Simplex Infrastructures Ltd. (SIL)

Transcription

1 Simplex Infrastructures Ltd. (SIL) BUY CMP: Rs Date: 24 th November, 2009 Key Ratios: Particulars FY09 FY10E FY11E OPM (%) NPM (%) ROE (%) ROCE (%) P/BV(x) P/E(x) EV/EBDITA(x) Debt-Equity(x) Key Data: Sector Construction Face Value Rs wk. High/Low Rs.546/Rs Volume (2 wk. Avg.) 7568 BSE Code V.S.R. Sastry Vice President Equity Research Desk Target Price: Rs Market Cap.:Rs mn. SYNOPSIS Simplex Infrastructures is one of the top five infrastructure solutions providers in India with a proven track record of 80 years. The company s current order book stands at Rs billion, which represents 2.21x of FY09 revenue and provides strong revenue visibility for the near-to-medium term. The company is scouting for acquisitions in other infrastructure sectors including power transmission, ports, hydro, railways and water supply. The company has forayed into On-shore Oil rigging business with purchase of 1500 HP rig costing Rs. 500 mn. Recently Simplex Infra has entered in to real estate development through joint venture. Net sales and net profit of the Company are expected to grow at a CAGR of 27.54% &22.48% over FY08 to FY11E. Share Holding Pattern: Dr. V.V.L.N. Sastry Ph.D. Chief Research Officer drsastry@firstcallindia.com 1

2 Table of Content Content Page No. 1. Investment Highlights Company Profile Peer Group Comparison Key Concerns Financials Charts & Graph Outlook and Conclusion Industry Overview 16 2

3 Investment Highlights Results Update (Q2 FY10) For the quarter ended on September 30, 2009 (Standalone) the company has registered a 1.70 % (YOY) growth in the net sales and stood at Rs mn from Rs mn of the corresponding period of the previous year. The operating profit margins for the quarter stood at10.39%.the management indicated that the margin on the existing order book stands at %, and the incremental orders are at better margins. Also, change in composition of order book towards power segment is positive, given better margins.the operating profit for the quarter stood at Rs mn from Rs mn, for the same quarter of last year. During Q2FY10 the net profit of the company stood at Rs mn. EPS for the quarter stood at Rs.5.62 per equity share of Rs Quarterly Results Standalone(Rs in mn) As at Q2FY09 Q2FY10 %Change Net Sales Net Profit (0.53) Basic EPS(Rs) (0.35) 3

4 Strong Order book The current Order book for Simplex stands at Rs105b (down 1.5%YoY, up 5%QoQ), and is largely stagnant for past 6 quarters. Order intake in 2QFY10 stood at Rs15.5b (down 8.4% YoY, up 42% QoQ), and has shown marginal improvement. While the order intake during 2QFY10 has been moderate, bids submitted pipeline stands at Rs390b (up 30% YoY, up 20% QoQ) indicating improved environment as compared to past 2-3 quarters. During the quarter, 78% of the order intake was contributed by India (mainly from power which contributed ~47% of order intake). Also in 1QFY10, power segment contributed 61% of order intake. Composition of domestic power to order book has increased to 24% in 2QFY10 vs 12% YoY. We believe that given the improved fund availability, better project economics and increased focus on execution by private developers; power sector should be a key contributor to order intake in 2HFY10. This is also positive for margins and working capital cycle, given that a large part of the private sector projects are on negotiated basis (and not on L1).Also, overseas projects contributed 22% of order intake in 2QFY10 vs 7% in 1QFY10, indicating improved traction. A large part of this order intake was driven by buildings and housing order from Libya (new market for Simplex). Also, the inquiries in Middle East (ME) market have improved, largely in power, industrials and buildings segment. 4

5 Forayed into On-shore Oil rigging business Simplex infra has forayed into On-shore Oil rigging business with purchase of 1500 HP rig costing Rs. 500 mn. The rig is funded with mix of internal accruals (30%) and debt (70%). The company has entered into an agreement with Oil India Ltd for on-shore oil exploration for 2 years period with rentals of $16000 per day for the contract period. The contract is extendable for another one year. The contract is an annuity based project, which will generate revenue for the next to two years. Simplex has also plans to foray further in its rig business. Simplex plans to enter in to power, railways Simplex infra is scouting for acquisitions in other infrastructure sectors including power transmission, ports, hydro, railways and water supply. Simplex plans to enter in to Real Estate development Now the company focusing on Real estate development because of this is the new focus area for construction major companies. Extension to its civil construction contract work, SIL has entered to real estate development through joint venture. Wherein SIL has entered into MoU with the third party who owns the land and SIL undertakes construction work, which minimizes risk of holding the land for long period. Various property development projects in cities like Kolkata, Hyderabad, Chennai and Bangalore. Simplex plans to increase their Airport infrastructure business Simplex infrastructures having very good orders in hand but due to growing airport infrastructure industry they are consolidating their diversification plans. They are looking at increasing their order book position not just quantitatively but qualitatively. These airport projects will provide them with valuable experience, which will further help them to secure other airport projects in future." Dividend The company is giving dividend to its investors continuously. For FY09, the company has given100% dividend on equity share of Rs.2.00 each. 5

6 Company Profile Simplex Infrastructure Ltd (SIL) is one of the oldest players in infrastructure industry and it is one of the top-five infrastructure solutions providers in the country with a proven track record of 80 years. It has executed over 2100 projects in India and abroad; it has worked on an equal footing with major international construction companies in mega-sized projects. Traditionally the company s focus was on pilling and now emerged as an infrastructure solution provider. Business areas The company currently engaged in the following business areas 1. Ground engineering 2. Power 3. Industrial construction 4. Urban utilities 5. Building& 6. Housing 6

7 7. Roads 8. Marine 1. Ground engineering Ground engineering encompasses activities related to foundation engineering a thorough understanding of various soil types, their load-bearing capacity and the specialized alteration required to enable the soil to withstand pressure for years to come. Having been present in this space since inception in 1924, mastery of this space enabled Simplex to forward-integrate to provide services across civil and structural engineering and end-to-end infrastructure solutions. Till date Simplex Infrastructure has installed over two million piles. 7

8 2. Power Simplex is present in the hydel, thermal (coal, gas) and nuclear power plant segment. The Company is into thermal (coal and gas), nuclear, and hydro power plants and is associated with more than 80% of all thermal power plants in India. Simplex holds a record in the installation of the largest number of turbo generator foundations ranging from 10 MW to 500 MW. 3. Industrial construction Simplex offers an entire gamut of heavy industrial construction in civil and structural engineering for the following industries: Iron and steel, aluminium, cement, paper, fertiliser, textile, chemical, refineries, petrochemical and other Industries.It possesses latest expertise in construction of high-rise RCC silos and tapered / cylindrical chimneys with a height of 220 mts and wall thickness of up to 600 mm, cooling towers, water and effluent treatment plants for industries such as cement, paper, fertilisers and power stations. It uses the slip form shuttering system a method which demands meticulous designing and calculation for maintaining the delicate balance required between the height of the structure and the thickness of the wall.the Company s range of industrial creations includes refineries and petrochemicals, iron & steel plants, alumina refinery, copper smelters, chemical plants, process industry, automobiles plant and paper plants. 4. Urban utilities Simplex undertakes construction of water, waste and sewerage treatment plants, pipelines and metro rail With scale and integration being representative of a large number of infrastructure projects in the country, developers and builders alike are turning to infrastructure providers who can manage the entire lifecycle of a project. 5. Building and housing Simplex has completed prestigious projects where the demand was for top class construction quality and speedy construction, including the construction of the first 17th Storied RCC framed building in South East Asia at Kolkata.In collaboration with Aardings, Holland, the Company has introduced a super-fast construction technology in India, which executes building projects with amazing speed. The technology can be adapted for buildings of different shapes and sizes of multi-storied offices and residential complexes, hotels and hospitals, row houses etc. 8

9 6. Road, railways and bridges It has been associated with projects under GQ and NSEW corridors. Simplex was awarded the 72-km stretch at Ongole in Andhra Pradesh, a project commissioned by the National Highway Authority of India. It has built bridges over rivers and has expertise in RCC pre-stressed concrete bridges. It forayed into the railways sector in 2006 with projects involving the construction of related buildings, bridges and platforms.12.5 Km elevated Expressway at Hyderabad. 7. Marine Simplex enhanced its focus and evolved marine constructions into one of its primary divisions as a clear extension of the Company s core competence in land piling into piling under water Today it is associated with most of the major marine projects in the country.its area of operation includes the design and construction of offshore structures like ports, harbours, jetties, wharfs, quays, berths, dry docks, wet basin, mooring and berthing dolphin sand breakwater etc. Peer Group Comparison Name of the company CMP(R.s) (As on Nov 24,2009) Market Cap. (Rs. Mn.) EPS (Rs.) P/E (x) P/BV (x) Dividend (%) Simplex Infra IVRCL Ltd Gammon India NCC Ltd Key Concerns Glob economic slowdown Slow execution of orders Slow down in the infrastructure sector More number of players and tough competition Commercial risks associated with BOT projects 9

10 Financials Results update 12 months ended Profit&loss Account (Consolidated) Value(Rs. in million) FY08A FY09A FY10E FY11E Description 12m 12m 12m 12m Net Income 28, , , , Other Income Total Income 28,407 47, , , Expenditure -25, Operating Profit 2, , , Interest , Gross Profit 1, , Depreciation PAI but before Exceptional Items 1, , Exceptional Items _ Profit before Tax 1, , Tax PAT , Minority Interest _ -7.7 Net Profit , Equity Capital Reserves 7, , Face Value Total No. of Shares EPS(Rs)

11 Quarterly ended Profit & Loss Account (Consolidated) Value(Rs. in million) 31-Mar Jun Sep Dec-09E Description 3m 3m 3m 3 m Net Income 13, , , , Other Income Total Income 13, , , , Expenditure -12, , , , Operating Profit , , , Interest Gross profit Depreciation Profit before Tax Tax PAT Minority Interest _ _ Net Profit Equity Capital Face Value(Rs) EPS(Rs)

12 Key Ratios Particulars FY08 FY09E FY10E Equity Capital (Rs.mn.) EBDITA Margin (%) 8.44% 9.75% 9.66% Net Profit Margin (%) 2.60% 2.54% 2.84% P/E (x) ROE (%) 13.91% 12.47% 14.03% ROCE (%) 31.81% 14.51% 15.63% EV/EBDITA(x) Book Value (Rs.) P/BV (x) Debt-Equity ratio(x)

13 Charts A) Net sales & PAT Chart B) EV/EBITDA(x) chart 13

14 C) P/E(X) Chart D) Debt-Equity ratio(x) chart 14

15 1 Year Comparative Graph SIMPLEX INFRA BSE SENSEX Outlook and Conclusion At the current market price of the stock Rs , the stock trades at a P/E of x and 15.75x for FY10E and FY11E respectively. The EPS of the stock is expected to be at Rs and Rs for the earnings of FY10E and FY11E respectively. The top line and bottom line of the company are expected to growth a CAGR of 27.54% and 22.48% over FY08 to FY11E. On the basis of EV/EBDITA, the stock trades at 6.71 x and 7.24 x for FY10E and FY11E respectively. Price to Book Value of the stock is expected to be at 2.57 x for FY10E and 2.21x for FY11E. Book Value the company is expected to be at Rs and Rs for FY10E and FY11E respectively. The company has an outstanding Order book of Rs105bn, which is 2.21x its FY2009 Revenues. The company s Order book is well diversified, across nine segments in the Infrastructure space, and also has exposure to international markets. This diversification across geographies and segments gives stability to the Margins and excellent Revenue visibility going ahead. Simplex infra is scouting for acquisitions in other infrastructure sectors including power transmission, ports, hydro, railways and water supply. Simplex infra has forayed into On-shore Oil rigging business with purchase of 1500 HP rig costing Rs. 500 mn. Extension to its civil construction contract work, SIL has entered to real estate development through joint venture. We recommend BUY in this particular scrip with a target price of Rs for Medium to Long term investment. 15

16 Infrastructure Sector Overview: The Infrastructure sector is currently going through tough phase due to the global slow down. As the sector s dependency on other sectors are much more, any slow down in other sectors will affect the performance of this sector. Decline in the price of commodity and easing interest rates will help the companies to come out from the troubles created by the slowdown. But we expect that the effects of these factors will be seen only from the last quarter of the current fiscal. Slow execution of orders is the main concern for the companies in the sector. Even some companies in the sector are facing order cancellation also. As a positive indication towards this, the country has witnessed a rapid increase in private investment in infrastructure over the last five years. The estimated investment in infrastructure has now been pegged at USD 500 billion by the end of the Eleventh Five Year Plan. This is both a challenge and an opportunity for the Government as well as for the private sector The General Index for the month of November grew by 2.4% as compared to the level in the month of November The cumulative growth for the period April-November stands at 3.9% over the corresponding period of the pervious year. Hit by the global financial meltdown, the key infrastructure sector industries showed poor performance during December, registering a dismal growth of 2.3 per cent, a trend which economists feel is likely to continue during the remaining part of the fiscal year. With steel and crude oil showing negative growth during the month, six infrastructure industries in December recorded the second-lowest growth during , marginally up from 1.8 per cent in November. For the nine-month period of April-December, the growth of the infrastructure sector - crude oil, petroleum refinery products, coal, electricity, cement and finished steel - dropped to 3.5 per cent from 5.9 per cent in the same period of However, now that the infrastructure sector is struggling with liquidity problem, high interest rates and financing constraints.on the positive side, the government s investment in infrastructure sectors can receive a boost from the fiscal stimulus announced as part of the package to boost economic growth.despite strong estimated revenue growth of about per cent in Q4, net profit growth in the construction sector will only be about 8-10 per cent. This is primarily on the back of higher cost of funds of about per cent compared to per cent earlier. Meanwhile, there is enough visibility in the infrastructure sector given the order book of times FY08 revenue. Also, as interest rates are on a downtrend and liquidity is improving, the funding and visibility of the projects could improve. Lastly, the lag effect of lower commodity prices should reduce the pressure on the margins in the coming quarters. 16

17 The Indian construction industry Construction activity is an integral part of a country s infrastructure and industrial development. It includes hospitals, schools, townships, offices, houses and other buildings; urban infrastructure (including water supply, sewerage, drainage); highways, roads, ports, railways, airports; power systems; irrigation and agriculture systems; telecommunications etc. Covering as it does such a wide spectrum, construction becomes the basic input for socioeconomic development. Besides, the construction industry generates substantial employment and provides a growth impetus to other sectors through backward and forward linkages. It is, essential therefore, that, this vital activity is nurtured for the healthy growth of the economy. With the present emphasis on creating physical infrastructure, massive investment is planned during the eleventh Plan. The construction industry would play a crucial role in this regard and has to gear itself to meet the challenges. In order to meet the intended investment targets in time, the current capacity of the domestic construction industry would need considerable strengthening. In India, construction is the second largest economic activity after agriculture. Investment in construction accounts for nearly 11 per cent of India s Gross Domestic Product (GDP) and nearly 50 per cent of its Gross Fixed Capital Formation (GFCF). Fund injection into the sector could go up to US$ billion by FY2010. Construction accounts for nearly 65 per cent of the total investment in infrastructure and is expected to be the biggest beneficiary of the surge in infrastructure investment over the next five years. The Indian construction industry recorded a consistent double-digit year-on-year growth (12%) during , and is expected to grow at 25-30% during The key drivers of this growth are government investment in infrastructure creation and real estate demand in the residential and industrial sectors. The industry is experiencing increasing polarisation between large and small players. These players are increasing their market share through large-scale contracts, joint ventures, and foreign operations. Though an increasing number of small players are also entering the market, most of them do not have the resources to bid for big contracts. 17

18 The construction segment constitutes a significant part of infrastructure development in the economy. The following table shows the construction investments figures in the various areas of infrastructure development: (Rs. in billion) FY02-FY06 FY07-FY11 Roads Urban infrastructure Power Irrigation Railways Others Total 3, Demand for construction has resulted in the following macro trends: The increasing spend in the infrastructure sector has resulted in an increased order book for construction companies thereby easing the supply demand competitive pressure. Margins of construction companies were adversely impacted by increase in prices of inputs in the past especially steel, aggregate and now cement. Whilst commodity prices continue to exhibit volatility, price escalation clauses are being used to allow for some protection. Whilst partly mitigated, this remains an area of concern. Construction companies are moving towards public-private partnership, raising funds from the market to finance these projects. Whilst some participants, especially the smaller ones, have adopted a fragmented approach to the market, bidding aggressively, the more established players who have financial strength, experience and access to technology and an appetite to undertake large contracts are adopting a selective approach in their order mix and client selection, leading up to risk management on margins. To accelerate and increase public private partnerships in infrastructure, two major initiatives have been taken by the GoI provision of viability gap funding and Establishment of India Infrastructure Finance Company Limited. 18

19 These initiatives are designed to implement public projects to make them financially feasible and involve either a one-time grant or a deferred grant of funds to aid in the respective project.the Indian construction industry is facing the challenges of outdated land and property ownership regulations, infrastructural bottlenecks, and a shortage of civil engineers. The construction sector has major linkages with the building material industry since construction material accounts for sizeable share of the construction costs.these include cement, steel, bricks/tiles, sand/aggregates, fixtures/fittings, paints and chemicals, construction equipment, petro-products, timber, mineral products, aluminum, glass and plastics. Power As the Indian economy continues to surge ahead, its power sector has been expanding concurrently to support the growth rate. The demand for power is growing exponentially and the scope of growth of this sector is immense. India's total installed capacity of electricity generation has expanded from 105, MW at the end of to 150, MW at the end of June In fact, India ranks sixth globally in terms of total electricity generation. Source-wise, thermal power plants account for an overwhelming 63.9 per cent of the total installed capacity, producing 96, MW. Hydel power plants come next with an installed capacity of 36, MW, accounting for 24.6 per cent of the total installed electricity generation capacity. Besides thermal and hydel power, renewable energy sources contribute 8.8 per cent to the total power generation in the country producing 13, MW. Nuclear energy makes up the balance 2.7 per cent contributing 4,120 MW. Growth Potential According to a report by KPMG and CII, India's energy sector will require an investment of around US$ 120 billion-us$ 150 billion over the next five years. The government has revised its target of power capacity addition to 90,000 MW in the 11th Five-Year-Plan ( ), up by 11,423 MW from the earlier estimate of 78,577 MW to sustain the growth momentum of the economy. Further, according to the Planning Commission estimates, renewable energy (RE) projects worth US$ billion, for the generation of 15,000 MW power, would come up in the 11th Plan. 19

20 Moreover, the government has earmarked a total capital subsidy of US$ 6.88 billion for providing electricity connections and for the distribution of infrastructure to rural households. The Indian Real Estate Industry Size Real Estate and Construction is a US$50 billion (2008) industry in India Rapid growth in the industry in the past few years FDI it is expected that the sector would witness inflows to the tune of US$ 8-10 billion by FY 2010 High demand growth has led to prices doubling over 3 years in many cities. Outlook The Real Estate market is projected to grow to US$60 billion by 2010 at a CAGR of 40% Real Estate companies have been successfully tapping the country s booming capital markets for funds Companies have also raised equity internationally at the AIM in London Tier 2 cities (non metros) likely to experience faster growth in the future Opportunity Commercial and office complexes mushrooming in major Indian metros Over 20 million new housing units required in 5 years Potential Several factors are expected to contribute to the rapid growth in Real Estate Large demand-supply gap in affordable housing, with demand being fuelled by tax incentives and a growing middle class with higher savings. Increasing demand for commercial and office space especially from the rapidly growing Retail, IT/ ITeS and Hospitality sectors. 20

21 The recently announced JNNURM expected to provide further impetus Investment opportunities exist in almost every segment of the business Housing: About 20 million new units expected to be built in five years Office space for IT/ITeS: Five-fold increase in office space requirement over the next 3 year Commercial space for organized retailing: 200 million sq. ft. by 2010 Hotels & Hospitality: Over 40,000 new rooms in the next 5 years. Investment opportunity of over US$75 billion in the next five years. Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but we do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it s affiliates 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 in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. 21

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