Better than peers

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.

In Rs crore FY13E FY14E
Net sales 6669.3 7459.7
% change y-o-y  13.1 11.9
Operating profit 591.7 663.0
% change y-o-y  29.0 12.1
Net profit 103.8 118.0
% change y-o-y  16.4 13.6
EPS (Rs) 21.0 23.8
P/E (x) 9.1 8.0
E: Estimates                    

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.”

In Rs crore Simplex IVRCL NCC* HCC
FY12 Q1′ FY13 FY12 Q1′ FY13 FY12 Q1′ FY13 FY12* Q1′ FY13
Net sales 5,897.6 1,585.3 4,971.0 NA 6,665.0 1,793.0 8,158.0 969.4
% change y-o-y  23.8 25.7 -12.0 NA 7.0 11.9 14.1 -8.4
Operating profit 458.6 126.9 377.0 NA 897.5 204.5 423.5 68.9
% change y-o-y  -2.5 5.7 -26.6 NA 25.5 -40.7 -26.0 -50.1
Net profit 89.2 20.1 36.0 NA 54.9 20.3 -364.0 -40.5
% 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.