Simplex Infrastructures' Q1FY19 results (Outperformer) - Execution set to accelerate in H2

Q1FY19 result highlights

• Simplex Infrastructures’ (Simplex) Q1FY19 earnings declined 1.6%yoy to Rs283m, sharply below estimate of Rs458m, due lower revenue/margins.
• Revenue grew 4.8%yoy to Rs15.8bn, below estimate of Rs16.9bn, due to slow down in execution owing to stretched working capital situation.
• EBITDA grew 2.4%yoy to Rs1.8bn, below estimate of Rs2bn, primarily due to lower revenue. EBITDA margin declined 20bp yoy to 11.2%, below estimate of 12%.
• Interest expenses grew 6.9%yoy to Rs1.2bn (est: Rs1.1bn). Gross debt declined Rs4.9bn qoq from Rs36.1bn in Mar-18 to Rs31.2bn in Jun-18, primarily due to repayment from i) QIP proceeds of Rs4bn, ii) receipt of upfront contribution (25%) of Rs500m from issue of warrants to the promoters and iii) recoveries of ~Rs400m of past receivables. Net D/E as on Jun-18 stood at 1.8x as against 2.1x in Mar-18.
• Simplex has recovered overdue payments of Rs1.3bn in Q1 and has guided for recoveries of Rs8bn in FY19.
• Order inflow during Q1 declined 47.4%yoy to Rs7.4bn and order backlog as of Jun-18 stood at Rs178bn (3.0x TTM revenue). The company is also L1 in projects worth Rs5.2bn.
• The joint auditor qualifications on long outstanding amounts have reduced from Rs15.6bn in Mar-18 to Rs7.8bn in Jun-18. This reduction was driven by completion of site level verifications and verification of documents by the auditor. Further, there was no change in qualifications on the company’s exposure to Abhijeet Power (Rs1.3bn). The qualification on the classification of certain assets as current instead of non-current has been discontinued as the company has been able to convince the auditors of the correctness of its approach. 

Key positives: Strong order backlog.

Key negatives: Weak execution and elevated working capital levels. 

Impact on financials: Downgrade in FY19E/FY20E earnings by 4.4%/3.8% mainly due to higher than expected interest cost.

Valuations & view

Simplex’s current order backlog of Rs178bn (ex of L1 orders of Rs5.2bn) provides strong growth visibility over the next 2-3 years. We expect recovery of overdue receivables to gather pace with Rs4.3bn being recovered in FY18 (Rs1.3bn recovered in Q1FY19). Simplex has also guided for Rs8bn and Rs10bn 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 Rs590.