Simplex Infrastructure Ltd

Betting on Execution; Relying on valuation

Institutional Research

22nd June 2011

Institutional Research

22nd

June 2011

Ayush Killa 033-40099979 research@vckgroup.org

Construction
Buy

Simplex Infrastructure Ltd. (SIL)

CMP - INR 280
BSE
523838

Target Price - INR 336

Initiating Coverage
NSE
SIMPLEXINF Basic Snapshots Market Cap (INR Mn) Free Float 52-wk Hi/Lo (INR) Avg. daily volume (1 year) Latest Shareholding Pattern (%) Promoters Institutional Investors -MF/UTI -FIIs -Others Non Institution Price Performance % 1M 6M (26.96) (10.18) 1 Yr (39.11) 4.06 SIMPLEXIN Sensex (0.59) (0.44) 14652 45% 515/295.5 5439 54.74% 32.78% 18.36% 11.99% 2.43% 12.48%

Betting on Execution; Relying on valuation

Significant OB growth in the last two years to provide revenue visibility to the company - Order inflows have grown considerably at 20% CAGR over the last couple of years. We have factored in an order intake growth of 15% in FY12E and 12% in FY13E. Current order book to sales is 3.1 times, which gives revenue visibility for next 2 years. Revenue to grow at a CAGR of 21% in the next three years - We have seen that order execution has remained stagnant in the last 2 years as a result huge order backlog has piled up. However, we expect order execution to take pace and grow at a 30% CAGR for next 2 years. Subsequently, order execution period is expected to decline to 30 months from 37 months in FY11. Our assumption is based on order book composition in favour of shorter duration project and better execution capability of the company than industry. Average execution period is conservatively assumed to be 30 months for FY12E and FY13E after considering the company and industry execution cycles. Comfortable cash flow position of the company to provide cushion against WC scenario - We expect cashflow situation to deteriorate in FY12E, mainly because of our assumption of higher WC requirement in FY12E but still operating cash flow remains positive on account of higher revenue and profits. Free cash flow is negative for most of the years and we expect it to improve from FY13E due to small capex plans and lower amount of change in WC over FY12E. Debtor turnover days for FY11 is 160 days on account of time lag in realization and is expected to come down. Hence, for FY12E we have assumed it at 150 days and for FY13E at 155 days. Valuations looking attractive despite incorporating stressed Working capital cycle, slippage in execution to the extent of 5-10% - After considering 10% average execution slippage to our base case estimates, execution period of 30 months and 12% increase in order intake, the EPS for FY13E is expected to be ~ INR 42. Valuation & Recommendation At present the company is trading at a PE of 6.4x and EV/EBIDTA of 4.7x based on its FY13E financials. The company has historically traded in a PE band of 10-12x on 2 year forward earnings basis. Based on our base case earnings at INR 42 for FY13E, we believe that the company is attractively priced at present levels. Hence We recommend BUY with target price of INR 336. At our target price, the stock would trade at PE of 8x and EV/EBIDTA of 5.4 based on its FY13E financials.
Key Financial Highlights INR Mn Net Sales EBIDTA EBIT Net Profit Adjusted EPS CEPS EBIDTAM NPM EV/EBIDTA PE Ratio P/BV ROE (%) ROCE (%) FY10 44,435 4,651 3,118 4,045 24.8 55.79 10.39% 2.76% 5.7 11.8 1.5 12.65% 13.73% FY11E 48,289 5,008 3,371 6,198 25.7 58.76 10.31% 2.63% 6.2 11.4 1.2 10.44% 11.72% FY12E 70,252 6,774 4,721 8,003 33.9 75.38 9.63% 2.39% 5.4 8.6 1.1 12.22% 12.83% FY13E 80,863 7,782 5,503 9,964 45.7 91.82 9.61% 2.80% 4.7 6.4 0.9 14.26% 14.25%
Source: Company, VCK Research
800 700 600 500 400 300 200 100 0

BLOOMBERG
SINF IN

INR Mn Net Sales PAT PBIDTM% PATM% EPS

Quarterly Performance (INR Mn) Q4FY10 Q4FY11 Q3FY11 YoY % 12,510 459 9.25 3.67 9 13,654 370 10.71 2.70 7 11,659 232 9.48 1.99 5 9 (19) 15.78 (26.43) (19)

QoQ % 17 59 12.97 35.68 60

Order backlog (at the end of the yr) Order inflow (In INR Mn.) Average execution period (In Months) 160000 140000 120000 100000 80000 60000 40000 20000 0 FY07 FY08 FY09 FY10 FY11 50 40 30 20 10 0

Actual Price INR p/e of 10.00

p/e of 12.00

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

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Construction

Simplex Infrastructure Ltd. (SIL)

Order Book Execution (INR Mn) FY07 Orderbook at the beginning Order inflow Execution Order backlog (at the end of the yr) Execution growth Order book growth Order intake growth Average execution period Per month execution Execution
42503 25562 17082 50983

Significant OB growth in the last two years to provide revenue visibility to the company - Order inflows have grown considerably at 20% CAGR over the last couple of years. We have factored in an order intake growth of 15% in FY12E and 12% in FY13E. Order book has constantly increased from FY08 and is expected to grow at a CAGR of 15% for FY12E and FY13E . Current order book to sales stands at 3.1 times, which gives revenue visibility for next 2 years. Average execution period has declined from high of 39 months in FY08 to 30 months in FY10 and had again risen to 37 months in FY11. However, we expect order execution to take pace and grow at 30% CAGR for next 2 years. Subsequently, order execution period is expected to decline to 30 months in FY12E from 37 months in FY11. Our assumption is based on order book composition in favour of shorter duration project and better execution capability of the company than the industry. Average execution period is conservatively assumed to be 30 months for FY12E and FY13E after considering the company and industry execution cycles.
Execution Cycle compared to industry Order Book SIL Execution % Cycle in months Pilling Industrial Power Urban Utilities Building & Housing Marine Roadways, Railways & Bridges Average Cycle 4% 15% 22% 13% 22% 3% 21% 3-6 18-24 24-36 24-30 12-18 18-24 18-24 18-25

FY08
51007 66963 28081 89889 64% 76% 162%

FY09
89866 56904 46961 99809 67% 11% -15%

FY10

FY11

FY12E
150000 95884 70252 175631 45% 17% 15%

FY13E
175631 107390 80863 202158 15% 15% 12%

100593 114912 59842 45525 83377 48289

114910 150000 -3% 15% 5% 6% 31% 39%

36 1416 16994

38.5 2335 28017

25 3992 47908

30 3830 45964

37 4024 48289

30 5854 70252

30 6739 80863

Source: Company, VCK Research

Order backlog (at the end of the yr) Average execution period (In Months) 200000 36 50983 25562 0 FY07 FY08 FY09 39 89889 66963 99809 25 56904

Order inflow

(In INR Mn) 60 40 20

150000 114910 30 59842 FY10 83376 37

100000

0 FY11

Source: Company, VCK Research

Industry Execution Cycle in months 6-12 18-30 48-64 24-36 20 30-32 24-30 27-36

When we compare Industry and company execution cycle on the basis of order book composition of SIL, average execution cycle for SIL for current order book comes out to ~18-25 months against industry average of ~27-36 months. So we have conservatively assumed 30 months as average execution cycle for SIL considering the fact that long duration projects like power project still constitute 22% of the order book. Percentage of overseas order has also declined in order book from 30% in FY09 to 13% in FY11 providing for better execution cycle for the company. Valuations looking attractive despite incorporating stressed Working capital cycle, slippage in execution to the extent of 5-10% - After considering 10% average execution slippage to our base case estimates of 30 months and order intake growth of 12%, the EPS for FY13E is expected to be ~ INR 42. Sensitivity - If average execution period increases from 30 to 36 months, EPS for FY13E is expected to decline from INR 45 to INR 39, showing a growth of 24% over FY11-13E, which is still higher than 15% CAGR in EPS over last 5 years. Further in worst case scenario of only 10% increase in order inflow with 36 months stretched execution cycle, SIL would generate an EPS of INR 39.4.
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Increase in Order Inflow FY13E Average Execution in months 25 30 33 36 Worst Case Scenario Base Case Scenario Source: Company, VCK Research 10% 51.9 45.4 42.2 39.4 12% 52.3 45.7 42.5 39.7 15% 52.8 46.2 42.9 40.1

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Construction

Simplex Infrastructure Ltd. (SIL)

38%

Working capital cycle expected to be at similar levels but working capital requirement in absolute terms to get stressed with large size order execution. We have assumed Net WC days to be at similar levels of 105-116 days in FY13E. However, due to higher execution, NCA (net of cash) as a % of sales is expected to go down from 34.19% in FY11 to 30.65% in FY13E. In absolute terms, we believe WC cycle to be a little stressed as compared to what we have seen in FY11 as execution picks up.

33%

28%

23%

18% FY08 FY09 FY10 FY11 FY12E FY13E

NCA (net of cash) as a % of sales

Source: Company, VCK Research

Cash Flow from operating activities

Changes in working capital

Free Cash Flow (In INR Mn)

Major cashflow indicators showing concerns in FY12E however solely a phenomenon of our stressed WC assumption in the model. We expect cashflow situation to deteriorate in FY12E, mainly because of our assumption of higher WC requirement in FY12E. We believe post FY12E, cashflow situation to improve because of stagnant WC cycle (in FY13E as compared to FY12E) and scalable revenue growth.
(4,964) (2,527)

5,842 FY13E 725 2,567 842 FY12E 596 FY11 (3,111) FY10 (595) 356 FY09 3,122
Source: Company, VCK Research

5,007

3,487 1,406 2,240

Free cash flow is negative for most of the years and we expect it to improve by from FY13E due to small capex plans and lower amount of changes in WC. Debtor turnover days for FY11 is 160 days on account of time lag in realization and is expected to come down. Hence, for FY12E we have assumed it at 150 days and for FY13E at 155 days.

Debtor Turnover days Inventory Turnover days Loans and advances days Other CA days Creditor turnover days

FY09 110 45 31 5 116

FY10 142 55 39 6 141

FY11 160 60 38 6 135

FY12E 150 55 45 6 135

FY13E 155 50 45 6 138

Source: Company, VCK Research

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Construction

Simplex Infrastructure Ltd. (SIL)

Peer Group Comparison SIMPLEX INFRRASTRUCTURES LTD CMP (INR) SALES (INR Mn) MCAP (INR Mn) FY11 EBIDTA% PATM% P/E MCAP/SALES EV/EBIDTA ROE ROA
10.31% 2.63% 11.41 0.30 6.17 10.4% 4.4% 280 48288 14508

GAMMON INDIA LTD

91 56937 13452

IVRCL
64 68035 20198

FY12E
9.63% 2.39% 8.65 0.21 5.43 12.2% 4.6%

FY13E
9.61% 2.80% 6.41 0.18 4.70 14.3% 5.9%

FY11
8.26% 2.02% 11.22 0.24 7.72 6.6% 3.6%

FY12E
8.55% 1.84% 13.46 0.21 6.73 5.3% 3.9%

FY13E
8.54% 1.86% 10.22 0.19 6.07 6.1% 4.5%

FY11
10.84% 3.08% 9.81 0.30 8.49 9.7% 4.7%

FY12E
11.93% 2.61% 9.96 0.26 7.22 9.2% 4.1%

FY13E
11.87% 2.17% 10.12 0.22 6.12 10.2% 4.2%

Source: VCK Research, Bloomberg Estimates. Figures in blue are Bloomberg consensus estimates

Mar-06

Sep-06

Dec-06

Mar-07

Sep-07

Dec-07

Mar-08

Sep-08

Dec-08

Mar-09

Sep-09

Dec-09

Mar-10

Sep-10

Dec-10

Actual Price INR p/e of 17.00

p/e of 31.00 p/e of 12.00

p/e of 24.00 p/e of 10.00

Source: Bloomberg, VCK Research

What can go wrong:-

Execution slippage and unwanted project delays: We have assumed a significant revenue growth in FY12E on the back of execution phase of projects the company has bagged in the last 3 years (calculated on the basis of per months execution over a period of time) and supporting management guidance. For our valuation, we have incorporated 5-10% slippage in execution cycle. Any further significant slippage would act as a negative surprise to our valuation model. Working capital and cash flow position could worsen situation for the company. Over the years, SIL has exhibited an efficient working capital management. However, with the ongoing credit crisis expected to prolong at least for next 8-10 months, we believe the company could face cash crunch & subsequently require higher working capital. The same is expected to result in an increased level of borrowings leading to a concerning debt equity ratio of 1.68 and 1.43 for FY12E and FY13E respectively.

research@vckgroup.org

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Mar-11

Jun-06

Jun-07

Jun-08

Jun-09

Jun-10

Valuation & Recommendation: The company is trading at a PE of 6.4x and EV/EBIDTA of 4.7x based on its FY13E financials. The company has historically traded in a PE band of 10-12x on 2 year forward earnings basis. Based on our base case earnings at INR 42 for FY13E, we believe that the company is attractively priced at present levels. We recommend BUY with target price of INR 336. At our target price, the stock would trade at PE of 8x and EV/EBIDTA of 5.4 based on its FY13E financials.

1000 900 800 700 600 500 400 300 200 100 0

Historical P/E Band

Construction
Financial Summary
Profit And Loss [INR-Millions] DESCRIPTION Net Sales Total Income EXPENDITURE : Total Expenditure Operating Profit (Excl OI) Other Income Operating Profit Interest PBDT
Depreciation & Amortisation

Simplex Infrastructure Ltd. (SIL)

Cash Flow Statement -- [INR-Millions] FY10

44,435 44,427 40,097 4,330 321 4,651 1,207 3,444 1,533 1,911 3,118 1,911 685 1,227 24.78 9.75% 10.39% 2.76%

FY11
48,289 48,289 43,581 4,708 300 5,008 1,476 3,532 1,637 1,895 3,371 1,895 625 1,270 25.67 9.75% 10.31% 2.63%

FY12E
70,252 70,252 63,578 6,674 100 6,774 2,219 4,555 2,053 2,502 4,721 2,502 826 1,676 33.88 9.50% 9.63% 2.39%

FY13E DESCRIPTION 80,863 CF from operating activities 80,863 CF from Investing activities CF from Financing activities 73,181 Net cash inflow 7,682 Opening Bal 100 Closing Bal
7,782 2,125 5,657 2,279 3,377 5,503 3,377 1,114 2,263 45.74 9.50% 9.61% 2.80%

FY10
1,406 (913) (503) (10) 883 873

FY11
596 (2,444) 1,196 (652) 873 220

FY12E
842 (2,150) 1,884 576 220 796

FY13E
5,842 (2,150) (3,836) (143) 796 653

Financial Ratios DESCRIPTION Operational & Financial Ratios Earnings Per Share (INR) CEPS(INR) Book Value (INR) Performance Ratios ROA (%) ROE (%) ROCE (%) Growth Ratio Net Sales Growth(%) EBIT Growth(%) PAT Growth(%) EPS Growth(%) Financial Stability Ratios Total Debt/Equity(x) Current Ratio(x) Quick Ratio(x) Interest Cover(x) FY10 24.78
42.77 195.99 5.6% 13.3% 14.2% -4.7% -2.4% 1.5% 1.5% 1.34 1.84 1.45 2.58

PBT & Exceptional Items EBIT Profit Before Tax Provision for Tax Profit After Tax Earnings Per Share OPM% EBIDTAM% PATM%

FY11 25.67
58.76 245.81 4.4% 10.4% 11.7% 8.7% 8.1% 3.5% 3.6% 1.37 1.85 1.39 2.28

FY12E 33.88
75.38 277.35 4.6% 12.2% 12.8% 45.5% 40.0% 32.0% 32.0% 1.68 1.72 1.38 2.13

FY13E 45.74
91.82 320.76 5.9% 14.3% 14.3% 15.1% 16.6% 35.0% 35.0% 1.43 1.90 1.54 2.59

Balance Sheet [INR-Millions] DESCRIPTION SOURCES OF FUNDS: Share Capital Total Reserves Shareholder's Funds Total Debts Total Liabilities APPLICATION OF FUNDS : Gross Block Less: Accumulated Dep. Net Block Capital Work in Progress Total FA Investments CA Loans & Advances Inventories Sundry Debtors Cash and Bank Other Current Assets Loans and Advances Total Current Assets Less: CL and Provisions Current Liabilities Provisions Total Current Liabilities Net Current Assets Deferred Tax Assets / Liabilities Total Assets FY10
99 9,597 9,697 13,024 22,721 12,509 2,832 9,677 187 9,864 277 6,593 17,928 873 789 5,090 31,272 17,020 789 17,809 13,463 (883) 22,721

FY11
99 12,061 12,160 16,600 28,760 15,040 3,720 11,320 11,320 490 9,283 24,407 220 918 4,964 36,850 18,701 817 19,900 16,950 (997) 28,760

FY12E
99 13,621 13,721 23,077 36,798 16,290 5,040 11,250 11,250 1,490 11,889 33,334 796 1,565 12,358 59,942 33,267 1,520 34,787 25,155 (1,097) 36,798

FY13E
99 15,769 15,868 22,743 38,611 17,540 6,309 11,231 11,231 2,490

Valuation Ratios FY10

18.24 2.31 0.78 8.61 11.07 0.50

DESCRIPTION Adjusted PE (x) Price / Book Value(x) EV/Net Sales(x) EV/EBITDA(x) 10,266 EV/EBIT(x) 35,344 M Cap / Sales
653 1,293 7,581 Dupont Analysis 55,136 27,879 1,170 29,049 26,087 (1,197) 38,611

FY11
11.41 1.19 0.64 6.17 22.97 0.30

FY12E
8.65 1.06 0.44 4.56 13.10 0.21

FY13E
6.41 0.91 0.38 3.97 9.67 0.18

DESCRIPTION PBITM% Sales / Total Assets(x) Return on Assets Interest to debt Debt to Assets Assets to Shareholders' funds

FY10
10.39% 1.96 13.72% 9.27% 0.57 2.34

FY11
10.31% 1.78 11.72% 8.89% 0.58 2.37

FY12E
9.63% 1.87 12.83% 9.62% 0.63 2.68

FY13E
9.61% 2.19 14.25% 9.35% 0.59 2.43

Source: Company, VCK Research

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Construction
Company Background

Simplex Infrastructure Ltd. (SIL)

Current Order Book Analysis
Bridges Roads Power Industrial Urban Utilities 13% 4% 15% 3% Railways Marine Building & Housing Piling and Ground Engineering 9% 2% 10%

Simplex Infrastructures Ltd. (SIL) is a Kolkata - based leading infrastructure & construction player having an experience of eight decades in executing mega-sized projects across India & Middle East. Its service offerings include design, E&C using RCC and steel, fittings & furnishing work on structures; electromechanical fit outs, piling foundations, ground engineering & earth work. It offers these services across 8 different segments & has a proven expertise in piling, construction of industrial & thermal power projects. SIL's initial operations were focused on construction of cast-in-situ driven pile foundations, which it pioneered in 1924. Over the years, SIL has successfully executed over 2,200 projects earning a reputation for efficient project management & execution skills. The company's strong infrastructural grounding is reflected in its track record of having been associated with over 80% of India's power projects, 15 steel plants, 24 petrochemical/chemical plants and over 100 bridges, roads and railway projects.

22% 22%

Source: Company, VCK Research

Key to our Recommendation Structure

BUY Absolute) SELL (Absolute) ACCUMULATE REDUCE Disclaimer: This report is for the personal information of the authorized recipient and is not for public distribution. This should not be reproduced or redistributed to any other person or in any form. This report is for the general information of the clients of VCK Shares & Stock Broking Services Ltd and should not be construed as an offer or solicitation of any offer to buy/sell any securities. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to current and historical information, but do not guarantee its accuracy or completeness. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. VCK Shares & Stock and any other person connected with it do not accept any liability arising from the use of this document. The recipients of this material should rely on their own judgment and take their own professional advice before acting on this information. VCK Shares & Stock and any of its connected persons including its directors and subsidiaries or associates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained, views and opinions expressed in this publication. VCK Shares & Stock and/or its affiliate companies may deal in the securities mentioned herein as a broker or any other transaction as a Market Maker, Investment Advisor, etc. to the issuer company or its connected persons. VCK Shares & Stock generally prohibits its analysts from having financial interest in the securities of any of the companies that the analysts cover. In addition the company prohibits analysts from conducting F&O transactions or holding any shares for a period of less than 30 days.
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Stock expected to give a positive return of above 15% over a 1 year horizon Stock expected to give a negative return of less than (-5%) over a I year horizon Stock expected to give a positive return between 5%-15% over a 1 year horizon Stock expected to give a return in the range of (-5%) to 5% over a 1 year horizon