CRISIL assigns valuation grade of 5/5 to Simplex Projects

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CRISIL assigns valuation grade of 5/5 to Simplex Projects

CRISIL Research has come out with its report on Simplex Projects. According to the research firm the fair value is Rs 322 per share. We initiate coverage on Simplex with a valuation grade of ‘5/5’.

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CRISIL Research has come out with its report on Simplex Projects . According to the research firm the fair value is Rs 322 per share. We initiate coverage on Simplex with a valuation grade of '5/5'.

Incorporated in 1990, Simplex Projects Ltd (Simplex) is a Kolkata-based construction player with a focus on piling, bridges, flyovers, irrigation and urban infrastructure projects. We assign Simplex a fundamental grade of '3/5', indicating that its fundamentals are 'good' relative to other listed securities in India. We assign a valuation grade of '5/5', indicating that the market price has a 'strong upside' from the current levels.

Reputed player with focus on urban infrastructure: Boasts a strong order book
Simplex is a reputed player in the construction industry with a focus on urban infrastructure projects - piling, bridges, flyovers, irrigation and buildings - mainly for government entities. Given the strong domain expertise in this space, Simplex is well positioned to benefit from an increase in the government's thrust on urban infrastructure (likely spending of Rs 1.0 tn under JNNURM phase II). Simplex also has a strong order book of Rs 32.3 bn (5.3x FY10 revenues), which provides high revenue visibility for the next two-three years.

Breaking new grounds in Libya with Rs 20 bn housing project
Simplex has ventured out of India to tap the opportunities in lesser competitive international markets. It won a ~Rs 20 bn (Libyan Dinar 531.3 mn) order from the Government of Libya in December 2008, which has considerably strengthened its order book. The order is for construction of housing units and allied infrastructure. Although bagging of such a large project is a testimony of the company's credentials and capabilities in urban infrastructure, we believe execution challenges exist (mobilisation of resources in an overseas location and cost management) and risks arising from the absence of the escalation clause. However, we believe, Simplex has taken the necessary steps to mitigate the risks.

A pioneer in automated multi-level car parking system
Through its subsidiary Simpark, Simplex is involved in the business of development, operation and maintenance of multi-level car parking systems. This segment is highly specialised and has limited players; Simplex has the first-mover advantage. Crisil Equities believes that there are sizeable opportunities in this space, given the increase in car ownership and its impact on weak infrastructure, leading to traffic and congestion problems. Leveraging on its technical expertise and demonstrated capabilities, Simpark has recently won four new projects in Jaipur (two projects), Noida and Guwahati to develop multi-level car parking projects.

Large proportion of government orders: Minimal credit risk but stretched finances
Simplex primarily undertakes projects from the government entities. Of the domestic order book of ~ Rs 14 bn, as on FY10, ~ 85% of its orders are from state governments. Payments from government agencies are assured, which results in low credit risk, but are delayed compared to private clients, which has stretched Simplex's finances.

Revenues to grow at two-year CAGR of 51%, EPS to treble to Rs 61 per share
We expect revenues to register a two-year CAGR of 51% to Rs 13.8 bn in FY12 driven by execution of the Libya project and expected strong order inflows. Adjusted PAT is expected to increase at a CAGR of 71.6% to Rs 768 mn in FY12, primarily driven by revenue growth. EPS is expected to increase from Rs 20.7 in FY10 to Rs 61 in FY12.

Compelling valuations - strong upside from the current levels
We value Simplex's standalone contracting business based on the PE multiple, while parking projects are valued on the basis of the value of its investments. Based on these methods, we arrive at a fair value of Rs 322 per share. We initiate coverage on Simplex with a valuation grade of '5/5', indicating that the market price of Rs 251 (as on July 09, 2010) has a 'strong upside' from the current levels, says CRISIL Research report

Disclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report.  The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose.

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