Concrete growth

POUND WISE

Higher infrastructure spending at home and increasing foreign orders are expected to keep Simplex's order book position strong.

With the continued thrust on infrastructure and road development, construction companies have been witnessing strong order books. Needless to say, this has resulted in strong performance by stocks in the construction and engineering segment.

Simplex Concrete Piles is among the biggest gainers in the sector, with the stock price surging 640 per cent in the past 12 months. Though competition in the sector is intense, with reputed players like L&T, Gammon India, Hindustan Construction Company (HCC) and Nagarjuna Constructions vying for market share, analysts see considerable growth potential for Simplex going forward.

And despite the stratospheric rise in stock price, the valuation of Simplex is still some way behind competitors, which is good news for investors. However, analysts add a note of caution. Considering the appreciation in the stock, there is bound to be some correction at the counter, sooner than later.

The business
Simplex Concrete Piles is an integrated engineering procurement construction (EPC) company with eight decades of experience. It has successfully executed over 100 power projects, 100 bridges, 15 steel plants and chemicals plants. Interestingly, Simplex also has to its credit, the impressive Supreme Court building in New Delhi.

What has stood Simplex in good stead in the past has been its presence and expertise in many areas of infrastructure development-related businesses.

The company has six strategic business units, viz. marine construction, transportation, urban infrastructure, industrial construction, power plants & cooling towers and piling & ground engineering. With a share of over 25 per cent of the total revenues, power plants division accounts for the biggest share of total revenues.

According to director Amitabh Mundhra, marine construction, urban infrastructure and piling generate higher profit margins. The company expects at least 30 per cent growth in each division over next five years. It is also planning to obtain the pre-qualification in the oil & gas pipeline business.

Burgeoning order book
As is the case of most companies in the infrastructure space, Simplex has also seen a big spike in its order book position. As of now, the company has an order book of Rs 3600 crore across industry segments.

The company has completed projects worth over Rs 10, 000 crore and envisages to become a $ one billion company (turnover of Rs 4,500 crore) in the next five years.

Recently, it bagged a Rs 260 crore contract from National Highway Authority of India (NHAI) to build a 40 km road in Gorakhpur-Gopalganj section in UP. As part of its future growth strategy, Simplex is focusing more on the engineering and value-added component and is expecting an order book of Rs 4000 crore by the end of FY06.

Impressive financials
Simplex posted a turnover of Rs 1000 crore in FY05, a y-o-y increase of 55 per cent. Net profit growth was even more impressive at 155 per cent to Rs 25 crore in FY05.

For Q1FY06, the company posted a turnover of Rs Rs 311 crore and a net profit of Rs 11.60 crore. However, increasing number of projects has meant that the overall borrowings has also shot up, which resulted in a 60 per cent rise in interest costs in the June quarter. 
 

FINANCIALS
(Rs crore)	JQ05	JQ04	% change	FY05	FY04	% change
Net sales	311.26	307.81	1.12	999.01	641.33	55.77
Other income	0.23	0.36	-36.11	1.21	1.92	-36.98
Operating profit	26.09	27.11	-3.76	71.39	45.80	55.87
OPM %	8.38	8.81	-	7.15	7.14	-
Net profit	11.62	13.20	-11.97	24.77	9.70	155.36
NPM %	3.73	4.29	-	2.48	1.51	-
EPS	15.94	1.87	-	34.53	13.30	-
P/E (12 months)						20.06

The company expects the borrowings to reduce this year due to fund infusion through preferential share allotment. The company expects net profit to be around Rs 45-50 crore and revenues to be about Rs 1500 crore in FY06. This would mean doubling of profits as well as a 50 per cent rise in revenues as compared to FY05. Analysts peg revenues to be at over Rs 1700 crore for FY06 and Rs 2500 for FY07.

To facilitate that kind of growth Simplex is looking at various options. Says Mundhra, "we are capitalising on untapped opportunities through the organic and inorganic routes. We are upbeat on the growth in urban infrastructure and ports, with increased emphasis on public & private partnership and establishment of special purpose vehicles (SPVs)."

The company plans to grow organically through focus on specific sectors like marine construction, thermal and nuclear power, industrial construction and water management.

Expanding horizons
Simplex expects big growth to kick in from its international operations. It is targetting 50 per cent of the total turnover from international markets after 4-5 years. The share of foreign revenues as part of total revenues is expected to touch 20 per cent by the end of FY06 itself. Analysts note that the company has the capabilities to go up the value chain.

According to Madhuchanda Dey of ILFS Investsmart, firms like L&T have proved that Indian companies can be successful in foreign markets.

"Simplex has the fundamental strengths to replicate that success," says Dey. The company is currently executing an EPC contract for Qatar Petroleum worth Rs 100 crore. Other ongoing international projects include building a 7-star hotel, Hilton Doha.

It is not just the foreign projects that keep the cash bells ringing. The domestic scenario is equally exciting, say analysts. Four-laning of highways, the East-West-North-South corridors and an increasing number of power projects are expected to further drive the domestic growth story.

According to Mundhra, construction industry in India has the potential to become a $ 180 billion industry from current $ 50 billion. The sector, which accounts for about five per cent of the GDP, has been witnessing fast growth over the past two years. Dey points out that in power sector there is a demand-supply gap, which will ensure that new projects will continue to be announced.

According to Mundhra, certain stringent and unfavourable government policies pose a threat to the growth of this industry, especially in case of offshore projects. Also, there is intense competition and firming up of commodity prices, which could result in some squeeze in margins.

On an annualised EPS of Rs 63.8 Simplex trades at a P/E of 20.06x, which is attractive compared to Its peers like L&T (34.5x), Gammon India (47.17x), HCC (25.15x) and Nagarjuna Construction (4.77x).