Simplex Infrastructures' Q2FY19 results (Outperformer) - Working capital levels remain elevated
Q2FY19 result highlights
- Simplex Infrastructures’ (Simplex) Q2FY19 PAT declined 12%yoy to Rs244m led by lower other income (Rs207m in Q2FY19 vs. Rs294m in Q2FY18 as it included positive impact of IndAS worth Rs100m) and higher effective tax rate (29.7% in Q2FY19 vs. 19.3% in Q2FY18). However, it was in-line with our estimate of Rs249m.
- Revenue grew 18.7%yoy to Rs14.8bn but was below estimate of Rs15.6bn. EBITDA grew 3.8%yoy to Rs1.8bn (in-line). However, EBITDA margin contracted 170 bp yoy to 11.9% and was above our estimate of 11.6% due to better project mix.
- Gross debt increased sharply by Rs4.5bn qoq from Rs31.2bn in Jun-18 to Rs35.7bn in Sep-18 due to payments held up in few projects. However, currently, the debt stands lower at Rs33.7bn.
- Simplex has recovered overdue payments of Rs2.4bn in H1 and has guided for recoveries of Rs7bn in FY19. In addition, Simplex also expects to conclude the sale of its 34% stake in the Chandikhole asset within FY19 leading to an inflow of ~Rs3bn. Consequently the company has guided for debt levels of Rs29-31bn by FY19 end.
- Order inflow during Q2 declined 77.7%yoy to Rs4.3bn (H1 inflow of Rs11.7bn) and order backlog as of Sep-18 stood at Rs168bn (2.8x TTM revenue). The company is also L1 in projects worth Rs17.6bn.
- The joint auditor qualifications on long outstanding amounts have reduced from Rs7.8bn in Jun-18 to Rs6bn in Sep-18. Further, with regards to exposure to Abhijeet Power, out of Rs1.3bn, the company has written off Rs1bn.
Key positives: Strong order backlog.
Key negatives: Sharp increase in debt, Elevated working capital levels.
Impact on financials: Downgrade in FY20E earnings by 21.3% due to higher interest cost due to higher debt amid reduction in expectations for execution growth and margins.
Valuations & view
Simplex’s current order backlog of Rs168bn (ex of L1 orders of Rs17.6bn) provides strong growth visibility over the next 2-3 years. However, working capital cycle has stretched again with lower than anticipated recoveries (Rs2.4bn in H1 against annual target of Rs7-8bn). These recoveries should improve liquidity and accelerate execution while also driving reduction in leverage. Furthermore, due to emerging challenges on availability of funding and higher interest rates in the country, we have lowered our EV/ EBITDA multiple by 8% to 6x, thereby valuing EPC business at Rs20.6bn. We maintain our Outperformer rating with a revised FY20 based target price of Rs388.
Simplex Infrastructures Limited is engaged in the business of contract constructing infrastructural facilities. The Company's segments include Construction business and Others. The Others segment includes oil drilling services, real estate, and hire of plant and equipment. The Company is engaged in building rail infrastructure, including rail tracks, station buildings, bridges and culverts; marine structures, including ports and bridges; design and construction of high-rise infrastructure, including multistoried residential towers, institutional or information technology buildings, hotels, hospitals and mass housing projects; construction of power infrastructures, such as thermal, hydel and nuclear, as well as ultra-mega power projects (UMPP), and renovation and modernization of airports. The Company offers projects for cement, aluminum, copper, engineering, automobiles, petrochemicals, fertilizers, paper textiles, pharmaceuticals, chemicals and other industrial plants.
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