Standing tall

PENNY WISE

Simplex Infrastructures, which was largely into piling and ground engineering, today has a presence across different verticals of infrastructure such as power, marine, industrial, roads, railways, bridges, urban infrastructure and housing.

The ongoing investments in the infrastructure sector thus, should see Simplex emerge as a key beneficiary. Its diversified order book of Rs 9,150 crore as on January 2008, which is 5.35 times its FY07 revenues, provides strong visibility besides, stability against any slow down in a particular segment or geography. The company's recent foray into the mining, onshore drilling and power T&D segments, should also drive growth and lead to expansion of margins.

Well diversified

Until the recent past, the company was focused on ground engineering and piling. While it continues to be the leading player, this segment now accounts for a mere 3 per cent of the current order book.

Over the past few years, Simplex has built a strong position in other construction segments like Marine, wherein it has contributed to several port projects including Adani, Haldia, Chennai, Paradip, Cochin and Vizag. Recently, it completed a terminal for Maersk at JNPT, the biggest terminal in India.

Within the transport segment, while the company is not very gung-ho on the road segment (accounts for 4 per cent of the current order book), due to relatively low margins, it prefers high-margin projects like in railways, bridges and elevated road corridor, including the metro rail projects.

The company recently received the prestigious first phase of the Mumbai Metro order worth Rs 406 crore, which involves civil construction of 10.7 km elevated corridor between Versova and Ghatkopar. Within urban infrastructure, the company is also executing several projects such as Udaipur and Jaipur airports and large sports complex, water supply and sewage projects.

Also, the company has been a key player in the industrial construction segment, benefiting from the rising capex in the country. This includes construction of plants for companies in sectors such as oil and gas (including Reliance's Jamnagar refinery project and many thermal power projects), power, metals, cement, textile and chemicals.

The industrial segment accounts for about Rs 1,637 crore (17.9%) of the current order book and contributed 35 per cent to sales for the quarter ended sales of December 2007. The company is also pre-qualified to construct nuclear power plants and plans to move up the value chain through a consortium based foray in the erection of balance-of-plant (BOP) in the power generation space.

A fourth or Rs 2,342 crore of Simplex's order book are orders for constructing buildings, including multi-storied towers for residential and commercial use, housing colonies and low-cost mass housing. Currently, the company is executing around 25 million sq ft of space in this segment.

To capitalise its expertise in piling and drilling, the company has entered in the promising on-shore oil drilling segment through the joint-venture route. The alliance will provide the rig operators, manpower and technical expertise to execute the contract.

The joint venture has recently commissioned its first rig for Oil India, which is for a two year period at $16,000 per day. The company is currently negotiating for two more rigs at a rate of about $22,000-24,000 per day. Though, this is relatively smaller business and in its early days, its prospects are promising.

New geographies

In order to de-risk its business further, besides the sectoral diversification, the company has also spread its presence in the overseas markets, mainly Qatar and UAE. As a result, the company is witnessing growing share of the international business, from about 4 per cent in FY05 to 15 per cent in quarter ended December 2007; it accounts for 29 per cent of the order book. 
 

RISING MARGINS
In %	FY03	FY04	FY05	FY06	FY07	Dec-07
EBITDA margin	7.3	7.9	8.2	9	10.1	10.8
PAT margin	1.6	1.5	2.5	3.1	3.2	3.3

The shift in the business mix has also resulted in expansion of operating margins, which have moved up from 7.3 per cent in FY03 to 8.2 per cent in FY05 and further to 10.1 per cent in FY07. Unlike in the past, when the company used to bid in consortium and share the margins with others to gain qualification, it is now pre-qualified to bid for projects in several segments thus, helping it to enhance margins. Also, the quick turnaround in projects and increased use of in-house equipments (90 per cent) augur well for margins. 
 

SIMPLY EXCITING
Rs crore	FY08E	FY09E	FY10E
Sales	2755	3800	5100
Net profit	95	180	279
EPS (Rs)	21	35	51
PE (x)	24.0	14.4	9.9

Valuations

At Rs 503, down 35 per cent from its recent 52-week high of Rs 774, the stock trades at 22 times its FY08 estimated earnings and 14 times FY09 earnings. Given that earnings growth is pegged at over 60 per cent annually for the next two years, well-backed by the robust order book (executable over the next 2.5 years) and expected improvement in margins, the valuations look attractive. Investors can invest in this stock and expect good gains.