Simplex Infrastructures Ltd....Simplex Infrastructures Ltd. SKP Securities Ltd Page 3of 34 Last...
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May 21, 2018
Simplex Infrastructures Ltd.
Growth catalysts in place; rerating potential…
CMP INR 555 Target INR 828 Initiating Coverage –BUY
SKP Securities Ltd www.skpmoneywise.com Page 1 of 34
Key Share Data
Face Value (INR) 2.0
Equity Capital (INR Mn) 99.3
Market Cap (INR Mn) 27,545.8
52 Week High/Low (INR) 650/392
1 month Avg. Daily Volume (BSE) 7,002
BSE Code 523838
NSE Code SIMPLEX
Reuters Code SINF.BO
Bloomberg Code SINF:IN
Shareholding Pattern (as on March 2018)
56%
21%
23%
Promoter
FII/MF
Puiblic & Other
Source: Company
Particulars FY17 FY18E FY19E FY20E
Net Sales 56,075.1 57,757.3 70,531.8 86,865.4
Growth (%) -5.0% 3.0% 22.1% 23.2%
EBITDA 6,886.7 7,254.3 8,788.3 10,822.6
PAT 1,202.7 1,418.3 2,785.3 4,216.7
Growth (%) 13.3% 17.9% 96.4% 51.4%
EPS (INR) 24.3 28.6 47.2 69.9
BVPS (INR) 309.3 336.2 418.6 489.5
Key Financials (INR Million)
Particulars FY17 FY18E FY19E FY20E
P/E (x) 24.0 19.4 11.7 7.9
P/BVPS (x) 1.9 1.7 1.3 1.1
Mcap/Sales (x) 0.5 0.5 0.5 0.4
EV/EBITDA (x) 8.9 8.6 6.5 4.9
ROCE (%) 9.9% 10.4% 10.4% 11.9%
ROE (%) 7.9% 8.5% 11.3% 14.3%
EBITDA Mar (%) 12.3% 12.6% 12.5% 12.5%
PAT Mar (%) 2.1% 2.5% 3.9% 4.9%
Debt - Equity (x) 2.1 2.0 1.0 0.7
Key Financials Ratios
Source: Company, SKP Research
Company Background
Simplex Infrastructure Ltd (Simplex), incorporated in 1924, amongst India’s leaders in construction, executing projects in several sectors like energy & power, mining, buildings, real estate, etc. It was initially promoted as Simplex Concrete Piles (India) Ltd. by HP Lancaster of the UK, with a focus on high-end piling contracts and was taken over by Mundhra's of Kolkata, the current promoters, in 1947. Its operations are spread across India and overseas, with ~200+ on-going projects, catering to a diverse clientele. Investment Rationale Pure play on the construction sector with diversified and robust order book Simplex is a pure play construction company with focus on traditional EPC format
(in EPC, client is billed and pays for the costs incurred) and has limited exposure to capital intensive BOT business where cash flows are back ended.
Simplex’s order book is well-diversified across 9 business segments which reduces risk due to delay from single contract/business segment/country. Moreover, due to its vast experience, the Company has the ability to identify profitable business segments to drive its revenue growth.
The Company has a strong order book position of Rs 176 bn, 3.1x order books to bill ratio on a TTM basis, providing strong revenue visibility over the next few years. It has a large fleet of owned construction equipment, worth Rs 29.9 bn, giving it a competitive edge in terms of cost of construction and hence, in pricing.
Execution track record, a key differentiator In a space where project delays are a norm, Simplex is among the few
construction companies which has a proven track record of timely completion of projects, if not ahead of schedule. This not only enables completion within cost, but also entails lucrative benefits like Early Completion Bonus.
Positioned to capitalize on Infrastructure opportunity; resultant robust growth visibility Capex recovery is truly underway in India while the fundamentals suggest the
pick-up will be both reasonably robust and sustainable. All segments (T&D, urban infra, metro rail, buildings & housing etc.) are witnessing large-scale bid pipeline spearheaded by Government’s spending on infrastructure build up.
As the scenario is improving on bidding pipeline and liquidity, Simplex has the option of choosing the best-suited orders in terms of segment, geography, client, payment terms, etc. Therefore, we expect the Company’s revenue to gain traction from FY19E onwards and expect it to grow at a CAGR of 11% during FY18-20E to Rs 76 bn.
Focus on fast-tracking recovery of receivables, debt reduction on cards Simplex is focused on improving cash collection cycle and reducing debt.
Management targeted to recover receivables worth Rs 6 bn in FY18, of which it had recovered Rs 2.3 bn in 9MFY18. Further, with rigorous follow up with clients, management is hopeful of recovering old debts worth Rs 8 bn during FY19E and FY20E. For FY17, total outstanding old debts amounting to Rs 52.9 bn, which include unbilled revenue of Rs 32 bn and retention money of Rs 5.5 bn. It also expects to receive Rs 0.9 bn from its Bangladesh project by year end.
Simplex has large arbitration claims due from Government and private agencies, which it expects to receive in next few years. As on Q3FY18, total arbitration claims stands at Rs 22.6 bn, of which the Company had already won Rs 4.6 bn.
Further, it has proposed to raise Rs 200 crores from promoter entity by issuing ~3.6 mn warrants at Rs 554/share of which, it has already received 25% of the application money amounting Rs 50 crores. The Company has recently raised Rs 402 crores via QIP by issuing ~7.1 mn shares at Rs 569/share. Accordingly, it aims to reduce debt by Rs 12.8 bn by FY20E.
Valuation
Government’s multi-pronged focus on infrastructure sector on the anvil coupled with creation of robust financial and regulatory environment is providing a fillip to the construction sector. Simplex’s diversified presence across infra verticals will enable it to capture opportunities arising from capex recovery spearheaded by public sector spending. This, coupled with substantial fall in debt, will prop the improvement in working capital cycle reinforcing its earnings.
We have valued the stock on SOTP basis and recommend a BUY on the stock with a target price of Rs 828/- (~49% upside) in 18 months.
Anik Das
Tel No: +91-33-40077020;
Mobile: +91-8017914822;
E-mail: [email protected]
Simplex Infrastructures Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 2 of 34
Exhibit: Construction Industry in India
Correlation between Construction activities & GFCF growth is high •
•
•
Source: RBI, SKP Research
Infrastructure constitute ~49% of the total construction industry
Construction Industry in India FY17 - Composition of Value Added •
•
•
•
Source: RBI, SKP Research
With focus on spends in road,
urban infra, airports, rail and
irrigation the construction
industry is expected to grow
at a CAGR of 10-12% during
FY17-21 (higher than 2%-4%
rate w itnessed during 2011-
14)
Residential – It typically involves the construction of buildings
for group housing and townships, as well as independent
residences for select private customer
Commercial & Institutional – It typically involves the
construction of buildings for hospitals and healthcare
services and educational institutes. It also includes retail
malls, hospitality services (hotels and leisure sector) and
corporate offices
Industrial – It primarily involves the construction of buildings
for manufacturing plants, pharmaceutical plants, chemical
plants, metal plants, food processing units, engineering units
and waste processing facilities among several other
The industry provides growth impetus
to several manufacturing sub-sectors
like cement, bitumen, iron and steel,
chemicals, bricks, paints, tiles, etc.
whose combined value is Rs 1,920 bn
annually. It also provides imputes for
large off-takes for specialized
equipment such as excavators, backhoe
loaders and tunneling machines etc.
• Equipment ~10%
Buildings Segment - An evolving opportunity
Buildings are broadly classified under Residential,
Commercial, Institutional and Industrial
Construction
contributes to
~10% of India’s
GDP
Composition of
the total
Industry:
• Materials ~55%
• Services ~35%
Construction activities contributes ~10%
of India’s GDP; employing ~35 mn
people, the second largest sector after
agriculture
The industry has backward and forward
linkages with several sectors, including
hospitals, schools, offices, houses &
other buildings; urban infra (including
water supply sewerage, drainage);
highways, roads, ports, railways,
airports; power systems; agriculture &
irrigationsystems etc.
2.5%
4.8%5.0%
2.4%1.8%
4.1%
6.1%
2.4%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
FY14 FY15 FY16 FY17
Gross Fixed Capital Formation, YoY (%) Construction, YoY (%)
42%
5%
49%
Buildings Segment
Industrial projects
Infrastructure
Industry Snapshot
Infrastructure is a major sector that propels overall development of the Indian economy. The
broad categories under the core infrastructure space are power, railways, bridges, roads,
ports and urban infrastructure.
Market size of Indian construction industry is ~Rs 2,480 bn, employing a workforce of nearly
~35 mn, making it the second largest sector after agriculture. Infrastructure projects are
major demand drivers in the Indian construction industry accounting for an estimated 49%
of industry value followed by real estate and housing (42%) and industrial projects (5%).
Furthermore, infrastructure sector provides growth impetus to several manufacturing sub-
sectors like cement, bitumen, iron and steel, chemicals, bricks, paints, tiles, etc. whose
combined value is Rs 1,920 bn annually.
Construction industry is highly fragmented and working capital intensive, particularly in the
case of projects of long gestation periods. Although the project risk for contractors is low,
due to a relatively small investments commitment in projects, institutions had been cautious
about lending to small contractors until recently. This is due to the high risk associated in
delay of payment by the client.
Simplex Infrastructures Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 3 of 34
Last investment cycle (FY11-14) – Going from bad to worse:
The infrastructure sector in India has gone through a rough patch between FY11-14
wherein policy logjam, delay in clearances and aggressive bidding by developers led to
a collapse in the investment climate and stalled projects. This, along with reduced
Government spending, stressed finances of private sector and tightened bank funding,
resulted in a decline in investments in the sector, which was the backbone of economic
growth. Consequently, the entire infrastructure sector (spending for the sector grew at a
meager ~2-4% during the cycle) went into a vicious loop.
Lack of new orders and delay in payments from Government bodies led to
ballooning working capital, raising debtors days to as high as 150‐180 days for
many companies.
To ensure that their operations continued even at such debtor day levels,
companies borrowed more, which led to corporate debt rising exponentially.
The high interest‐rate regime had already pushed up interest payment and as
companies piled on more debt, their interest outgo increased further.
This in turn put more pressure on cash flows, which led to even higher debt levels.
This led to more interest expenses — the vicious loop.
The working capital (WC) cycle also elongated because companies invested
indiscriminately in their various real estate and BOT subsidiaries. Most of these
investments were in the form of loans and advances.
New investment cycle (FY14 onwards) – On the cusp of recovery; Government is
becoming a viable client now
Lately Government has taken many initiatives - 1) formation of dispute resolution
committees, 2) faster clearances, 3) easing financial norms and 4) increased ordering
under new viable models have created a robust financial and regulatory environment
and improved investor sentiments.
With multi-pronged focus on social infra and refurbishment programmes on the anvil,
the Government’s tendering is likely to increase materially over the next two years.
Government orders are larger, more complex and significantly higher than in the past.
Presently, Government and allied agencies are driving the tendering system. Moreover,
there is a steady stream of investments ongoing in social infra projects wherein
tendering had a step-up in FY15 and has maintained pace since.
As a result, more players are now looking at the Government as a viable client. A key
difference vis-à-vis the FY08-11 up-cycle was that Government projects can now match
up (if not exceed) to private sector orders in terms of order sizes, project complexity and
onus on execution.
Fund allocation to various sectors in the Union Budget with allocation to roads and
highways increased by 16% to Rs 710 bn, to irrigation by 28% to Rs 94.3 bn and to
railways by 33% to Rs 531 bn. The emphasis on low cost housing, irrigation and roads
is likely to create construction opportunities worth over Rs 1.2 trn in FY19E.
With macros improving, and measures to revive the PPP sector being taken through
new forms of awarding (hybrid annuity) and financing (REITs and InVITs), there will be
stranded projects revival easing cash flows while new project flows will provide growth
visibility.
Simplex Infrastructures Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 4 of 34
Exhibit: Government Expenditure to Drive Order Inflow s (In Rs Bn)
Source: Union Budget documents * BE denotes budgeted estimates,SKP Research
42
9
42
42
0 43
0
58
0
19
0
51 1
50
30 40
45
061
0
16
9
60
23
0
54
10
40
0
71
0
19
0
65
21
0
38
20
53
1
0
200
400
600
800
Road
s an
db
rid
ge
s
Rura
l ro
ad
s
PM
AY
urb
an
PM
AY
ru
ral
Rura
lele
ctrifi
catio
n
Natio
nal
invest
me
nt
and
infr
ast
ruct
ure
fu
nd
Railw
ays
FY16 BE FY17 BE FY18 BE FY19 BE
Exhibit: Reversal of the vicious loop
Source: SKP Research
Higher Interest
Expense
Lower Earnings & Cashflow
Increase in Debt
Higher Earnings & Cash flow
Lower interest expense
Reduction in Debt
Further aggravated by elongated WC cycle
Further aggravated by investment in subsidiaries
Further aggravated by high interest rate regime
Further enhanced by capital raising & divestments
Further enhanced by order inflow and WC management
Further enhanced by reduction in interest rates
Presently, the Government has laid a roadmap on infrastructure creation for a sustained
growth in the country's economic activity. In the Union Budget 2018-19, the
Government of India (GoI) has given a massive push to the infrastructure sector by
allocating Rs 5.97 lakh crore (USD 92.22 billion) for the sector. Assuming GDP growth
at 8%, investment in infrastructure can be expected to increase to Rs 76 trn over the
next five years assuming an increase in construction spend to 9% of GDP, which
provides significant opportunity for industry players.
Reversal of elongated working capital cycle for construction sector:
Construction sector’s financial health is driven by higher scale, better absorption of
overhead costs and continued bidding discipline. Asset utilization of the industry is likely
to increase, although Companies may have to incur capex to upgrade machinery to
meet the changing requirement and specification, mainly in the road sector. On a net
cycle basis, the entire construction sector has a relatively benign working capital cycle.
This is mainly driven by its high customer receivables. However, the sector credit profile
could witness a gradual recovery as companies are currently more focused on
managing lean working capital cycle and liquidity position rather than reckless
accumulation of orders.
Consequently, prior elongated cycle are expected to reverse as 1) Robust order award
activity – leading to better WC management 2) Lower interest rate regime – leading to
lower interest expense 3) Asset divestment by companies – leading to incremental cash
flow. These factors, which will play out over the next few years, will all contribute to
reducing debt levels and interest expenses and lead to better cash flows.
Simplex Infrastructures Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 5 of 34
Source: SKP Research
Exhibit : Porter’s Five Force Framework Analysis
Threat of substitutesLOW
1. Whilst the risk of substitution is low (as a project is awarded on the lowest-cost basis), risk of a project being postponed or cancelled is very high.
2. Project can be delayed or cancelled due to multiple external issues such as delay in clearances or lack of availability of capital with the developer.
Barriers to entryLOW
1. Low capital requirement for EPC contracts (gross block) results in low entry barriers.
2. New firms can gain prequalification either by taking smaller jobs or by forming JV with other mid-sized construction companies/ international players.
3. On the private side, relationships rule the roost
CompetitionMEDIUM
1. Competitive intensity from mid-sized players has reduced in sectors such as metros, and marine transportation, which requires capital investment in either gross block or working capital.
2. More demanding projects may limit the number of bidders on the Government side.
Bargaining power of buyersHIGH
1. Government bodies, large corporates, infrastructure/real-estate developers are the key clients that award contracts on a low-cost basis and enjoy high bargaining powers.
2. Bargaining power of buyers have increased, as they squeeze EPC contractors for margins and working capital payments
Bargaining power of suppliersMEDIUM
1. Bargaining power of suppliers is low as the order quantity by buyers is in bulk.
2. Shortage of skilled manpower, especially for high-end engineering project in sectors such as metros and water/waste management.
3. No advantage in sourcing raw material (cement and steel) due to fragmented nature of the construction industry.
The construction industry is highly fragmented as low fixed capital requirements for
construction contracts remove entry barriers. Capital expenditure is only required for
procuring necessary equipment unlike a manufacturing business, which requires plants
and machinery. Porter’s five force framework analysis as follows -
Simplex Infrastructures Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 6 of 34
Exhibit: Positioning of the Construction Industry
Roads
Dilip Buildcon
KNR Constructions
Sadbhav
Engineering
PNC Infratech
Ashoka Buildcon
Cummins
Tata Hitachi
BEML
IRB Infra, IRB InvIT
Sadbhav
Infastructure Projects
ITNL
Cement
Ultratech, ACC, Ambuja,
JK Lakshmi, Shree
Aggregates, Bitumen &
Steel
Power
L&T
Simplex
NCC
BGR
BHEL
L&T
Thermax
KEC
Kalpataru
Triveni
NTPC, Tata Pow er,
Adani Pow er, Torrent
Pow er, GMR, GVK,
JSW Energy,
RattanIndia Pow er,
CESC, NHPC
Suzlon, INOX Wind
Cement & Steel
Fuel
Coal India, ONGC
Petronet LNG, GAIL,
GSPL
Pow er Trading – PTC
India, IEX
Ports/Airports
L&T
ITD Cementation
NCC, Simplex,
Ahluw alia
Adani Ports & SEZ
Gujarat Pipavav
APM, PSA, DP World
GMR, GVK
Shipping and Shipyards
Cochin Shipyard
Dredging
Logistics – ConCor,
Navkar
L&T
IRCON
GMR
Tata Projects
J Kumar
Simplex
Alstom, Siemens
ABB
L&T
Texmaco
Titagarh
Wagons
L&T – Hyderabad
Metro
Cement & Steel
Fuel
Coal India, ONGC
Petronet LNG, GAIL,
GSPL
Pow er Trading – PTC
India, IEX
Buildings
L&T
Shapoorji Pallonji
NCC, Simplex, JMC
Projects
Ahluw alia,
Capacité, PSP
NBCC
Cranes/
Formw ork
manufacturers
Excavators,
Dumpers – Tata
Hitachi, BEML
Concrete Pumps
– Schw ing Stetter
DLF
Puravankara
Shobha
Oberoi
Prestige
Cement
Ultratech, ACC, Ambuja,
JK
Lakshmi, Shree
Building Materials & Steel
Kajaria, CERA, Somany,
Finolex, Greenply
Source: SKP Research
Ministry of Housing and
Urban Affairs
CPWD,State
PWDs,HSCC,City Development
Authorities
Private Developers, NBCC
State-level RERA
Authorities
Ministry of Road Transport
& Highw ays
NHAI, NHIDCL, State PWDs
Ministry of Pow er, Ministry
of Coal, Ministry of New and
Renew able Energy, SECI
CERC, CEA, SERCs, NLDC,
State DisComs, State
TransCos, State GenCos
Ministry of Shipping,
Ministry of Civil Aviation
Maritime Boards of States
TAMP, AERA
AAI
Ministry of Railw ays
Western and Eastern
Dedicated Freight Corridors
Ministry of Housing and
Urban Affairs
EPC ContractorEquipment
Manufacturer Asset Owner OthersMinistry/ Regulator/ Key
project awarding entities
EPC in Transmission
Railways/ Metro
Positioning of the Construction Industry – Most fragmented, least organized:
Competitive intensity at its ebb:
Over the last ten years, industry has witnessed multiple exits due to financial troubles.
Mid-sized players have been impacted by unrelated expansion into new segments and
balance sheet issues. As a result, few players (domestic & foreign) with a relatively
large net worth to take on large projects are operating currently. Given a higher impetus
on the quality and technical qualifications of contractors, consolidation could be a major
stimulus for a handful of players.
In 2009, at the peak of the investment cycle, 32 construction companies were a part of
the BSE500 index. However, over the last few years, many of the contractors faced
financial stress due to higher working capital and lower growth. A few contractors also
diversified into other infra segments resulting in further diversion of resources and
ballooning of capital employed.
Simplex Infrastructures Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 7 of 34
Exhibit: EPC Player's order book and geographical presence
Order book (Rs bn) 40.1 52.4 76 27.5 165.2 230 NA 316 2586
Buildings & factories 91% 100% 76% 100% 27% 100% NA 50% NA
Non- B&F 9% 0% 24% 0% 73% 0% NA 50% NA
Govt 68% <5% 32% 4% 62% NA NA NA NA
Private 32% 95%+ 68% 96% 38% NA NA NA NA
Geographical mixMainly North
India
Mainly West
India
Mainly
South India
Mainly
GujaratPan-India Pan-India Pan-India Pan-India Pan-India
Source: Company,SKP Research
NCC Ltd L&TJMC
Projects
PSP
Projects
Simplex
Infra
Tata
Projects
Mid-sized local players Pan-India
Ahluwalia Capacit'e SP Ltd
Exhibit: A sharp fall from grace for EPC contractors from BSE500 Index
Source: BSE,SKP Research
3220
13
2
0
10
20
30
40
50
FY2009 9MFY18
EPC Buildings EPC
Exhibit:Favorable markets help in fundraising activities
Date Company Issue Raised (Rs Bn)
Feb-18 ITD Cementation QIP 3.4
Jan-18 NCC QIP 5.5
Sep-17 Capacite Infraprojects IPO 4
Sep-17 Bharat Road Netw ork IPO 6
May-17 PSP Projects IPO 1.5
May-17 IRB Invit Fund Invit 50.4
Oct-16 NBCC OFS 22
Aug-16 Dilip Buildcon IPO 4.3
Jan-16 JMC Projects Rights 1.5
Oct-15 IL&FS Transportation Rights 7.4
Sep-15 Sadbhav Infrastructure IPO 4.3
May-15 PNC Infratech IPO 4.8
Apr-15 MEP Infrastructure IPO 3
Apr-15 Ashoka Buildcon QIP 5
Apr-15 HCC QIP 4
Mar-15 IRB Infrastructure QIP 4.4
Source: BSE,SKP Research
Location - Important for an engineering, procurement, and construction (EPC) player:
Not all the established contractors have a pan-India presence. Whilst most mid-sized
players attempt expansion, it is a gradual process as building a supply chain and
reputation is a cumbersome process. Larsen, Shapoorji, Tata Projects, NCC and
Simplex tend to operate on a pan-India basis whilst all others have a limited footprint.
Fund raising improves health; new
avenues come up in the form of
InVITs:
With easing liquidity constraints in
the Indian financial system, many
infrastructure players are raising
equity through either Qualified
Institutional Placement (QIP) or
rights issue or IPOs. With new
funding avenues such as
Infrastructure Investment Trust
(InVITs) and the issue of double
taxation on it getting resolved, it
can be safely assumed that over
the next few years, BOT players
will utilize this avenue of further
fund raising.
Simplex Infrastructures Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 8 of 34
Q3FY16 84 175 23 144 19 - 92 77 47 12 674
Q4FY16 147 78 114 79 16 - 142 138 39 34 788
Q1FY17 110 65 40 58 2 - 23 171 24 16 509
Q2FY17 121 219 52 119 32 - 75 105 51 13 787
Q3FY17 77 78 33 18 21 - 107 95 48 3 479
Q4FY17 87 51 65 122 10 - 11 176 57 4 584
Q1FY18 78 5 50 20 12 45 107 144 89 4 554
Q2FY18 89 66 76 33 39 61 21 72 65 2 524
Q3FY18 177 17 155 64 55 - 147 88 47 24 775
Growth
YoY (%) 129% -78% 366% 256% 166% NA 38% -7% -2% 711% 62%
Source: Projects Today,SKP Research
Exhibit: Grow th in order inflows (In Rs Bn)
Water &
Irrigation OthersSegment Pow er Total
Railw ays
& MRTS
Transportati
on & Marine
Infra
Buildings Oil & Gas Industrial DefencePow er
T&D
One of the best trends in last nine quarters
0
46%
8%6%
10%
8%
2%10%
10%
Segment-wise breakdown Segment-wise breakdown
Roadways
Water supply
Community services
Irrigation
Irrigation
Power Distribution
Real Estate
Others
24%
7%
2%8%
3%
3%0%
5%5%
2%
2%
1%
4%
34%
State-wise breakdownMaharashtra
Karnataka
Odisha
Madhya Pradesh
West Bengal
Jharkhand
Bihar
Andhra Pradesh
Uttar pradesh
Tamilnadu
Rajasthan
Haryana
Gujarat
Others
Demand Drivers
Government is on spending spree, tender announcements robust, new project
tendering: highest in January
The Government has laid a roadmap on infrastructure creation for a sustained growth in
the country's economic activity. In the Union Budget 2018-19, the Government of India
has given a massive push to the infrastructure sector by allocating Rs 5.97 lakh crore
(USD 92.22 bn) for the sector, which includes aviation, housing, energy, power,
railways, roads, shipping & water. Recent initiatives and public spending re-affirm the
Central Government’s strong commitment to infrastructure.
The EPC sector will be the biggest beneficiary of this huge opportunity. Whether it is in
roads, railways, or metros, a large part of the capex for the infrastructure projects
involves civil work, which will be executed by the local EPC players – irrespective of
whether the project is awarded on EPC/BOT basis or to a domestic/foreign player.
New project tendering was at its peak in January, led by the roads sector, likely to
translate into higher order finalization in near term. Post weakness over last 20 months,
on a trailing-six-months basis, contract awards in construction, which surged in
November and December 2017, continued their upward move in January 2018 posting
strong 62% y-o-y growth at Rs 775 bn. Sector’s revenue outlook looks robust with
current order-book providing healthy visibility (average visibility of ~3 years). Execution
is at 9% growth in 9MFY18 over 9MFY17, as GST issues subside.
Simplex Infrastructures Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 9 of 34
Date Investor Details
Jun-17 Qatar HoldingInvested $250 million in Arthveda Fund Management’s new Affordable
Housing Fund
Nov-17 IFC, HDFCIFC has teamed up w ith mortgage lender HDFC to create an $800 million
fund dedicated to affordable housing
Dec-17 HDFC Capital HDFC Capital raises $550 million for 2nd affordable housing fund
Jan-18 Indiabulls Housing Finance IBHF raises Rs 1,000 crore from Yes Bank for affordable housing
Jan-18 SBI SBI to raise Rs 200bn for affordable housing, infra via bonds
Source: Media, SKP Research
Exhibit: Private sector financiers are raising funds to promote ‘Affordable Housing'
Exhibit: Urban Housing: New Sanctions Improve; Await Completion
Source: MHUPA,SKP Research,*as on February 2018
700 1
100
1900
0
500
1000
1500
2000
FY
16
FY
17
FY
18*
House sanctions: 3.7mn to date since inception
('000 units)
0
200
400
600
800
1000
AP
MP
KA
UP TL
GJ
TN
MP
KA
JH
Top states: Andhra Pradesh in new sanctions and Gujarat in completion
House sanctions House completed
('000 units)
Affordable Housing- A new frontier for EPC companies:
Housing has been a cornerstone of the Government’s political agenda both in terms of
social upliftment and job creation. ‘Housing for All’ is a difficult end-goal in the traditional
construct of high land prices + high profit margin for developers + safe haven for black
money. Demonetisation, RERA (Real Estate Regulatory Act) and incentives for
affordable housing may be the moves to control and lower pricing. Central Government
budget has allotted Rs 46 bn towards subsidies for developers that build affordable
houses or redevelop the slums. If fully utilised, this figure can support affordable
housing and slum redevelopment projects of up to Rs 250 bn. Furthermore, the
Government may allow financially weak public sector companies to provide land for
these projects. Snapshot of this scheme as follows:
Budgetary allocation for PMAY (Urban) increases by 8% to Rs 65 bn for FY19 BE. Also,
a dedicated Affordable Housing Fund of Rs 600 bn gets Union Cabinet approval.
Total 3.7 mn houses sanctioned till date. Around 0.3 mn houses completed under
PMAY (Urban).
Smart Cities: 99 cities selected with outlay of Rs 2,040 bn. Projects worth Rs 23 bn
completed and Rs 205 bn are under progress.
AMRUT: 494 projects worth Rs 194 bn awarded for water supply & 272 projects worth
Rs 124 bn for sewerage work.
There has been a material step down in ticket prices in the new housing launched by
private developers. ‘Affordable’ may not fit the Government criteria but private
developers are looking for ways to lower ticket sizes in order to attract buyers. There
have been multiple fund raises by major financiers to provide funding in this segment.
Simplex Infrastructures Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 10 of 34
Exhibit: Urban Transportation: In Full Swing
Source: Projects Today,SKP Research
22
48
48
65
40
12
35 38
85
0
20
40
60
80
100
CY
02
CY
04
CY
05
CY
10
CY
11
CY
13
CY
14
CY
15
CY
17
Highest-ever metro length turns operational in CY17
Metro length turns operational (km) 252
43
27
28
18 26
12
9 9
30
80
75
75
26
86
23
14
66
40 43
30
23 32
0
100
200
300
De
lhi
Be
ng
alu
ru
Kolk
ata
Ch
en
na
i
Kochi
Gurg
ao
n
Mu
mb
ai
Jaip
ur
Lu
ckn
ow
Hyde
raba
d
Ahm
ed
ab
ad
Nag
pu
r
Noid
a
Navi M
um
ba
i
Pun
e
Metro: 454km operational & 612 km underconstruction
Operational (km) Under-construction (km)
Urban Infrastructures – Set to grow rapidly:
The Indian demography has seen rapid urbanization over the last decade and its pace
is expected to increase over the next few decades. Currently 377 mn Indians (31% of
the population) reside in urban centres (Census 2011) as compared to 45% in China,
54% in Indonesia and 87% in Brazil. There is an urgent need for re-generating urban
areas in existing cities and the creation of new, inclusive smart cities to meet the
demands of the increasing population and migration of rural population to the urban
areas.
Most Indian cities remain ill equipped to handle a large population migration. With such
migrations, not only do basic necessities such as water, power, and sanitation need to
be provided, but also infrastructure facilities such as public transport and roads need to
be upgraded. Since most cities in India are not planned, there is limited scope for intra-
city road expansions, and this creates a pressing need for other forms of transport. The
Central Government proposes to give financial support to the Mission to the extent of
USD 7.77 bn in the next five years (FY15-16 to FY19-20).
Snapshot of projects under this scheme as follows -
In the Union Budget, the Finance Minister announced 150 km of suburban network of
Rs 400 bn in Mumbai and 160 km of suburban network of Rs 170 bn in Bengaluru.
Maharashtra metro plans to interlink four Indian Railways stations with Pune metro
rail project.
South Korea - based firm Hyadai Rotem bags contract to supply 96 metro cars to
metro-lnk express for Gandhinagar & Ahmedabad (MEGA).
Maharashtra Government signs MoU with Virgin Hyperloop One Group to build first
Hyperloop route in India between Pune and Mumbai.
Chennai metro rail starts land survey for the second phase of metro rail project.
The National High Speed Railway Corporation (NHSRCL) starts the process to
acquire land for the 508 km Mumbai-Ahmedabad High Speed rail (bullet train) project.
The project has been put in the fast lane by converting it into an elevated corridor
which would require railways to acquire 1,100 hectares of land against 1650 hectares
earlier. The line’s alignment passes through nine districts in Gujarat & three districts
in Maharashtra.
Simplex Infrastructures Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 11 of 34
Exhibit: National Waterways: Gathering Pace
Construction of multimodal terminal at Haldia ITD Cementation 5174 Dec-19 3.2
Construction of multimodal terminal at Varanasi Afcons Infrastructure 1697 Nov-18 0.5
Construction of new navigational lock at Farakka Larsen & Tubro 3592 Mar-19
Construction of multimodal terminal at Sahibganj Larsen & Tubro 2809 Mar-19 2.2
Source: : Inland Waterways Authority of India,SKP Research
Hasnapur & Bakhtiyarpur: DPR under preparation
Intermodal terminal at Kalugha
Intermodal terminal at Ghazipur
Ro-Ro terminals
DPR and tender document under f inalization
DPR and tender document under f inalization
DPR and tender document under f inalization;NOC aw aited from World Bank.The terminal is being
planned for LNG bunkering
Rajmahal & Manikchak: Draft DPR submitted
Samdaghat & Manihari: Draft DPR submitted
Kahalgaon & Tintanga: Draft DPR submitted
Hasnapur & Bakhtiyarpur: DPR under preparation
Project cost
(Rs Mn)
Target
completion
Terminal capacity
(mn tonnes pa) Civil ContractorProject implementation on NW-1
National Waterways: Gathering pace:
The Indian port sector, which at present is on a rather slow track, has an array of
opportunities for its up-gradation and development. Aimed at modernizing existing
ports, Government launched the Sagarmala project, where there could be an
investment of Rs 50,000 crore in port mechanization. Simultaneously, steps are being
taken to link inland waterways to various ports to facilitate coastal shipping and ensure
last mile connectivity. Under the National Waterways Bill 2015 recently cleared, 106
waterways have been declared national waterways during the last two years compared
with just five in the last 30 years, which would have positive impact on reduction of
overall logistics cost.
Several factors promise growth in coastal shipping: (1) it is more price-competitive than
road transportation; (2) if road connectivity of ports (Sagarmala) indeed improves
according to plan, we could see coasting shipping growing as a chunk of transportation
(currently mid-single digits), (3) the development of inland waterways in India would add
another fillip to the segment. However, the location of manufacturing capacities in India
(mostly in the hinterland) precludes comparisons with China, where coastal shipping
accounts for more than 25%. The transhipment/feeder business (aggregation of cargo
at certain ports) is a global phenomenon and its relevance would further increase as the
size of main-line vessels increase.
Snapshot of projects under this scheme as follows:
Central Road Fund (Amendment) Bill, 2017 to allocate 2.5% for development of NW,
which would provide ~Rs 20 bn pa.
Union government declares four rivers – Chenab, Indus, Jhelum and Ravi — as
national waterways (NW) to be developed in phases.
Waterway-airport connectivity proposed by Kerala Government to make 610km
waterway from Kovalam-Bekal navigable by 2022. Chennai metro Rail starts land
survey for the second phase of metro rail project.
.
Simplex Infrastructures Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 12 of 34
Exhibit: National Highways: Gearing Up
Source: Projects Today,SKP Research
30
00
58
00
26
00
22
00
24
00
30
00
38
00
40
00
29
00
96
00
0
2000
4000
6000
8000
10000
12000
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
10M
FY
18
FY
18E
NHAI awarding muted, but bid pipeline robust
23
00 2
80
0
23
00 2
90
0
19
00
15
00 2
00
0
28
00
15
00
34
00
0
700
1400
2100
2800
3500
4200
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
10M
FY
18
FY
18E
NHAI completes road length of 1,566km; 4.3km per day
Length awarded (km) Length completed (km)
Roads & Highways: Gearing Up for next growth:
The Indian road space is on a secular uptrend with surging NHAI project awards
(~4,000 km YTD) and a huge bid pipeline (~7,768 km worth Rs 1.4 trn at YTD). Various
policy measures adopted by the Government saw project awards in FY17 catapulting to
~66% as compared to FY14. Buoyed by its success, Government is looking at spending
Rs 7.1 trn in the road sector to construct 83,677 km of roads over next 5 years. These
targets are a whopping ~190% higher when compared to the achievements of the past
5 years (FY13-17).
To achieve this mammoth target, Government is looking at roping in agencies like
NHAI, MoRTH, State PWDs and the National Highways & Infrastructure Development
Corporation (NHIDCL). Substantial delegation of powers has been recommended to
ensure that these works witness speedy completion. The programme comprises 2 main
components – Bharatmala and road projects under existing schemes like the Left Wing
Extremism (LWE) scheme for road development in Naxalite areas, Special Accelerated
Road Development Programme for the North-Eastern Region (SARDP-NE), National
Highways Interconnectivity Improvement Project (NHIIP), SetuBharatam, Char Dham,
etc.
Snapshot of projects under this scheme as follows:
NHAI revised expenditure of Ministry of Roads, Transport & Highways stands at Rs
610 bn for FY18 and expenditure is expected to increase by 16% to Rs 710 bn in
FY19. The ambitious Bharatmala Pariyojna scheme has been approved to develop
35,000 km of roads network in Phase I at an estimated cost of Rs 5,350 bn.
NHAI awards 2,697 km in 10MFY18 worth Rs 423 bn with ~62% on EPC, 34% on
HAM and 5% on toll mode.
NHAI invites bids for 7,768 km worth Rs 1,416 bn with 61% on HAM, 38% on EPC
and 1% on toll mode.
First tranche of ToT highways for 648 km receive bids from Brookfield, Macquarie
Group, IRB Infrastructure & NIIF and Macquarie won with a bid of Rs 97 bn.
Simplex Infrastructures Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 13 of 34
Power Generation - Opportunity exists but will take time to materialise:
Power sector continues to face constraints in terms of: 1) soft demand recovery and low
pricing, 2) delayed policy implementation and 3) lack of long-term PPAs from state
discoms. The recent initiatives taken by the Government, e.g. UDAY, auctioning of coal
& gas linkages and supply etc might unblock the policy logjam.
As demand is expected to pick-up at 7-8% per annum and capacity addition likely to
stagnate, power deficit is set to rise in the long-term. Hence, increasingly there will be a
case for spurt in capacity addition programme from FY19 onwards which will be needed
for fresh and replacement demand (Government has identified 36,000 MW of
generating plants which are more than 25 years old).
In the near term, Government will facilitate shutting down old plants and coal linkage will
also be transferred. 36,000 MW of generating plants, if replaced, would mean order size
of Rs 2,160 bn for the EPC players. It is expected that the PSU sector would be taking a
lead in setting up these capacities leading to continuous opportunities for the
construction players.
Power -Transmission and Distribution (T&D): Gearing up for the next level of growth
While the power sector has seen remarkable accretion in generation capacities,
investments in T&D networks have lagged behind, causing network congestion and
inefficiencies. The requirement for large scale transmission gets further accentuated as
the load centers are scattered at far off places, away from generating stations located in
resource rich areas.
Industry estimates indicate that massive transmission corridors need to be built in
Northern and Southern regions for transferring power from other regions. Going
forward, substantial investments (the Government has envisaged a capex of Rs 2.6 trn
over the 13th plan) are expected in T&D systems to gain pace as utilities upgrade and
ramp up the T&D infrastructure.
Exhibit : Transmission and distribution spending over the 10th-13th plan
Description 10th Plan 11th plan 12th plan 13th plan
Rs Bn Total PGCIL Share Total PGCIL Share Total PGCIL Share Total PGCIL Share
Transmission
Inter State 200 190 95% 550 553 98% 1,250 1,100 80% 1,600 800 50%
Intra State 255 562 0% 550 112 20% 1,000 250 25%
Distribution 300 0 0% 1,000 0 0% 3,062 0 0% 2540 254 10%
Total T&D spending 755 190 25% 2112 553 26% 4862 1212 25% 5140 1304 25%
Total (transmission) 455 190 42% 1112 553 50% 1800 1212 67% 2600 1304 50%
Source: CEA, SKP Research
Railways - Provides large opportunities for EPC players:
The railways sector has a high construction intensity of ~78% which provides ample
opportunities for the EPC players. For FY19, the ministry is targeting a growth of 8% at
Rs 1.3 trn with major growth in outlay envisaged under new lines (+36%), track
renewals (+108%), and DFC. The total opportunities for the EPC players are envisaged
at over Rs 1,000 bn in FY19E.
Simplex Infrastructures Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 14 of 34
Rs Bn FY13 FY14 FY15 FY16 FY17BE FY19BE
Rolling stock 184 175 165 194 273 252
New lines 53 58 71 202 156 212
Track renew als 54 50 54 44 40 83
Doubling 25 30 39 105 251 180
Electrif ication projects 10 13 14 23 34 35
Workshops 15 18 17 15 37 33
Invt. in non-govt. undertakings 28 40 46 54 84 168
Metros 12 12 10 13 14 14
Others 124 144 172 286 321 334
Grand Total 504 540 588 936 1,210 1,310
Source: Railway Budget, SKP Research
Exhibit: Railways - Rising trend in financial expenditure
Exhibit: Cement production on the uptrend since Nov’17
Source: Industry,SKP Research
26
23 22 23 24
21 22 22 21
25 24 25 25 2422 23 24 24
26 27
10%
1%3%
5% 6%
1%
-9%-13%
-16%
-7%-5%
-1%-3%
1% 1% 0% -1%
18%19%21%
0
5
10
15
20
25
30
-20%
-10%
0%
10%
20%
30%
Jun-1
6
Jul-1
6
Aug-1
6
Sep-1
6
Oct
-16
Nov-1
6
Dec-1
6
Jan-1
7
Feb
-17
Ma
r-1
7
Apr-
17
Ma
y-17
Jun-1
7
Jul-1
7
Aug-1
7
Sep-1
7
Oct
-17
Nov-1
7
Dec-1
7
Jan-1
8
Cement Production (mnT) YoY growth (%)
Input Indicators: Cement Volumes: Growth picks up again after a lull
Over the last 15 year period, cement demand in India has grown at 7% CAGR and
typically followed infrastructure growth closely. India’s cement industry has seen an
uptick in production over the past three months (Nov’17-Jan’18), backed by increase in
spending on affordable housing and uptick in the infrastructure sector.
Outlook
Construction industry is in a sweet spot. There are larger, more demanding projects on
the Government side. Commercial projects are picking up. The contracting community
may need to adapt, driven by the clients’ changing needs – do fewer but larger projects,
focus on execution quality and speed and protect the balance sheet. But the benefits
may be real – a natural attrition of customers towards more professional contractors, a
leaner working capital cycle and stable margins.
Simplex Infrastructures Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 15 of 34
Exhibit: Key Milestones
1924 Pioneered cast-in-situ driven piles in Asia.
1935 Foray into construction of industrial structures.
1940 Built the prestigious King George Docks (Jawaharlal Nehru Port), Mumbai.
1947 Current promoters Mundhras take over.
1958 Designed and constructed the first RCC framed structure in Asia, the 17-storied national tower in Kolkata.
1960 Forayed into construction of thermal power plants ranging 10 to 4000 MW.
1990 Started piling jobs in UAE – Abu Dhabi.
1992 Built international class hotel at Tashkent, Uzbekistan.
1993 Becomes public listed company in 1993. Turnover crossed Rs.3000 mn.
1996 Follow on public issue of equity shares & rights Issue of POCD.
2004 Began overseas expansion.
2005 Private placement of 15% equity shares for Rs 93 Cr at Rs 726 per share of Rs 10 each.
2007 QIP Rs 400 Cr, 13% dilution at 625 per share of Rs 2.
2010 Foray into power T&D and road BOT.
2011 Entry in Ethiopia, Bangladesh & Saudi Arabia.
Completed construction of India's tallest pilgrimage.
Acquires Joy mining services to expand its footprint into underground mining services and divest the
same in Sept 2012.
2014 Completed BOOM Project.
2015 Built airport on turnkey basis.
Source: Company,SKP Research
2012
Company Profile Simplex Infrastructures Ltd (Simplex), incorporated in 1924, is one of the leading
construction players in India, executing projects in several sectors like transport, energy &
power, mining, buildings, marine, real estate etc. It was initially promoted as Simplex
Concrete Piles (India) Limited by HP Lancaster of the UK, with a focus on high-end piling
contracts and was taken over by Mundhra's (current promoters) in 1947.
Simplex is the market leader in the concrete piles business in India. Over the years, the
company has evolved as a diversified infrastructure player, with presence across the
infrastructure segments and undertakes project contracts starting from design to complete
execution and commissioning on turnkey basis.
Simplex’s operations are spread across India and overseas, with ~200+ ongoing projects.
The company has access to latest technologies and has a strong technically competent
workforce (completed ~2,900 project across business segments and geographies) to cater
to a diverse clientele, ranging from private and public institutions, Government and various
international conglomerates.
Simplex has ramped up its capabilities and currently executes projects in the power,
industrial structures, buildings, roads, railways, marine, and urban infrastructure segments
etc. It has a diversified revenue stream, which protects the company from downside in any
particular contract, vertical, client or country.
Simplex Infrastructures Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 16 of 34
Parameter Engineering, procurement and construction (EPC) Others
Key competitors
Government spending on infrastructure development.
Source: Company, SKP Research
In urban infra, company is targeting to bid aggressively for metro projects across cities like Mumbai,
Delhi, Ahmadabad, etc. and expects huge opportunity from other urban Infra projects.
Revenue contribution
(FY17)
(1) Experienced and motivated Leadership, (2) Skilled middle management and project managers,
(3) Corporate ethos & culture to provide client satisfaction through quality and timely work, (4) Proven
strategy to be selective in choosing projects/ clients, (5) Reputation among clients enabling repeat
orders.
98%
CARE Ratings assigned CARE A rating in view of long and satisfactory track record of the company,
proven project execution capabilities, strong order book position and diversified project mix as well as
client portfolio.
98%
In buildings, the company focuses on Government orders and the company gets good order flow from
authorities such as Delhi Urban Shelter Board, NBCC, DDA etc. It has also developed goodwill
among private developers and has been getting repeat orders. The industry is highly fragmented with
a large number of un-organized players.
Key Success Factors
L&T, TATA projects, NCC Ltd, Ahluwalia Contracts, Capacit'e, JMC Projects, PSP Projects
Credit Rating
Demand drivers
Revenue contribution
(FY20E)
Market position
2%
Various initiatives such as Bharatmala, Sagarmala, Pradhan Mantri Awas Yojna, Pradhan Mantri
Sadak Yojna, Regional connectivity scheme, Freight corridors, Industrial corridors, Smart cities, etc. to
provide additional impetus to construction industry.
2%
Exhibit : SIL - Business Mix
Geographic presence The company has projects in 22 states.
The company started as a piling contractor, ramped up its capabilities and currently executes projects
in the power, industrial structures, buildings, roads, railways, marine, and urban infrastructure
segments etc. Currently buildings, urban infra, power and road comprise ~83% of the order book.
Product / service
offering
Revenue Mix:
Simplex is among the most diversified players in the India’s infrastructure space with a
presence across all construction verticals. This approach is a part of its overall strategy
towards risk mitigation ensuring that it is not overly dependent on any one vertical for its
revenues and at the same time can factor in the multiple risks of the business.
Simplex reports its revenues under two segments, namely, EPC and others. The ‘EPC’
segment contributes ~98% to the revenues. The revenue from ‘other’ segment includes
income from equipment including oil drilling rig. EPC segment is further divided into nine
sub-segments such as ground engineering, industrial, building & housing, power &
transmission, marine, roads & highways, railways and urban infrastructure etc.
In FY17, building & housing segment accounted for 38% of its revenues, followed by
urban infrastructures (13%), industrial (13%) and power (10%). It is currently working on
over ~200+ projects across 9 verticals and 6 countries. The diversified revenue stream
as well as exposure protects the company from downside in any particular contract,
vertical, client or country.
Simplex Infrastructures Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 17 of 34
Exhibit: Revenue break-up (Segment w ise)
Building & Housing
Simplex has been involved in undertaking the design and construction
of high-end high-rise infrastructure, comprising – multi-storied
residential tow ers, institutional buildings, hotels, hospitals and mass
housing projects.
27% 38%
Urban Infrastructures
Simplex has the expertise, resources & experience to design,
construct and execute complex or critical civil backbone infrastructure
ranging from w aterw orks to sew erage, urban, transportation,
renovation and modernization of airports.
20% 13%
Industrial Structures
Closely associated w ith industrial construction in various industries –
cement, steel, aluminum, copper, engineering, automobile,
petrochemicals, oil & gas, fertilizers, paper, textiles etc.
5% 13%
Pow er-Generation &
Transmission
Involved in civil construction w ork in pow er plants like thermal-coal, gas
and oil, hydel and nuclear as w ell as ultra mega pow er projects (UMPP)
and the large transmission lines.
25% 10%
Roads & Highw ays
Simplex has leveraged its construction capabilities and has been
undertaking a variety of highw ay and urban road construction w ork
including flyovers, elevated corridors and bridges.
15% 7%
Marine
Primarily engaged in civil construction of complex marine infrastructure
w hich ranges from underw ater piling including steel piling under
adverse sea conditions to construction of ports, terminals,
breakw aters, and shipyards.
1% 4%
Railw aysInvolved w ith the Indian railw ays in laying of metro lines, elevated
overhead stations, underground tunnel and stations.3% 4%
Source: Company,SKP Research,(Based on FY17 financials)
Share of order
book
% Share of
revenuesSub- segmentsSegments
Investment Rationale
Pure play on the construction sector, a well-managed construction company in the
challenging times
Simplex is among the few construction companies which managed to efficiently counter
challenging business environment in the past 3-5 years when many large peers struggled to
sustain their businesses. Its decision of limited exposure to capital intensive build operate-
transfer (BOT) space in an era of easy liquidity and instead focus on traditional EPC format,
(in EPC, client is billed and pays for the costs incurred for the project) and geographies
within the ambit of construction space has been favorable for the company. In today's
changing environment, it's proving to be a prudent decision as BOT operators are finding it
difficult to raise cash to complete projects. As a strategy, Simplex has always given priority
to bid only for profitable EPC projects in order to keep the balance sheet light.
Simplex Infrastructures Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 18 of 34
Regionally Diversified Across 22 States
Exhibit: Diversified Order Book
Source: Company, SKP Research,Order book- (as on 9MFY18)
Piling, 4%
Power, 24%
Industrial, 2%Marine, 4%
Road, 10%
Railways, 3%Bridges, 4%
Bldg & Hsg, 27%
Urban, 22%
Div ersified across 9 Industry Segments
Government, 73%
Private, 27%
Client wise orderbook break-up
Diversified order book and strong order inflow enhance revenue visibility
Simplex’s order book is diversified across ~200+ contracts, 9 business segments and 6
countries which reduces risk due to delay from single contract/ business segment/ country.
The order book having an average project execution period of around two and half years
consists of orders from building & housing sector (27%, including 6% for institutional
building and 21% from residential towers), power sector (24%), urban infra (22%), roads &
bridges (10%), industrial sector (2%) and ground engineering (8%), marine Sector (4%).
Domestic orders comprise ~92% and international orders comprise ~8% of the order
backlog. ~73%+ of its contracts are from Government and private sector contributes to
27%, which enhances security of payments and results in better working capital
management, given Government’s recent emphasis on timely execution of projects.
Simplex has a large fleet of owned construction equipment (Simplex owns Rs 29.9 bn worth
of construction equipment), giving it a competitive edge in terms of cost of construction and
hence, in pricing. Its top 10 orders constitute about ~30-35% of the aggregate order book,
indicating diversified order book profile.
Furthermore, Simplex has an increasing share of EPC projects in the order book
accompanied with the advantages of building a business model which is likely to result in
long-term benefits for the Company. Continued preference for pure contracting space with a
focus on short duration projects along with risk mitigation by way of geographical and
business mix diversification provides the Company with a great platform to achieve solid
growth going forward.
Simplex Infrastructures Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 19 of 34
Exhibit: Order intake keeps revenue visibility intact
Source: Company, SKP Research
15
2.2
154
.9
152
.6
161
14
0.7
165
.2
17
6.5
18
1.2
20
8.2 242
.8
64.5
63.1
78.8
64.9
50.6
81.2
51.0
80.0
100 12
0
2.5 2.6 2.7 2.82.5
2.93.3 3.2
3.0 2.8
0.0
0.9
1.8
2.7
3.6
-30.0
30.0
90.0
150.0
210.0
270.0
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
9M
FY
18
FY
18E
FY
19E
FY
20E
Order inflows to remain strong
Total Order Book ( Rs Bn) Total Order Inflow ( Rs Bn) OB/Bill (x)
Simplex has bagged strong order inflows worth Rs 67.2 bn per year (average) during FY12-
17 which is higher than its average revenue of Rs 57.2 bn per year. Order inflows were at
Rs 51 bn for 9MFY18, taking its order book to ~Rs 176 bn, 3.1x order book to bill ratio on a
TTM basis, providing strong revenue visibility over the next few years.
Simplex has L1 position on orders worth Rs 13 bn, which should facilitate achievement of
order inflows target of Rs 70-80 bn for FY18. Other newly won orders include IIT
Bhubhaneshwar order worth Rs 5.2 bn, Chennai metro order worth Rs 4 bn, NTPC order
worth Rs 2 bn, Power Grid order worth Rs 1.55 bn, BHEL order worth Rs 1 bn, etc.
The management has guided an order intake of ~Rs 100-120 bn in FY19E & FY20E.
Consequently, we build in order inflow of Rs 100 bn and Rs 120 bn in FY19E and FY20E,
respectively. With an improvement in execution on the back of an anticipated recovery, the
order book is expected to reach Rs 208 bn and Rs 243 bn in FY19E and FY20E,
respectively.
Execution track record, a key differentiator, strong project management and execution
capabilities
Simplex is among the few construction companies which has executed several projects
ahead of schedule. In a space where project delays are the norm rather than exception,
Simplex has time and again completed projects ahead of schedule. This not only enables
completion within cost, but also entails lucrative benefits—early completion bonus. Primary
reasons behind Simplex’s successful execution track record are:
Intense preparatory work: This commences right from the bidding stage when the
company analyses whether it should bid for a project keeping in mind the progress of
land acquisition and other statutory clearances, the client’s payment ability, past
experiences of projects developed in the region/client etc. There have been many
instances when the Company has let go of an opportunity to bid for a project (even
while facing declining order book) when it felt that execution may not progress smoothly
due to lack of clearances etc.
Sourcing raw material at optimal costs: Simplex’s execution capabilities are
significantly bolstered by sourcing major raw materials required for construction like
stone aggregates, bitumen, diesel, steel and cement near project sites at optimum
costs. This enables greater cost control and promotes efficiency, reducing project
execution period.
Simplex Infrastructures Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 20 of 34
Exhibit: Strong Execution Track Record
Details of Major Projects Executed
Details of Major Under Execution
Tata Housing Delhi Metro
Metrolinkexpress for
Gandhinagar and Ahmedabad
–6 stations
Gujarat 6.6
5.2
Source: Company, SKP Research
200+ in-house project execution teams w ith Rs29.96bn
ow ned construction equipment.
Robust planning and management systems for projects,
plants and human resources.
In house developed ERP for real-time project management and
monitoring.
Also, has a full-f ledged designing & draw ing department and
a separate R&D department as w ell
Mumbai Metro
NHAI NHIDCL Jaipur AirportConstruction of buildings for IIT
Bhubanesw ar (NBCC)Odisha
DLF NTPC NHPCMumbai Metro-Metro w ork and
11 stations (MMRDA)Maharashtra 10.8
Client Name Project Name Location Project Cost
(Rs Bn)
NBCC BHEL PGCIL
Contraction of RCC Chimney,
NDCT for 2x660 MW Super
Thermal Pow er station
Tamil Nadu 12.2
QAR 93 mn
MaithonPow er project -2 X 525
MW (Tata Group)Jharkhand 5.2
Key Clientele
Hotel Hilton Doha
MMRDA -Eastern Freew ay
BridgeMaharashtra 8.1
ICTT -Cochin DP World Kerala 5.9
Proven Execution Capabilities
Completed 2,900 project across business segments and
geographies.Project Name Location Project Cost
(Rs Bn)
Bhubanesw ar Chandikhol Raod
ProjectOdisha 9.2
In house execution team: Simplex does majority of the work in-house with minimal
sub‐ contracting. It has an in‐house execution team of 200 experienced employees,
which have boosted its execution skills.
Best placed to capitalize on the Infra opportunity, resulting in robust growth visibility
Management indicated that capex recovery is truly underway while the fundamentals
suggest the pick-up will be both reasonably robust and sustainable. All segments are
witnessing large-scale bid pipeline spearheaded by Government spending on infrastructure
build up. Over the past couple of years policy logjam, delay in clearances and aggressive
bidding by developers led to a collapse in the investment climate and stranded projects led
to the company adopting a prudent stance to conserve capital by restricting growth. As the
scenario improving on bidding pipeline and liquidity, Simplex intends to pursue growth
vigorously. It perceives huge opportunities in power T&D, urban infra, metro rail, buildings &
housing segments and road & bridges sector etc.
Buildings segment - Turning a new leaf: The past couple of years have seen
increasing opportunities in building construction like residential & commercial space and
educational & medical facilities, largely driven by public sector spending. Government
orders are larger, more complex and significantly higher than in the past. Simplex is well
placed to benefit from increasing Government outlay on the buildings space. It has
identified public sector/institutional buildings segment as a major growth driver in future.
Simplex Infrastructures Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 21 of 34
Details of Major Projects Executed
Details of Major Under Execution
Construction of Residential
project " Grand One“ (Bengal
Shriram Hi-techCity)
West Bengal 2.3
Client Name
Key Clientele
Lodha
Godrej
Hiranandani
Prestige
NBCC
DLF
Tata Housing
ITC The Park –project in Mumbai Maharashtra 2.2
Construction of HIG in
Dw arka(DDA)New Delhi 3.8
Project Name Location Project Cost (Rs
Bn)
Construction of buildings for IIT
Bhubanesw ar (NBCC)Odisha 5.2
DGP MAP -Siliguri
Karnataka
Haryana
4.6
3.1
West Bengal 2.9
Source: Company, SKP Research
Exhibit:Building & Housing
Project Cost (Rs
Bn)LocationProject Name
World One -Tallest Residential
BuildingMaharashtra 4.8
Palladium Building
Regal Garden
Building & Housing,
27%
Order Book (As on Dec 31, 2017)
Rs 47.7 Bn
Company traditionally works on buildings contracts of sizes Rs. 500-2,000 mn and it’s
focus will continue to remain in this segment. Simlex is amongst the top 4-5 companies
in India as far as pre-qualification (determined by net worth, revenues, equipment bank
and experience) credentials in the buildings domain are concerned. Segment’s current
order book stands at ~Rs 48 bn (~27% of total order book) which imparts healthy mid-
term revenue visibility. With increasing Government investment in housing, education
and medical services, we believe Simplex’s order inflow prospects remain bright.
Urban infra to play pivotal role in infra order inflow: Simplex’s capabilities span the
entire spectrum of urban infra space. It is one of the prominent contractors of metro rail
projects. The Company has been associated with metro rail projects in cities like
Mumbai, Delhi, Kolkata, Ahmedabad, Pune, and Bengaluru. Apart from metro projects,
Simplex also undertakes projects for water supply and sewerage works in the urban
infra domain. With India likely to have operational metro projects in ~25 cities by 2025
(compared to 10 cities today), coupled with likely increase of airport capacity by 5x, it
will throw up huge EPC opportunity for construction players.
Whilst many construction companies cater to the urban infrastructure sector, only a few
players are capable of capitalising on this opportunity. Simplex has relatively better
managed balance sheets (low debt:equity) and is, thus, better placed to bid for high-end
and complex EPC contracts, either through technology transfer or investments in
labour. Segment’s current order book stands at ~Rs 38 bn (~22% of total order book)
imparts healthy medium term revenue visibility. Furthermore, Government is likely to
Simplex Infrastructures Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 22 of 34
Details of Major Projects Executed
Details of Major Under Execution
Bangalore Metro -
Construction of Via duct
and 5 Metro Station
Karnataka 5.8
Client Name
Key Clientele
Delhi Metro
Bangalore Metro
Sew arage for Indore
Corporation
Jaipur Airport
Mumbai Metro
Ahmedabad Metro
Sew arage for Kolkata
Corporation
Udaipur AirportUrban Sew erage for
sew erage at HalisaharWest Bengal 2.2
Metrolink express for
Gandhinagar and
Ahmedabad – 6 stations
Gujarat 6.6
Project Name Location Project Cost (Rs
Bn)
Mumbai Metro - Metro w ork
and 11 stations (MMRDA)Maharashtra 10.8
Andal Airport
Maharashtra
Chhattisgarh
4.6
2.7
West Bengal 1.8
Source: Company, SKP Research
Exhibit:Urban Infrastructure
Project Cost (Rs
Bn)LocationProject Name
Mohali Sports Complex Punjab 7.2
Mumbai Metro
Bilaspur Sew erage
Urban Inf ra , 22%
Order Book (As on Dec 31, 2017)
Rs 38.8 Bn
expedite spending on its ambitious flagship programme like Smart Cities and AMRUT,
which will bring immense opportunities for the Company.
Power segment – Continue to post secular growth: Simplex is amongst the most
experienced contractors in the power projects (thermal, nuclear, hydel). In the past, it
has undertaken works for NTPC, BHEL, NHPC, Vedanta, Tata Power, Jindal, Bharat
Forge, etc. It has also made a mark in the power T&D segment. Government’s recent
initiatives such as UDAY, auctioning of coal & gas linkages and supply etc may unblock
the sector constraints such as 1) soft demand recovery and low pricing, 2) delayed
policy implementation and 3) lack of long-term PPAs from state discoms.
Moreover, substantial investments (the Government has envisaged a capex of Rs 2.6
trn over the 13th plan) expected in T&D systems to gain pace as utilities upgrade and
ramp up T&D infrastructure, which will bring incremental order inflow for the Company.
Segment’s current order book stands at ~Rs 42 bn (~24% of total order book).
Simplex Infrastructures Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 23 of 34
Details of Major Projects Executed
Details of Major Under Execution
BOW of main plant & off-site
civil w orks for Mejathermal
pow er plant (2x663MW)
Uttar Pradesh 2.7
Source: Company, SKP Research
Exhibit: Power
Project Cost (Rs
Bn)LocationProject Name
Maithon Pow er Plant Jharkhand 5.9
Coastal Project
Jindal Pow er Plant
Vindhyachal-NTPC
Gujarat
Chhattisgarh
4.4
3.1
Uttar Pradesh 2.4
Project Name Location Project Cost (Rs
Bn)
Contraction of RCC Chimney,
NDCT for 2x660 MW Super
Thermal Pow er station
Tamil Nadu 12.2
Construction of 400 KV , 220
KN and 132 KV substantionand
transmission lines
Madhya
Pradesh1.9
Raw w ater Reservoir for North
KaranpuraSTPP ( 3x660 MW)Jharkhand 6.2
Client Name
Key Clientele
PGCIL
NHPC
Vedanta
Gujarat UMPP
BHEL
NTPC
Bajaj Infra
Jindal
Power, 24%
Order Book (As on Dec 31, 2017)
Rs 42.4 Bn
Road & bridges sector, the biggest thrust area: Simplex has leveraged its
construction capabilities and has been undertaking a variety of highway and urban road
construction work including flyovers, elevated corridors and bridges. Simplex has
stayed away from plain-vanilla road EPC projects. It has concentrated on projects which
have high structural complexity and require good design skills. As a result, it has won
many projects in North East India, where a combination of difficult terrain and technical
complexity ensure that competition for projects is low.
The new umbrella program “Bharatmala” targets development of a North East Economic
corridor to enhance connectivity to state capitals and key towns. It also focuses on
ensuring seamless connectivity with neighboring countries to make North-East India a
hub of East Asia. In addition, it involves development of 2,000 km of border and
international connectivity roads, which provides enormous opportunity for the company.
For the road vertical, Simplex is among the few construction companies which had
adopted selective approach in the past 3-5 years of highly competitive and challenging
business environment and did not bid aggressively. Segment’s current order book
stands at ~Rs 18 bn (~10% of total order book). Simplex is focused on asset light EPC
business and has limited exposure to capital intensive BOT business where cash flows
are back ended. Considering robust project pipelines in road EPC segment for next two
years, the order book of the company is expected to be driven by EPC projects only.
Simplex Infrastructures Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 24 of 34
Details of Major Projects Executed
Details of Major Under Execution
Widening & Strengthening of
existing NH from 2 to 4 lane from
WB border to Assam
(NHAI)
Assam 1.3
Client Name
Key Clientele
NHIDCL
HMDA
NHAI
MSRDC
Upgradation and rehabilitation of
Bodla-Taregaojn-DaldaliRoad
(PWD–CG)
Chattisgarh 1.2
Fore laningof NH-37 from
Rangagarato KaliaborTinali(NHAI)Assam 2.0
Project Name Location Project Cost (Rs
Bn)
Construction of 4/6 laning of
20.683 Km of Daboka-
Dimapurbypass (NHIDCL)
Assam 3.9
Mayor Mohd Haif Bridge
Maharashtra
Telangana
8.1
4.3
Bangladesh BDT 12 bn
Source: Company, SKP Research
Exhibit: Roads
Project Cost (Rs
Bn)LocationProject Name
Bhubanesw ar –Chanikhol Odisha 9.2
Eastern Freew ay
PVNR Expressw ay
Roads, 10%
Order Book (As on Dec 31, 2017)
Rs 17.7 Bn
Exhibit: Road Portfolio Snapshot
State Odisha Appointed date 14-Dec-11 - BRNL* 591
NH/SH no. NH-5 First Provisional COD 12-Jan-17 - SREI 637
Concession period 26 Years - Partners** 1298
Residual life 20 Years 8 Months - Grant 1,774
Design length (Kms) 67 Project Cost 18,390 - Debt 10,404
Asset details Concession terms Sponsors Fund
Source: *Bharat Road Network Limited (BRNL), **Simplex & Galfar, Q3FY18 Presentation (BRNL), SKP Research,
Figures in Rs mn
Shareholders group Simplex - 34% ,Galfar -
26% ,SREI - 40%
Value unlocking potential of BOT business
Simplex has largely stayed away from asset ownership ventures. Currently, it has a
BOT road portfolio of only one project post amicable termination of Mahulia Kharagpur
and Jowai Meghalaya project. The road BOT project is housed in an SPV called Shree
Jagannath Expressways (SJEPL), where it has 34% stake (with balance stake held by
SREI Group and Galfar). The SPV has implemented six-laning of Chandikhol-Jagatpur-
Bhubaneswar of NH-5 (total length 67 Km) in Odisha and achieved provisional
completion certificate (PCC) on January 12, 2017.
Simplex Infrastructures Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 25 of 34
Exhibit: Strong Upside Possibilities
Source: Bharat Road Network Limited (BRNL) - Q3FY18 Presentation, SKP Research
Loan Refinancing
Yield Arbitrage
Improvement in mining traffic and upcoming smart cities in Bhubaneshwar
& Raipur key trigger
Favourable award of Rs 1040 mn in Sept’17
Completed refinancing of SJEPL @ 9.62% (reduction 268 bps) upon
provisional completion of project and GIPL @ 9.25% resulting in reduction
of 125 bps.
Assets with fixed cash flow of long tenure can be staged on yield platform
which could result in a net differential yield.
Traffic Growth
Claims
Exhibit: Project Snapshot -Shree Jagannath Expressway Limited
Project Location Project Snapshot
Located on the NH-5 betw een Chandikhol and Bhubanesw ar
The end point of the project road at Chandikhol is a major
intersection, w here NH-200 and NH-5A cross NH-5 through an
overpass. NH-200 connects Daiteri mines and then runs
tow ards Raipur, one of the proposed smart cities.
Development activity
Expansion of Paradeep port to ramp up the overall cargo
handling capacity to 330 mn tonne.
Capacity expansion plan in Kalinga Nagar SEZ, a major steel
cluster near Chandikhol.
Revival in Iron ore cargo volume grow th at Paradeep port to
8.51 MT vs 2.27 MT a year ago.
Info valley, a JV Integrated IT Park w ith IL&FS comprising of
an IT SEZ w ith a tow nship of 500 acres land in the w estern
parts of Bhubanesw ar.
Bhubanesw ar selected for smart city project w ith a
proposal of over USD 708 mn.
ADT Growth (in terms of PCU)
Source: BRNL- Q3FY18 Presentation, SKP Research, ADT = Average Daily Traffic ; PCU = Passenger Car Unit
Traff ic grow th has seen signif icant improvement over the past
2 years, mainly driven by improvement in mining traff ic. With
the upcoming smart cities of Bhubaneshw ar and Raipur
adjacent to the project stretch, traff ic grow th is expected to be
strong going forw ard.7.7%
11.9%
6.1%3.2%
1.4%
FY16 FY17 Q1FY18 Q2FY18 Q3FY18
Over the next few years, the project offers large value unlocking potential for the company
due to following factors.
Robust traffic growth: Although the project achieved provisional completion certificate
(PCC) in January, 2017; it has a tolling track record of more than five years due to
tolling during construction period. The project has witnessed healthy traffic growth—
16% jump in FY17 in terms of passenger car units. The project stretch falls along the
busy Chennai–Kolkata corridor (part of National Highway-5 and Golden Quadrilateral)
wherein the movement of commercial traffic is high.
Simplex Infrastructures Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 26 of 34
Exhibit: Operating Performance
Particulars (Rs Mn) FY17 Q3 FY18 9MFY18
Toll Revenue 964 379 1,103
EBITDA 122 259 921
Finance Cost 116 508 1,064
Operational Cash Flows 7 -249 -144
Sponsors’ Fund 2,419 2,527 2,527
Secured Debt 9,911 10,266 10,266
Source: Bharat Road Network Limited (BRNL) - Q3FY18 Presentation, SKP Research
Going forward, improvement in mining traffic along with development of Smart Cities in
Bhubaneswar and Raipur can further aid traffic figures. Recently, SPV has increased
toll rates in the range of ~45-50% from February, 2017 upon completion of Mahanadi
Bridge. The transition to new toll rates has been smooth with no adverse impact on
traffic flow. Currently, the SPV is collecting toll of Rs 43 lakh per day.
Refinancing of debt will boost cash flows: SPV’s project cost of Rs. 1,839 crore was
financed through debt of Rs. 1,041 crore, grant of Rs. 177 crore, toll collections of Rs.
348 crore and sponsor funds including equity of Rs. 253 crore and long term liabilities of
Rs 20 crore. Recently, the project SPV has completed refinancing of its existing debt,
resulting in a reduction of interest rate (refinanced at an interest rate of 9.62%, resulting
in a reduction of ~270 bps in interest rate) and an elongated tenure which will boost its
cash flows going ahead. Furthermore, the SPV has won arbitration award of award of
Rs 1,040 mn in Sept’17 from NHAI.
Considering the project’s strong toll collection in future, there is a high probability that
Simplex will monetise its stake and will use the proceeds to prune debt. The
management has also indicated that it will now focus on EPC, which is its forte and
expects no equity commitment going forward, given the already stretched balance
sheet.
Financial Highlights:
Revenues to gain traction on back of higher execution
Simplex’s revenue is well-diversified across nine segments. Moreover, due to its vast
experience, the Company has the ability to identify profitable segments to drive its revenue
growth. This is reflected from the fact that revenue contribution from ‘Building & Housing’
and ‘Urban Infra’ segments is increased to 27%/22% in 9MFY18 from 26%/10% in FY13,
respectively. On the other hand, Simplex has reduced its dependence on the ‘Industrial’
segment (private capex plays a significant part in driving order flow) due to high business
uncertainties in the recent years, with its revenue contribution declining to 2% in 9MFY18
from 8% in FY13.
Over the next few few years, Simplex is likely to bag incremental orders, led by the recent
surge in tendering activity and reduced competition. Lately, the business opportunities in
terms of number of fresh orders for construction players, such as Simplex, have increased
significantly. Moreover, the number of companies participating in bidding for new orders has
declined. Hence, players like Simplex have the option of choosing the best-suited orders in
terms of segment, geography, client, payment terms, etc.
We expect the company’s revenue to gain traction from FY19E onwards, due to a ramp-up
in execution and strong fresh order inflow expected over next 2-3 years. We estimate
Simplex’s revenues to grow at a CAGR of 16% during FY18-20E to Rs 87 bn.
Simplex Infrastructures Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 27 of 34
Exhibit: Revenue to gain traction over next two years
Source: Company, SKP Research
58976
58208
55130
55816
59046
56075
57757 7
0532
86865
25.7%
-1.3%
-5.3%
1.2%
5.8%
-5.0%
3.0%
22.1% 23.2%
-10.0%
0.0%
10.0%
20.0%
30.0%
0
12000
24000
36000
48000
60000
72000
84000
96000
FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
Total Revenue ( Rs Mn) Growth (YoY %)
Expect revenue to grow at CAGR of 16% in FY17-20E
Exhibit: EBITDA CAGR of ~16% during FY17-20E
Source: Company, SKP Research
40
85
.3
45
87
.0
468
0.9
5159
.3
56
20
.0 68
22.4
688
6.7
725
4.3 8
78
8.3 1
08
22.6
8.7%7.8% 8.0%
9.4%10.1%
11.6%12.3% 12.6% 12.5% 12.5%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
0.0
2000.0
4000.0
6000.0
8000.0
10000.0
12000.0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
EBITDA (Rs Mn) EBITDA Margin%
EBITDA margins to stabilize at ~12%+
Major raw materials used by Simplex in their construction activities are steel and cement.
While the input prices are generally volatile, the cost of raw materials, as a percentage of
gross billing, remained at same level during the last ~1-2 years on account of optimal usgae
and escalation clause associated with most of the contracts.
During FY11-15, the EBITDA margin remained in the range of ~8.7%-10.1%, which
improved to 12.3% in FY17. This was mainly due to muted growth in order inflow and delay
in execution primarily owing to slow payment cycle and client side delays.
Going ahead, as buoyancy is returning in ordering activity, Simplex is selectively bidding for
high margins and cost plus (inflation insulated) projects. The Company is also focused on
controlling construction costs by implementing technologically advanced procedures and
equipments, which will result in better EBITDA margins. We expect the EBITDA margin to
stabilize at ~12.5%+, translating into a CAGR of 16% in the EBITDA during FY17-20E.
Simplex Infrastructures Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 28 of 34
Exhibit: Debt /equity trend
Source: Company, SKP Research
20938.9
26556.4
29074.4
31828.5
33644.4
32815.6
33000.6
25000.6
20000.6
1.7
2.1 2.1
2.5 2.4 2.1 2.0
1.00.7
0.0
0.7
1.4
2.1
2.8
0.0
8500.0
17000.0
25500.0
34000.0
42500.0
FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
Gross Debt (Rs Mn) D/E (X)
Focus on fast-tracking recovery of receivables, debt reduction on cards
Over the last couple of years, one major issues which constrained Simplex’s revenue
growth is elongated working capital cycle despite the Company largely remaining a plain-
vanilla EPC contractor with minimal BOT exposure, resulting in high debt levels. Going
forward, the Company is focued on improving its working capital cycle and bringing it down
to ~150 days from ~257 days reported in FY17. Key attributes for improvement in working
capital are:
Increasing share of public sector orders
One of the major reasons behind the Company’s high working capital intensity has been
the lesser share of public sector orders. Historically, ~50%+ of the Company’s orders
came from the private sector in power generation, industrial and real estate segments.
Over the last few years, muted industrial growth led to slowdown in private sector
capex. This led to lengthening of Simplex’s working capital cycle.
However, lately Simplex has completely overhauled its bidding strategy, focusing more
on Government projects. Currently, ~73%+ of its contracts are from Government, which
enhances security of payments and results in better working capital management, given
government’s recent emphasis on timely execution of projects. Most EPC companies
with large public sector share in order book have a working capital cycle of ~120-150
days. Going ahead, the change in Simplex’s approach will lead to reduction in its
working capital levels.
Debtor recovery will lead to reduction of debt; strengthen working capital cycle
The Company is focused on improving cash collection cycle and reducing debt.
Management targeted to recover receivables worth Rs 6 bn in FY18, of which it had
recoverd Rs 2.3 bn in 9MFY18. Further with rigorous follow up with clients, the
management is hopeful of recovering old debtors worth Rs 8 bn (for FY17, total
outstanding old debtor amounting to Rs 52.9 bn, which includes unbilled revenue of Rs
32 bn and retention money of Rs 5.5 bn.) in FY19E and FY20E respectively. It also
expects to receive Rs 0.9 bn from the Bangladesh project by year end.
The Company has large amounts of arbitration claims due (as on Q3FY18, total
arbitration claims stands at Rs 22.6 bn, of which the Company had already won Rs 4.6
bn) from Government and private agencies, which it expects to receive in next few
years. Therefore, with recoveries from old debtors, the Company aims to reduce debt
by Rs 12.8 bn by FY20E, leading to better working capital levels.
Simplex Infrastructures Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 29 of 34
Exhibit: Peer Comparison
FY15 FY16 FY17 FY15 FY16 FY17 FY15 FY16 FY17 FY15 FY16 FY17
Larsen & Toubro 1845 3.0x 11.2% 12% 10% 10% 4.6% 12% 10% 12% 10% 11% 11% 2.3x 2.0x 1.9x
NCC Ltd 79 2.5x 6.2% 11% 10% 7% -10.4% 2% 4% 1% 12% 11% 7% 1.0x 0.9x 0.7x
Ahluw alia Cont. 27 2.1x 0.9% 10.8% 12.9% 12.1% NA 19% 20% 17% 21% 22% 18% 0.5x 0.3x 0.2x
JMC Projects 20 3.0x 3.7% 8.5% 10.4% 11.2% 3.7% -6% -13% -9% 5% 8% 9% 4.8x 3.2x 3.3x
PSP Projects 19 2.1x 17.5% 8.0% 8.6% 16.4% 37.7% 30% 38% 38% 15% 19% 23% 0.7x 0.7x 0.6x
Simplex Infra 27 3.2x -1.0% 10.1% 11.6% 12.3% 6.2% 4.8% 7.4% 7.9% 10.1% 11.0% 9.9% 2.5x 2.4x 2.1x
Source: Company, SKP Research
ROE (%) ROCE (%) D/E (X)Companies
Mcap
(Rs Bn)
OB/Bill
(X)
Revenue
CAGR (%)
FY12- 17
EBITDA Margin (%) PAT
CAGR (%)
FY12- 17
Exhibit: PAT & Return ratios trend
Source: Company, SKP Research
892
598
606
624
1061
1203
1418
2785
4217
7.4%4.7% 4.3% 4.8%
7.4% 7.9%8.5%
11.3%
14.3%
8.9%8.2%
9.4%10.1%
11.0%9.9%
10.4%
10.4%
11.9%
0.0%
3.0%
6.0%
9.0%
12.0%
15.0%
-300
500
1300
2100
2900
3700
4500
FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
PAT (Rs Mn) ROE (%) R0CE (%)
PAT to grow at a CAGR of ~52% over FY17-20E, return ratios to improve
During FY12-17, PAT grew at muted 6.2% CAGR due to an increase in debt level
mainly required to finance its stretched working capital. However, better topline growth
(mainly due to its emphasis on the EPC business, well-built diversified order book and
strong execution capabilities) and expected improvement in working capital days and
debt reduction plan (lower interest expense) will enable the Company to report a PAT
CAGR of ~52% over FY17-20E (to Rs 42 bn).
In the past, Simplex has enjoyed return ratios in the range of ~9-10%. However, it
slipped in the last couple of years mainly due to stretched balance sheet leading to PAT
de-growth. However, going forward, we expect ROE and ROCE to improve to ~14.3%
and ~12%, respectively, in FY20E on the back of stable margins and robust bottom line
growth.
Additional funding via issuance of share warrants & qualified institutional placement
(QIP) to bolster balance sheet strength:
The Company has proposed to raise to Rs 200 crores (Simplex has already received 25%
of the application money amounting Rs 50 crores) from promoter entity by issuing ~3.6 mn
warrants at Rs 554/share which can be converted at any time during the next 18 months
(we have assumed worth Rs 125 crores of warrant conversion in FY19E and remaning Rs
75 crores worth of warrant conversion in FY20E). Further, it has recently raised Rs 402
crores via QIP by issuing ~7.1 mn shares at Rs 569/share. The proceeds of the issue will
be partly used to deleverage the balance sheet and grow the core EPC business. We
have assumed the fully diluted equity for our projections
Peer Comparison:
Simplex Infrastructures Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 30 of 34
Valuations
Government’s multi-pronged focus on infrastructure sector on the anvil coupled with
creation of robust financial and regulatory environment will provide a fillip to the
construction sector. Simplex’s diversified presence across infra verticals will enable it to
capture opportunities arising from the capex recovery spearheaded by the public sector
spending coupled with substantial fall in debt led by improvement in working capital cycle
will boost its earnings profile.
We have valued the stock on SOTP basis and recommend a BUY on the stock with a
target price of Rs 828/- (~49% upside) in 18 months.
Exhibit: SOTP based target price
Business Basis of valuation Rs/share
EPC Business at 6x FY20E EV/EBITDA 787
Shree Jagannath Expressways (BOT) DCF at COE of 13.5% 40
Raichur Sholapur (Transmission) at 0.5x P/BV 2
Total Value - SOTP 828
CMP 555
Upside 49%
Risks & Concerns
Elongated working capital: Simplex has a stretched working capital and its debtors and
unbilled revenue has increased over the years but that could reverse soon. Large portion
of retention monies also impacts the working capital. If Simplex’s working capital
continues to be stretched, then Company’s revenue and profitability could be impacted.
Delays in execution: Any execution delays remain the key risk in all large EPC
contracts, and can emanate from a number of factors including external (client-side
readiness, budget constraints, delay in clearances) and internal (delay in the mobilisation
of equipment, slow execution). Simplex has tried to address most of these factors by
ensuring that projects are secured from large and reputed clients, which do not suffer
from funding issues. As for now, most of its projects are running on schedule. However,
one cannot ignore the inherent risks associated with the business.
Slowdown in Government spending: As a substantial number of infrastructure projects
are funded by the Government and its agencies, any decrease in planned infrastructure
spending could lead to a slowdown in Government spending, which will affect future cash
flows.
Rise in competition: The massive growth in infrastructure has encouraged many new
private players to foray into different vertical of the construction industry, which has
resulted in increasing competition. Any aggressive bidding environment may negatively
impact its margin estimates.
Escalation in raw material costs: The raw material price risk is not significant in the
case of EPC contracts as they have price variation clauses, which offset the movement in
raw material prices. Commodity prices have been stable in the recent past, and hence we
do not see any immediate risk from movement in raw material prices.
Simplex Infrastructures Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 31 of 34
Exhibit: Q3FY18 Result Review-Standalone
Particulars Q3FY18 Q3FY17 YoY % Q2FY18 QoQ % 9M-FY18 9M-FY17 YoY %
Net Sales 13,600.6 13,864.4 -1.9% 12,460.4 9.2% 41,179.9 40,574.2 1.5%
Total Income 13,600.6 13,864.4 -1.9% 12,460.4 9.2% 41,179.9 40,574.2 1.5%
Expenditure 11,815.8 12,271.1 -3.7% 10,764.8 9.8% 35,971.2 35,738.3 0.7%
(as a % of Total Income) 0.1% 0.1% 0.0% 0.1% 0.0%
Employees Cost 1,312.0 1,282.4 2.3% 1,404.0 4,118.6 3,860.4
(as a % of Total Income) 9.6% 9.2% 40 Bps 11.3% (162)Bps 10.0% 9.5% 49 Bps
Other Expenses 6,403.3 6,915.7 -7.4% 5,680.0 18,863.6 20,180.6
(as a % of Total Income) 47.1% 49.9% (280)Bps 45.6% 150 Bps 45.8% 49.7% (393)Bps
EBITDA 1,784.8 1,593.3 12.0% 1,695.6 5.3% 5,208.7 4,835.9 7.7%
EBITDA M argin (%) 13.1% 11.5% 163 Bps 13.6% (48)Bps 12.6% 11.9% 73 Bps
Depreciation 453.9 490.2 -7.4% 470.1 -3.4% 1,402.6 1,491.3 -5.9%
EBIT 1,330.9 1,103.1 20.7% 1,225.5 8.6% 3,806.1 3,344.6 13.8%
Other Income 217.3 344.4 -36.9% 294.3 -26.2% 758.4 833.9 -9.1%
Interest Expense 1,147.2 1,164.7 -1.5% 1,175.7 -2.4% 3,455.3 3,325.0 3.9%
Profit Before Tax 401.0 282.8 41.8% 344.1 16.5% 1,109.2 853.5 30.0%
Income Tax 90.1 98.8 66.4 35.7% 233.3 319.1
Effective Tax Rate (%) 22.5% 34.9% - 19.3% - 21.0% 37.4%
Profit After Tax (PAT) 310.9 184.0 69.0% 277.7 12.0% 875.9 534.4 63.9%
PAT M argins (%) 2.29% 1.33% 361 Bps 2.23% 6 Bps 2.13% 1.32% 81 Bps
Diluted EPS 6.3 3.7 69.0% 5.6 12.0% 17.6 10.8 63.9%
Figs. in Rs M illion
Source: Company Data, SKP Research
Q3 FY18 Result Update
Simplex Infrastructures Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 32 of 34
Exhibit: Balance Sheet
Particulars FY17 FY18E FY19E* FY20E* Particulars FY17 FY18E FY19E* FY20E*
Total Income 56,075.1 57,757.3 70,531.8 86,865.4 Share Capital 99.3 99.3 117.9 120.7
Growth (%) -5.0% 3.0% 22.1% 23.2% Reserve & Surplus 15,203.7 16,592.3 24,569.6 29,410.9
Expenditure 49,188.4 50,502.9 61,743.6 76,042.0 Shareholders Funds 15,303.0 16,691.6 24,687.5 29,531.5
Material Cost 16,366.5 16,865.1 20,665.8 25,451.6 Total Debt 32,815.6 33,000.6 25,000.6 20,000.6
Traded goods 55.7 138.6 169.3 208.5 Current Liabilities & Prov 36,057.6 36,634.2 42,196.1 44,450.4
Employee Cost 5,142.9 5,313.7 6,488.9 7,991.6 Total Liabilities 84,176.2 86,326.5 91,884.2 93,982.5
Admin & Other Exp. 27,623.3 28,185.5 34,419.5 42,390.3
EBITDA 6,886.7 7,254.3 8,788.3 10,822.6 Net Block inc. Capital WIP 11844.7 10907.1 10362.9 9642.5
Depreciation 1,977.5 1,878.9 2,044.2 2,220.4 Goodwill on Consolidation - - - -
Goodwill - - - - Other Non Current Assets 5,271.1 4,909.4 4,253.1 3,796.0
EBIT 4,909.2 5,375.4 6,744.0 8,602.2 Non-Current Assets 65,420.4 68,980.3 75,362.3 78,246.1
Other Income 890.5 924.1 987.4 999.0 Inventories 7,464.4 7,024.2 8,350.9 9,671.5
Interest Expense 4,453.9 4,526.7 3,511.3 3,212.1 Sundry Debtors 52,885.5 56,302.0 59,640.7 62,208.9
Profit Before Tax (PBT) 1,345.8 1,772.9 4,220.1 6,389.0 Cash & Bank Balance 329.3 561.0 2,374.5 2,511.1
Income Tax 143.1 354.6 1,434.8 2,172.3 Other Current Assets 3,425.6 3,834.8 3,623.9 2,702.9
Profit After Tax (PAT) 1,202.7 1,418.3 2,785.3 4,216.7 Non Current Investments 1,315.6 1,258.3 1,372.3 1,151.8
Growth (%) 13.3% 17.9% 96.4% 51.4% Loans and Advances 1,640.0 1,529.7 1,906.0 2,297.9
Diluted EPS 24.3 28.6 47.2 69.9 Total Assets 84,176.2 86,326.5 91,884.2 93,982.5
Exhibit: Ratio Analysis
Particulars FY17 FY18E FY19E* FY20E* Particulars FY17 FY18E FY19E* FY20E*
Profit Before Tax (PBT) 1,345.8 1,772.9 4,220.1 6,389.0 Earning Ratios (%)
Depreciation 1,977.5 1,878.9 2,044.2 2,220.4 EBITDA Margin (%) 12.3% 12.6% 12.5% 12.5%
Finance Costs 4,293.2 4,526.7 3,511.3 3,212.1 PAT Margins (%) 2.1% 2.5% 3.9% 4.9%
Chg. in Working Capital (751.6) (2,675.4) (161.5) (2,600.1) ROCE (%) 9.9% 10.4% 10.4% 11.9%
Other Charges (458.5) - - - ROE (%) 7.9% 8.5% 11.3% 14.3%
Operating Cash Flows 6,404.8 5,503.0 9,614.2 9,221.4 Per Share Data (INR)
Capital Expenditure (999.9) (900.0) (1,500.0) (1,500.0) Diluted EPS 24.3 28.6 47.2 69.9
Sale of Assets 185.1 - - - Cash EPS (CEPS) 64.3 66.4 81.9 106.7
Others (355.1) - - - BVPS 309.3 336.2 418.6 489.5
Investing Cash Flows (1,169.9) (900.0) (1,500.0) (1,500.0) Valuation Ratios (x)
Changes in Equity - - 18.6 2.7 P/E 24.0 19.4 11.7 7.9
Inc / (Dec) in Debt (5,206.6) (4,341.7) (6,260.0) (7,464.8) Price/BVPS 1.9 1.7 1.3 1.1
Dividend Paid (inc tax) (29.9) (29.7) (59.4) (122.8) EV/Sales 1.1 1.1 0.8 0.6
Financing Cash Flows (5,236.5) (4,371.3) (6,300.7) (7,584.9) EV/EBITDA 8.9 8.6 6.5 4.9
Net Cashflow (9.5) 4,834.7 9,927.8 7,858.0 Mcap/Sales (x) 0.5 0.5 0.5 0.4
Opening Cash Balance 233.1 329.3 561.0 2,374.5 Balance Sheet Ratios
Cashflow during the year (9.5) 4,834.7 9,927.8 7,858.0 Debt - Equity 2.1 2.0 1.0 0.7
Bank Balances 97.8 - - - Current Ratio 1.1 1.2 1.3 1.4
Closing Cash Balance 329.3 561.0 2,374.5 2,511.1 Asset Turn. Ratios 0.7 0.7 0.8 0.9
Exhibit: Income Statement Figures in INR Million Figures in INR Million
Exhibit: Cash Flow Statement Figures in INR Million
Source: SKP Research, *Simplex issued preferential equity warrants of 3.6 mn shares (Face value of Rs 2), @ price of Rs 554.13, amounting Rs 200
crores.Further, it has also raised Rs 402 crores via QIP by issuing ~7.1 mn shares at Rs 569/share.We have assumed the fully diluted equity for our
projections
Simplex Infrastructures Ltd.
SKP Securities Ltd www.skpmoneywise.com Page 33 of 34
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