Accumulate Simplex Infrastructure; target Rs 185: ABMoney

Aditya Birla Money is bullish on Simplex Infrastructure (SIL) and has recommended accumulate rating on the stock with a target price of Rs 185 in its February 20, 2013 research report.

"SIL sales de-grew by 14% YoY and 3.3% QoQ to Rs 13,515.8 mn below our as well as street estimates mainly due to slower execution of projects as many of the clients are facing liquidity issues. Order inflow for 2QFY13 was ~Rs 12.4bn which has surprised us positively. Company has an order book of ~Rs 150.6bn with blended EBITDA margin of 10.1%. The management has revised its top-line guidance downwards to 5-10% growth for FY13 (earlier 10-15% growth). On the back of muted top-line growth and revised guidance we revise our top-line estimates downwards by 9.0% and 8.6% for FY13 and FY14 respectively.

Operating margin back on track; Guidance intact: The Company's operating profit declined by ~1.2% YoY to Rs 1,105mn; while the operating margin improved by 105bps YoY and 101bps QoQ to 8.2% .Operating margin have improved mainly due to better cost control management. We maintain our margin estimates for FY13 at 9.0% levels.

Working Capital deteriorates further; Investments in BOT's to keep the debt levels high: Company's net profit declined by 38.5% YoY and 45.2% QoQ to Rs 107.8 mn on account of lower top-line growth and high interest costs. Interest cost increased by 28.2% YoY to Rs 739.2mn due to increase in working capital. The management has however stated that the deterioration phase of working capital is likely to come to an end and working capital should improve from 2HFY14 onwards. Company's debt to equity stands at ~2.1x and is likely to continue at the current levels given the working capital requirements and likely investments in the BOT projects.

Equity Requirements of ~Rs 1160mn for BOT projects: Simplex needs to put in ~Rs 1,160mn additional equity during FY14 for its BOT projects. Meghalaya BOT projects financial closure has achieved and Bhubaneswar-Chandikhol BOT project is 46% complete and the average toll collection is Rs 21lacs per day.

Outlook and Valuations: SIL's execution has been below our as well as street estimates. Operating margin has been intact and management still maintains its margin guidance. Company's profitability has been badly impacted on account of high debt and interest costs. We revise our top-line growth estimates downwards by 9% and 8.6% for FY13 and FY14 respectively. We maintain our margin estimates and our debt to equity level estimates at 2.2x for FY13 and at ~2x for FY14. On the back of downward revision in top-line estimates, net profit estimates have also been revised downwards to Rs 568mn and 829mn for FY13 and FY14 respectively (previously Rs 734mn and 926mn for FY13 and FY14 respectively).

We value the company at 9x FY14 EPS of Rs 18.7 and arrive with a rolled over Dec14 price Rs 156/share and also value its BOT project at book value to arrive at a SOTP target price of Rs 185.3. Majority of the negatives have been priced in and hence we change our rating to "Accumulate" from "Neutral" on SIL. At the CMP of Rs 166.8 SIL trades at FY14 P/E 10.0x and 4.7x its FY14E EV/EBITDA," says Aditya Birla Money research report.

Institutional holding more than 40% in Indian cos

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