Simplex Infrastructures' Q3FY18 results (Outperformer) - Improved recoveries to accelerate growth

Q3FY18 result highlights

• Simplex Infrastructures’ (Simplex) Q3FY18 earnings were below estimate led by lower revenues. PAT grew 69%yoy to Rs311m but was below estimate of Rs339m.
• Revenue declined 1.9%yoy to Rs13.6bn (est: Rs15.5bn) but adjusted for change in representation post GST implementation, it grew ~1.5%yoy.  Revenue remained impacted due to delay in finalization of post GST impact in existing orders. However, these outstanding issues are now been resolved and hence the execution is likely to pick up materially in Q4FY18.
• EBITDA grew 12%yoy to Rs1.8bn (largely in line) and EBITDA margin grew 160bp yoy to 13.1% (est: 11.8%) led by favourable revenue mix. Simplex has guided for a sustainable EBITDA margin of ~12%.
• Other income declined 36.9%yoy to Rs217m (est: Rs250m) and includes notional interest of Rs95m on financial assets recognized at fair value. Simplex expects this impact to continue for the next 7 quarters. Interest cost declined 1.5%yoy and 2.4%qoq to Rs1.1bn (est: Rs1.2bn) due to sequential decrease in gross debt by Rs400m to Rs35.7bn. Net D/E as on Dec-17 stood at 2.1x. NWC intensity largely remained unchanged qoq at 257days.
• Order booking grew 0.7%yoy to Rs17.3bn (9mFY18: Rs50.7bn; +31.9%yoy). Order backlog grew 27.7%yoy to Rs177bn (3.1x TTM revenues). So far in Q4FY18, the company has secured new orders worth Rs15bn. As on date, the company is L1 in orders worth Rs2.5bn.
• FY18 guidance: Revenue growth of ~5%yoy, gross debt at ~Rs33bn as on Mar-18, order inflow of ~Rs80bn and capex of ~Rs1bn.

Key positives: Strong order inflow and strong margins.

Key negatives: Elevated working capital. 

Impact on financials: Downgrade in FY18E/FY19E earnings by 4.9%/3.6% due to delay in execution of newer projects. Introduced FY20 earnings.

Valuations & view

Simplex’s order inflows have continued to remain robust for the past several quarters and margins continue to improve. Current order backlog of Rs177bn (3.1x TTM revenue) is the highest ever and provides strong growth visibility over the next 2-3 years. We expect recovery of overdue receivables to gather pace with Rs2.3bn being recovered so far and ~Rs2.7bn likely by Mar 2018. Simplex has also guided for ~Rs8bn recovery of debtors each in FY19 and FY20. These recoveries should improve liquidity and accelerate execution while also driving reduction in leverage. We maintain our Outperformer rating with a revised FY20 based target price of Rs740.