Wednesday, April 1, 2009

Simplex Infra - Value Pick

Simplex Infrastructures

About 30 per cent of Simplex Infrastructure's Rs 10,200 crore total order book (3.6 times FY08 revenue) comprises orders from West Asian countries. Also, within the total order book, about 50 per cent is from the private sector, including 20 per cent from industrial sectors. These are some concerns being cited by analysts with the stock is down 72 per cent in the last one year. However, the 84-year old engineering and construction company has superior execution capabilities, high operating margins and a less leveraged balance sheet (debt-equity ratio of about one currently), which makes it a good investment case.

Moreover, these concerns are already factored into the share price and valuations-the stock is currently trading at four times its estimated earnings and 0.5 times estimated book value for FY10. These valuations are low, as historically (during FY97-FY08) the stock has traded at an average price-to-book value of 1.3 times (and high of 7.5 times).

Importantly, fundamentally, things are now progressing on a positive note. Led by improvement in working capital, the company has repaid part of its debt recently which should lead to better profitability. Also, the fall in commodity prices would add to the operating margins, which is seen at about 10 per cent in FY10 compared to 9.7 per cent in FY09 and 9.5 per cent in FY08.

Although, there could be some slowdown in orders in the short-term (about six months), the company is confident of maintaining revenue growth of about 25 per cent over the next two years on the back of a strong order book. Additionally, the company's diverse presence across sectors like power, marine, industrial, roads, railways, bridges, urban infrastructure and housing provides comfort. Its recent foray into mining, onshore drilling and power T&D segments could prove to be future growth drivers and provides stability in the event of any slowdown in a particular segment or geography.