our estimates but were lower than street expectations. The company posted yoy growth of 5.1% on the top-line front at Rs.1,141.5cr (Rs.1,086.5cr), which was in-line with our expectation of Rs.1,169.5cr and street expectation of Rs.1,193.5cr. Muted revenue performance was due to lower order booking during the year and delayed payments from clients.
On the order booking front, the company faced a slowdown. The company bagged orders of mere Rs.1,349cr during the quarter. Going ahead, we believe the order inflow would be driven by EPC work of its own power plant.\
Net margin under severe pressure due to higher interest cost and subdued top-line growth
On the operating front, the company’s margin was marginally ahead of our estimates at 10.2% (9.7%). The company continues to reel under pressure on the earnings front on account of subdued top-line growth and burgeoning interest costs. The bottom line came in at Rs.23.3cr (Rs.41.4cr), which was again pretty much in-line with our estimate of Rs.25.3cr but was lower than street’s expectation of Rs.28.4cr.
Order book analysis
NCC’s order book, which stands at Rs.16,189cr (3.2x FY2011 revenue) as of 1QFY2012, is spread across nine verticals and the major contributors include the building, water and power segments. Going ahead, management expects the road, building and captive power segments to gather momentum and add significantly to the order book.
Change in estimates
Going ahead, we expect NCC’s interest cost to increase on the back of higher debt requirements to fund its investments in the power project and on potential winning of road BOT projects. Therefore, this will significantly impact the company’s bottom-line growth, given the limited cushion from top-line growth.
Outlook and valuation
The current o/s order book of NCC stands at Rs.16,189cr, flat qoq, with order inflow of Rs.1,349cr for 1QFY2012. Going ahead, we believe order inflow would be driven by EPC work of its own power plant. However, earnings would continue to reel under pressure due to higher interest cost on the back of higher debt requirements to fund its investments in the power project and on potential winning of road BOT projects.
We have downgraded the P/E multiple for the stock (from 10x earlier to 8x currently) in light of increased debt levels, gloomy macro environment and pressure on earnings growth in the near to medium term. However, at the current price, the stock is trading at attractive valuations (3.9x FY2013E earnings adjusted for its investments and subsidiaries) and at 0.5x FY2013E on P/BV basis (standalone). Hence, we maintain our Buy view on the stock with a revised target price of Rs.82.
We have valued NCC on an SOTP basis with a target price of Rs.82/share by assigning 8x FY2013E earnings (standalone). The company’s real estate venture has been valued on P/B basis and its BOT assets have been valued on DCF basis. Our target price implies an upside of ~50.8% from current levels. Hence, we maintain our Buy view on the stock with a revised target price of Rs.82.