Simplex Infrastructures Ltd....Simplex Infrastructures Ltd. SKP Securities Ltd Page 3of 34 Last investment cycle (FY11-14) – Going from bad to worse: The infrastructure sector in

May 21, 2018

Simplex Infrastructures Ltd.

Growth catalysts in place; rerating potential…

CMP INR 555 Target INR 828 Initiating Coverage –BUY

SKP Securities Ltd www.skpmoneywise.com Page 1 of 34

Key Share Data

Face Value (INR) 2.0

Equity Capital (INR Mn) 99.3

Market Cap (INR Mn) 27,545.8

52 Week High/Low (INR) 650/392

1 month Avg. Daily Volume (BSE) 7,002

BSE Code 523838

NSE Code SIMPLEX

Reuters Code SINF.BO

Bloomberg Code SINF:IN

Shareholding Pattern (as on March 2018)

56%

21%

23%

Promoter

FII/MF

Puiblic & Other

Source: Company

Particulars FY17 FY18E FY19E FY20E

Net Sales 56,075.1 57,757.3 70,531.8 86,865.4

Growth (%) -5.0% 3.0% 22.1% 23.2%

EBITDA 6,886.7 7,254.3 8,788.3 10,822.6

PAT 1,202.7 1,418.3 2,785.3 4,216.7

Growth (%) 13.3% 17.9% 96.4% 51.4%

EPS (INR) 24.3 28.6 47.2 69.9

BVPS (INR) 309.3 336.2 418.6 489.5

Key Financials (INR Million)

Particulars FY17 FY18E FY19E FY20E

P/E (x) 24.0 19.4 11.7 7.9

P/BVPS (x) 1.9 1.7 1.3 1.1

Mcap/Sales (x) 0.5 0.5 0.5 0.4

EV/EBITDA (x) 8.9 8.6 6.5 4.9

ROCE (%) 9.9% 10.4% 10.4% 11.9%

ROE (%) 7.9% 8.5% 11.3% 14.3%

EBITDA Mar (%) 12.3% 12.6% 12.5% 12.5%

PAT Mar (%) 2.1% 2.5% 3.9% 4.9%

Debt - Equity (x) 2.1 2.0 1.0 0.7

Key Financials Ratios

Source: Company, SKP Research

Company Background

Simplex Infrastructure Ltd (Simplex), incorporated in 1924, amongst India’s leaders in construction, executing projects in several sectors like energy & power, mining, buildings, real estate, etc. It was initially promoted as Simplex Concrete Piles (India) Ltd. by HP Lancaster of the UK, with a focus on high-end piling contracts and was taken over by Mundhra's of Kolkata, the current promoters, in 1947. Its operations are spread across India and overseas, with ~200+ on-going projects, catering to a diverse clientele. Investment Rationale Pure play on the construction sector with diversified and robust order book Simplex is a pure play construction company with focus on traditional EPC format

(in EPC, client is billed and pays for the costs incurred) and has limited exposure to capital intensive BOT business where cash flows are back ended.

Simplex’s order book is well-diversified across 9 business segments which reduces risk due to delay from single contract/business segment/country. Moreover, due to its vast experience, the Company has the ability to identify profitable business segments to drive its revenue growth.

The Company has a strong order book position of Rs 176 bn, 3.1x order books to bill ratio on a TTM basis, providing strong revenue visibility over the next few years. It has a large fleet of owned construction equipment, worth Rs 29.9 bn, giving it a competitive edge in terms of cost of construction and hence, in pricing.

Execution track record, a key differentiator In a space where project delays are a norm, Simplex is among the few

construction companies which has a proven track record of timely completion of projects, if not ahead of schedule. This not only enables completion within cost, but also entails lucrative benefits like Early Completion Bonus.

Positioned to capitalize on Infrastructure opportunity; resultant robust growth visibility Capex recovery is truly underway in India while the fundamentals suggest the

pick-up will be both reasonably robust and sustainable. All segments (T&D, urban infra, metro rail, buildings & housing etc.) are witnessing large-scale bid pipeline spearheaded by Government’s spending on infrastructure build up.

As the scenario is improving on bidding pipeline and liquidity, Simplex has the option of choosing the best-suited orders in terms of segment, geography, client, payment terms, etc. Therefore, we expect the Company’s revenue to gain traction from FY19E onwards and expect it to grow at a CAGR of 11% during FY18-20E to Rs 76 bn.

Focus on fast-tracking recovery of receivables, debt reduction on cards Simplex is focused on improving cash collection cycle and reducing debt.

Management targeted to recover receivables worth Rs 6 bn in FY18, of which it had recovered Rs 2.3 bn in 9MFY18. Further, with rigorous follow up with clients, management is hopeful of recovering old debts worth Rs 8 bn during FY19E and FY20E. For FY17, total outstanding old debts amounting to Rs 52.9 bn, which include unbilled revenue of Rs 32 bn and retention money of Rs 5.5 bn. It also expects to receive Rs 0.9 bn from its Bangladesh project by year end.

Simplex has large arbitration claims due from Government and private agencies, which it expects to receive in next few years. As on Q3FY18, total arbitration claims stands at Rs 22.6 bn, of which the Company had already won Rs 4.6 bn.

Further, it has proposed to raise Rs 200 crores from promoter entity by issuing ~3.6 mn warrants at Rs 554/share of which, it has already received 25% of the application money amounting Rs 50 crores. The Company has recently raised Rs 402 crores via QIP by issuing ~7.1 mn shares at Rs 569/share. Accordingly, it aims to reduce debt by Rs 12.8 bn by FY20E.

Valuation

Government’s multi-pronged focus on infrastructure sector on the anvil coupled with creation of robust financial and regulatory environment is providing a fillip to the construction sector. Simplex’s diversified presence across infra verticals will enable it to capture opportunities arising from capex recovery spearheaded by public sector spending. This, coupled with substantial fall in debt, will prop the improvement in working capital cycle reinforcing its earnings.

We have valued the stock on SOTP basis and recommend a BUY on the stock with a target price of Rs 828/- (~49% upside) in 18 months.

Anik Das

Tel No: +91-33-40077020;

Mobile: +91-8017914822;

E-mail: [email protected]



Exhibit: Construction Industry in India

Correlation between Construction activities & GFCF growth is high •

•

•

Source: RBI, SKP Research

Infrastructure constitute ~49% of the total construction industry

Construction Industry in India FY17 - Composition of Value Added •

•

•

•

Source: RBI, SKP Research

With focus on spends in road,

urban infra, airports, rail and

irrigation the construction

industry is expected to grow

at a CAGR of 10-12% during

FY17-21 (higher than 2%-4%

rate w itnessed during 2011-

14)

Residential – It typically involves the construction of buildings

for group housing and townships, as well as independent

residences for select private customer

Commercial & Institutional – It typically involves the

construction of buildings for hospitals and healthcare

services and educational institutes. It also includes retail

malls, hospitality services (hotels and leisure sector) and

corporate offices

Industrial – It primarily involves the construction of buildings

for manufacturing plants, pharmaceutical plants, chemical

plants, metal plants, food processing units, engineering units

and waste processing facilities among several other

The industry provides growth impetus

to several manufacturing sub-sectors

like cement, bitumen, iron and steel,

chemicals, bricks, paints, tiles, etc.

whose combined value is Rs 1,920 bn

annually. It also provides imputes for

large off-takes for specialized

equipment such as excavators, backhoe

loaders and tunneling machines etc.

• Equipment ~10%

Buildings Segment - An evolving opportunity

Buildings are broadly classified under Residential,

Commercial, Institutional and Industrial

Construction

contributes to

~10% of India’s

GDP

Composition of

the total

Industry:

• Materials ~55%

• Services ~35%

Construction activities contributes ~10%

of India’s GDP; employing ~35 mn

people, the second largest sector after

agriculture

The industry has backward and forward

linkages with several sectors, including

hospitals, schools, offices, houses &

other buildings; urban infra (including

water supply sewerage, drainage);

highways, roads, ports, railways,

airports; power systems; agriculture &

irrigationsystems etc.

2.5%

4.8%5.0%

2.4%1.8%

4.1%

6.1%

2.4%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

FY14 FY15 FY16 FY17

Gross Fixed Capital Formation, YoY (%) Construction, YoY (%)

42%

5%

49%

Buildings Segment

Industrial projects

Infrastructure

Industry Snapshot

Infrastructure is a major sector that propels overall development of the Indian economy. The

broad categories under the core infrastructure space are power, railways, bridges, roads,

ports and urban infrastructure.

Market size of Indian construction industry is ~Rs 2,480 bn, employing a workforce of nearly

~35 mn, making it the second largest sector after agriculture. Infrastructure projects are

major demand drivers in the Indian construction industry accounting for an estimated 49%

of industry value followed by real estate and housing (42%) and industrial projects (5%).

Furthermore, infrastructure sector provides growth impetus to several manufacturing sub-

sectors like cement, bitumen, iron and steel, chemicals, bricks, paints, tiles, etc. whose

combined value is Rs 1,920 bn annually.

Construction industry is highly fragmented and working capital intensive, particularly in the

case of projects of long gestation periods. Although the project risk for contractors is low,

due to a relatively small investments commitment in projects, institutions had been cautious

about lending to small contractors until recently. This is due to the high risk associated in

delay of payment by the client.



Last investment cycle (FY11-14) – Going from bad to worse:

The infrastructure sector in India has gone through a rough patch between FY11-14

wherein policy logjam, delay in clearances and aggressive bidding by developers led to

a collapse in the investment climate and stalled projects. This, along with reduced

Government spending, stressed finances of private sector and tightened bank funding,

resulted in a decline in investments in the sector, which was the backbone of economic

growth. Consequently, the entire infrastructure sector (spending for the sector grew at a

meager ~2-4% during the cycle) went into a vicious loop.

Lack of new orders and delay in payments from Government bodies led to

ballooning working capital, raising debtors days to as high as 150‐180 days for

many companies.

To ensure that their operations continued even at such debtor day levels,

companies borrowed more, which led to corporate debt rising exponentially.

The high interest‐rate regime had already pushed up interest payment and as

companies piled on more debt, their interest outgo increased further.

This in turn put more pressure on cash flows, which led to even higher debt levels.

This led to more interest expenses — the vicious loop.

The working capital (WC) cycle also elongated because companies invested

indiscriminately in their various real estate and BOT subsidiaries. Most of these

investments were in the form of loans and advances.

New investment cycle (FY14 onwards) – On the cusp of recovery; Government is

becoming a viable client now

Lately Government has taken many initiatives - 1) formation of dispute resolution

committees, 2) faster clearances, 3) easing financial norms and 4) increased ordering

under new viable models have created a robust financial and regulatory environment

and improved investor sentiments.

With multi-pronged focus on social infra and refurbishment programmes on the anvil,

the Government’s tendering is likely to increase materially over the next two years.

Government orders are larger, more complex and significantly higher than in the past.

Presently, Government and allied agencies are driving the tendering system. Moreover,

there is a steady stream of investments ongoing in social infra projects wherein

tendering had a step-up in FY15 and has maintained pace since.

As a result, more players are now looking at the Government as a viable client. A key

difference vis-à-vis the FY08-11 up-cycle was that Government projects can now match

up (if not exceed) to private sector orders in terms of order sizes, project complexity and

onus on execution.

Fund allocation to various sectors in the Union Budget with allocation to roads and

highways increased by 16% to Rs 710 bn, to irrigation by 28% to Rs 94.3 bn and to

railways by 33% to Rs 531 bn. The emphasis on low cost housing, irrigation and roads

is likely to create construction opportunities worth over Rs 1.2 trn in FY19E.

With macros improving, and measures to revive the PPP sector being taken through

new forms of awarding (hybrid annuity) and financing (REITs and InVITs), there will be

stranded projects revival easing cash flows while new project flows will provide growth

visibility.



Exhibit: Government Expenditure to Drive Order Inflow s (In Rs Bn)

Source: Union Budget documents * BE denotes budgeted estimates,SKP Research

42

9

42

42

0 43

0

58

0

19

0

51 1

50

30 40

45

061

0

16

9

60

23

0

54

10

40

0

71

0

19

0

65

21

0

38

20

53

1

0

200

400

600

800

Road

s an

db

rid

ge

s

Rura

l ro

ad

s

PM

AY

urb

an

PM

AY

ru

ral

Rura

lele

ctrifi

catio

n

Natio

nal

invest

me

nt

and

infr

ast

ruct

ure

fu

nd

Railw

ays

FY16 BE FY17 BE FY18 BE FY19 BE

Exhibit: Reversal of the vicious loop

Source: SKP Research

Higher Interest

Expense

Lower Earnings & Cashflow

Increase in Debt

Higher Earnings & Cash flow

Lower interest expense

Reduction in Debt

Further aggravated by elongated WC cycle

Further aggravated by investment in subsidiaries

Further aggravated by high interest rate regime

Further enhanced by capital raising & divestments

Further enhanced by order inflow and WC management

Further enhanced by reduction in interest rates

Presently, the Government has laid a roadmap on infrastructure creation for a sustained

growth in the country's economic activity. In the Union Budget 2018-19, the

Government of India (GoI) has given a massive push to the infrastructure sector by

allocating Rs 5.97 lakh crore (USD 92.22 billion) for the sector. Assuming GDP growth

at 8%, investment in infrastructure can be expected to increase to Rs 76 trn over the

next five years assuming an increase in construction spend to 9% of GDP, which

provides significant opportunity for industry players.

Reversal of elongated working capital cycle for construction sector:

Construction sector’s financial health is driven by higher scale, better absorption of

overhead costs and continued bidding discipline. Asset utilization of the industry is likely

to increase, although Companies may have to incur capex to upgrade machinery to

meet the changing requirement and specification, mainly in the road sector. On a net

cycle basis, the entire construction sector has a relatively benign working capital cycle.

This is mainly driven by its high customer receivables. However, the sector credit profile

could witness a gradual recovery as companies are currently more focused on

managing lean working capital cycle and liquidity position rather than reckless

accumulation of orders.

Consequently, prior elongated cycle are expected to reverse as 1) Robust order award

activity – leading to better WC management 2) Lower interest rate regime – leading to

lower interest expense 3) Asset divestment by companies – leading to incremental cash

flow. These factors, which will play out over the next few years, will all contribute to

reducing debt levels and interest expenses and lead to better cash flows.




Exhibit : Porter’s Five Force Framework Analysis

Threat of substitutesLOW

1. Whilst the risk of substitution is low (as a project is awarded on the lowest-cost basis), risk of a project being postponed or cancelled is very high.

2. Project can be delayed or cancelled due to multiple external issues such as delay in clearances or lack of availability of capital with the developer.

Barriers to entryLOW

1. Low capital requirement for EPC contracts (gross block) results in low entry barriers.

2. New firms can gain prequalification either by taking smaller jobs or by forming JV with other mid-sized construction companies/ international players.

3. On the private side, relationships rule the roost

CompetitionMEDIUM

1. Competitive intensity from mid-sized players has reduced in sectors such as metros, and marine transportation, which requires capital investment in either gross block or working capital.

2. More demanding projects may limit the number of bidders on the Government side.

Bargaining power of buyersHIGH

1. Government bodies, large corporates, infrastructure/real-estate developers are the key clients that award contracts on a low-cost basis and enjoy high bargaining powers.

2. Bargaining power of buyers have increased, as they squeeze EPC contractors for margins and working capital payments

Bargaining power of suppliersMEDIUM

1. Bargaining power of suppliers is low as the order quantity by buyers is in bulk.

2. Shortage of skilled manpower, especially for high-end engineering project in sectors such as metros and water/waste management.

3. No advantage in sourcing raw material (cement and steel) due to fragmented nature of the construction industry.

The construction industry is highly fragmented as low fixed capital requirements for

construction contracts remove entry barriers. Capital expenditure is only required for

procuring necessary equipment unlike a manufacturing business, which requires plants

and machinery. Porter’s five force framework analysis as follows -



Exhibit: Positioning of the Construction Industry

Roads

Dilip Buildcon

KNR Constructions

Sadbhav

Engineering

PNC Infratech

Ashoka Buildcon

Cummins

Tata Hitachi

BEML

IRB Infra, IRB InvIT

Sadbhav

Infastructure Projects

ITNL

Cement

Ultratech, ACC, Ambuja,

JK Lakshmi, Shree

Aggregates, Bitumen &

Steel

Power

L&T

Simplex

NCC

BGR

BHEL

L&T

Thermax

KEC

Kalpataru

Triveni

NTPC, Tata Pow er,

Adani Pow er, Torrent

Pow er, GMR, GVK,

JSW Energy,

RattanIndia Pow er,

CESC, NHPC

Suzlon, INOX Wind

Cement & Steel

Fuel

Coal India, ONGC

Petronet LNG, GAIL,

GSPL

Pow er Trading – PTC

India, IEX

Ports/Airports

L&T

ITD Cementation

NCC, Simplex,

Ahluw alia

Adani Ports & SEZ

Gujarat Pipavav

APM, PSA, DP World

GMR, GVK

Shipping and Shipyards

Cochin Shipyard

Dredging

Logistics – ConCor,

Navkar

L&T

IRCON

GMR

Tata Projects

J Kumar

Simplex

Alstom, Siemens

ABB

L&T

Texmaco

Titagarh

Wagons

L&T – Hyderabad

Metro

Cement & Steel

Fuel

Coal India, ONGC

Petronet LNG, GAIL,

GSPL

Pow er Trading – PTC

India, IEX

Buildings

L&T

Shapoorji Pallonji

NCC, Simplex, JMC

Projects

Ahluw alia,

Capacité, PSP

NBCC

Cranes/

Formw ork

manufacturers

Excavators,

Dumpers – Tata

Hitachi, BEML

Concrete Pumps

– Schw ing Stetter

DLF

Puravankara

Shobha

Oberoi

Prestige

Cement

Ultratech, ACC, Ambuja,

JK

Lakshmi, Shree

Building Materials & Steel

Kajaria, CERA, Somany,

Finolex, Greenply


Ministry of Housing and

Urban Affairs

CPWD,State

PWDs,HSCC,City Development

Authorities

Private Developers, NBCC

State-level RERA

Authorities

Ministry of Road Transport

& Highw ays

NHAI, NHIDCL, State PWDs

Ministry of Pow er, Ministry

of Coal, Ministry of New and

Renew able Energy, SECI

CERC, CEA, SERCs, NLDC,

State DisComs, State

TransCos, State GenCos

Ministry of Shipping,

Ministry of Civil Aviation

Maritime Boards of States

TAMP, AERA

AAI

Ministry of Railw ays

Western and Eastern

Dedicated Freight Corridors

Ministry of Housing and

Urban Affairs

EPC ContractorEquipment

Manufacturer Asset Owner OthersMinistry/ Regulator/ Key

project awarding entities

EPC in Transmission

Railways/ Metro

Positioning of the Construction Industry – Most fragmented, least organized:

Competitive intensity at its ebb:

Over the last ten years, industry has witnessed multiple exits due to financial troubles.

Mid-sized players have been impacted by unrelated expansion into new segments and

balance sheet issues. As a result, few players (domestic & foreign) with a relatively

large net worth to take on large projects are operating currently. Given a higher impetus

on the quality and technical qualifications of contractors, consolidation could be a major

stimulus for a handful of players.

In 2009, at the peak of the investment cycle, 32 construction companies were a part of

the BSE500 index. However, over the last few years, many of the contractors faced

financial stress due to higher working capital and lower growth. A few contractors also

diversified into other infra segments resulting in further diversion of resources and

ballooning of capital employed.



Exhibit: EPC Player's order book and geographical presence

Order book (Rs bn) 40.1 52.4 76 27.5 165.2 230 NA 316 2586

Buildings & factories 91% 100% 76% 100% 27% 100% NA 50% NA

Non- B&F 9% 0% 24% 0% 73% 0% NA 50% NA

Govt 68% <5% 32% 4% 62% NA NA NA NA

Private 32% 95%+ 68% 96% 38% NA NA NA NA

Geographical mixMainly North

India

Mainly West

India

Mainly

South India

Mainly

GujaratPan-India Pan-India Pan-India Pan-India Pan-India

Source: Company,SKP Research

NCC Ltd L&TJMC

Projects

PSP

Projects

Simplex

Infra

Tata

Projects

Mid-sized local players Pan-India

Ahluwalia Capacit'e SP Ltd

Exhibit: A sharp fall from grace for EPC contractors from BSE500 Index

Source: BSE,SKP Research

3220

13

2

0

10

20

30

40

50

FY2009 9MFY18

EPC Buildings EPC

Exhibit:Favorable markets help in fundraising activities

Date Company Issue Raised (Rs Bn)

Feb-18 ITD Cementation QIP 3.4

Jan-18 NCC QIP 5.5

Sep-17 Capacite Infraprojects IPO 4

Sep-17 Bharat Road Netw ork IPO 6

May-17 PSP Projects IPO 1.5

May-17 IRB Invit Fund Invit 50.4

Oct-16 NBCC OFS 22

Aug-16 Dilip Buildcon IPO 4.3

Jan-16 JMC Projects Rights 1.5

Oct-15 IL&FS Transportation Rights 7.4

Sep-15 Sadbhav Infrastructure IPO 4.3

May-15 PNC Infratech IPO 4.8

Apr-15 MEP Infrastructure IPO 3

Apr-15 Ashoka Buildcon QIP 5

Apr-15 HCC QIP 4

Mar-15 IRB Infrastructure QIP 4.4

Source: BSE,SKP Research

Location - Important for an engineering, procurement, and construction (EPC) player:

Not all the established contractors have a pan-India presence. Whilst most mid-sized

players attempt expansion, it is a gradual process as building a supply chain and

reputation is a cumbersome process. Larsen, Shapoorji, Tata Projects, NCC and

Simplex tend to operate on a pan-India basis whilst all others have a limited footprint.

Fund raising improves health; new

avenues come up in the form of

InVITs:

With easing liquidity constraints in

the Indian financial system, many

infrastructure players are raising

equity through either Qualified

Institutional Placement (QIP) or

rights issue or IPOs. With new

funding avenues such as

Infrastructure Investment Trust

(InVITs) and the issue of double

taxation on it getting resolved, it

can be safely assumed that over

the next few years, BOT players

will utilize this avenue of further

fund raising.



Q3FY16 84 175 23 144 19 - 92 77 47 12 674

Q4FY16 147 78 114 79 16 - 142 138 39 34 788

Q1FY17 110 65 40 58 2 - 23 171 24 16 509

Q2FY17 121 219 52 119 32 - 75 105 51 13 787

Q3FY17 77 78 33 18 21 - 107 95 48 3 479

Q4FY17 87 51 65 122 10 - 11 176 57 4 584

Q1FY18 78 5 50 20 12 45 107 144 89 4 554

Q2FY18 89 66 76 33 39 61 21 72 65 2 524

Q3FY18 177 17 155 64 55 - 147 88 47 24 775

Growth

YoY (%) 129% -78% 366% 256% 166% NA 38% -7% -2% 711% 62%

Source: Projects Today,SKP Research

Exhibit: Grow th in order inflows (In Rs Bn)

Water &

Irrigation OthersSegment Pow er Total

Railw ays

& MRTS

Transportati

on & Marine

Infra

Buildings Oil & Gas Industrial DefencePow er

T&D

One of the best trends in last nine quarters

0

46%

8%6%

10%

8%

2%10%

10%

Segment-wise breakdown Segment-wise breakdown

Roadways

Water supply

Community services

Irrigation

Irrigation

Power Distribution

Real Estate

Others

24%

7%

2%8%

3%

3%0%

5%5%

2%

2%

1%

4%

34%

State-wise breakdownMaharashtra

Karnataka

Odisha

Madhya Pradesh

West Bengal

Jharkhand

Bihar

Andhra Pradesh

Uttar pradesh

Tamilnadu

Rajasthan

Haryana

Gujarat

Others

Demand Drivers

Government is on spending spree, tender announcements robust, new project

tendering: highest in January

The Government has laid a roadmap on infrastructure creation for a sustained growth in

the country's economic activity. In the Union Budget 2018-19, the Government of India

has given a massive push to the infrastructure sector by allocating Rs 5.97 lakh crore

(USD 92.22 bn) for the sector, which includes aviation, housing, energy, power,

railways, roads, shipping & water. Recent initiatives and public spending re-affirm the

Central Government’s strong commitment to infrastructure.

The EPC sector will be the biggest beneficiary of this huge opportunity. Whether it is in

roads, railways, or metros, a large part of the capex for the infrastructure projects

involves civil work, which will be executed by the local EPC players – irrespective of

whether the project is awarded on EPC/BOT basis or to a domestic/foreign player.

New project tendering was at its peak in January, led by the roads sector, likely to

translate into higher order finalization in near term. Post weakness over last 20 months,

on a trailing-six-months basis, contract awards in construction, which surged in

November and December 2017, continued their upward move in January 2018 posting

strong 62% y-o-y growth at Rs 775 bn. Sector’s revenue outlook looks robust with

current order-book providing healthy visibility (average visibility of ~3 years). Execution

is at 9% growth in 9MFY18 over 9MFY17, as GST issues subside.



Date Investor Details

Jun-17 Qatar HoldingInvested $250 million in Arthveda Fund Management’s new Affordable

Housing Fund

Nov-17 IFC, HDFCIFC has teamed up w ith mortgage lender HDFC to create an $800 million

fund dedicated to affordable housing

Dec-17 HDFC Capital HDFC Capital raises $550 million for 2nd affordable housing fund

Jan-18 Indiabulls Housing Finance IBHF raises Rs 1,000 crore from Yes Bank for affordable housing

Jan-18 SBI SBI to raise Rs 200bn for affordable housing, infra via bonds

Source: Media, SKP Research

Exhibit: Private sector financiers are raising funds to promote ‘Affordable Housing'

Exhibit: Urban Housing: New Sanctions Improve; Await Completion

Source: MHUPA,SKP Research,*as on February 2018

700 1

100

1900

0

500

1000

1500

2000

FY

16

FY

17

FY

18*

House sanctions: 3.7mn to date since inception

('000 units)

0

200

400

600

800

1000

AP

MP

KA

UP TL

GJ

TN

MP

KA

JH

Top states: Andhra Pradesh in new sanctions and Gujarat in completion

House sanctions House completed

('000 units)

Affordable Housing- A new frontier for EPC companies:

Housing has been a cornerstone of the Government’s political agenda both in terms of

social upliftment and job creation. ‘Housing for All’ is a difficult end-goal in the traditional

construct of high land prices + high profit margin for developers + safe haven for black

money. Demonetisation, RERA (Real Estate Regulatory Act) and incentives for

affordable housing may be the moves to control and lower pricing. Central Government

budget has allotted Rs 46 bn towards subsidies for developers that build affordable

houses or redevelop the slums. If fully utilised, this figure can support affordable

housing and slum redevelopment projects of up to Rs 250 bn. Furthermore, the

Government may allow financially weak public sector companies to provide land for

these projects. Snapshot of this scheme as follows:

Budgetary allocation for PMAY (Urban) increases by 8% to Rs 65 bn for FY19 BE. Also,

a dedicated Affordable Housing Fund of Rs 600 bn gets Union Cabinet approval.

Total 3.7 mn houses sanctioned till date. Around 0.3 mn houses completed under

PMAY (Urban).

Smart Cities: 99 cities selected with outlay of Rs 2,040 bn. Projects worth Rs 23 bn

completed and Rs 205 bn are under progress.

AMRUT: 494 projects worth Rs 194 bn awarded for water supply & 272 projects worth

Rs 124 bn for sewerage work.

There has been a material step down in ticket prices in the new housing launched by

private developers. ‘Affordable’ may not fit the Government criteria but private

developers are looking for ways to lower ticket sizes in order to attract buyers. There

have been multiple fund raises by major financiers to provide funding in this segment.



Exhibit: Urban Transportation: In Full Swing


22

48

48

65

40

12

35 38

85

0

20

40

60

80

100

CY

02

CY

04

CY

05

CY

10

CY

11

CY

13

CY

14

CY

15

CY

17

Highest-ever metro length turns operational in CY17

Metro length turns operational (km) 252

43

27

28

18 26

12

9 9

30

80

75

75

26

86

23

14

66

40 43

30

23 32

0

100

200

300

De

lhi

Be

ng

alu

ru

Kolk

ata

Ch

en

na

i

Kochi

Gurg

ao

n

Mu

mb

ai

Jaip

ur

Lu

ckn

ow

Hyde

raba

d

Ahm

ed

ab

ad

Nag

pu

r

Noid

a

Navi M

um

ba

i

Pun

e

Metro: 454km operational & 612 km underconstruction

Operational (km) Under-construction (km)

Urban Infrastructures – Set to grow rapidly:

The Indian demography has seen rapid urbanization over the last decade and its pace

is expected to increase over the next few decades. Currently 377 mn Indians (31% of

the population) reside in urban centres (Census 2011) as compared to 45% in China,

54% in Indonesia and 87% in Brazil. There is an urgent need for re-generating urban

areas in existing cities and the creation of new, inclusive smart cities to meet the

demands of the increasing population and migration of rural population to the urban

areas.

Most Indian cities remain ill equipped to handle a large population migration. With such

migrations, not only do basic necessities such as water, power, and sanitation need to

be provided, but also infrastructure facilities such as public transport and roads need to

be upgraded. Since most cities in India are not planned, there is limited scope for intra-

city road expansions, and this creates a pressing need for other forms of transport. The

Central Government proposes to give financial support to the Mission to the extent of

USD 7.77 bn in the next five years (FY15-16 to FY19-20).

Snapshot of projects under this scheme as follows -

In the Union Budget, the Finance Minister announced 150 km of suburban network of

Rs 400 bn in Mumbai and 160 km of suburban network of Rs 170 bn in Bengaluru.

Maharashtra metro plans to interlink four Indian Railways stations with Pune metro

rail project.

South Korea - based firm Hyadai Rotem bags contract to supply 96 metro cars to

metro-lnk express for Gandhinagar & Ahmedabad (MEGA).

Maharashtra Government signs MoU with Virgin Hyperloop One Group to build first

Hyperloop route in India between Pune and Mumbai.

Chennai metro rail starts land survey for the second phase of metro rail project.

The National High Speed Railway Corporation (NHSRCL) starts the process to

acquire land for the 508 km Mumbai-Ahmedabad High Speed rail (bullet train) project.

The project has been put in the fast lane by converting it into an elevated corridor

which would require railways to acquire 1,100 hectares of land against 1650 hectares

earlier. The line’s alignment passes through nine districts in Gujarat & three districts

in Maharashtra.



Exhibit: National Waterways: Gathering Pace

Construction of multimodal terminal at Haldia ITD Cementation 5174 Dec-19 3.2

Construction of multimodal terminal at Varanasi Afcons Infrastructure 1697 Nov-18 0.5

Construction of new navigational lock at Farakka Larsen & Tubro 3592 Mar-19

Construction of multimodal terminal at Sahibganj Larsen & Tubro 2809 Mar-19 2.2

Source: : Inland Waterways Authority of India,SKP Research

Hasnapur & Bakhtiyarpur: DPR under preparation

Intermodal terminal at Kalugha

Intermodal terminal at Ghazipur

Ro-Ro terminals

DPR and tender document under f inalization

DPR and tender document under f inalization

DPR and tender document under f inalization;NOC aw aited from World Bank.The terminal is being

planned for LNG bunkering

Rajmahal & Manikchak: Draft DPR submitted

Samdaghat & Manihari: Draft DPR submitted

Kahalgaon & Tintanga: Draft DPR submitted

Hasnapur & Bakhtiyarpur: DPR under preparation

Project cost

(Rs Mn)

Target

completion

Terminal capacity

(mn tonnes pa) Civil ContractorProject implementation on NW-1

National Waterways: Gathering pace:

The Indian port sector, which at present is on a rather slow track, has an array of

opportunities for its up-gradation and development. Aimed at modernizing existing

ports, Government launched the Sagarmala project, where there could be an

investment of Rs 50,000 crore in port mechanization. Simultaneously, steps are being

taken to link inland waterways to various ports to facilitate coastal shipping and ensure

last mile connectivity. Under the National Waterways Bill 2015 recently cleared, 106

waterways have been declared national waterways during the last two years compared

with just five in the last 30 years, which would have positive impact on reduction of

overall logistics cost.

Several factors promise growth in coastal shipping: (1) it is more price-competitive than

road transportation; (2) if road connectivity of ports (Sagarmala) indeed improves

according to plan, we could see coasting shipping growing as a chunk of transportation

(currently mid-single digits), (3) the development of inland waterways in India would add

another fillip to the segment. However, the location of manufacturing capacities in India

(mostly in the hinterland) precludes comparisons with China, where coastal shipping

accounts for more than 25%. The transhipment/feeder business (aggregation of cargo

at certain ports) is a global phenomenon and its relevance would further increase as the

size of main-line vessels increase.

Snapshot of projects under this scheme as follows:

Central Road Fund (Amendment) Bill, 2017 to allocate 2.5% for development of NW,

which would provide ~Rs 20 bn pa.

Union government declares four rivers – Chenab, Indus, Jhelum and Ravi — as

national waterways (NW) to be developed in phases.

Waterway-airport connectivity proposed by Kerala Government to make 610km

waterway from Kovalam-Bekal navigable by 2022. Chennai metro Rail starts land

survey for the second phase of metro rail project.

.



Exhibit: National Highways: Gearing Up


30

00

58

00

26

00

22

00

24

00

30

00

38

00

40

00

29

00

96

00

0

2000

4000

6000

8000

10000

12000

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

10M

FY

18

FY

18E

NHAI awarding muted, but bid pipeline robust

23

00 2

80

0

23

00 2

90

0

19

00

15

00 2

00

0

28

00

15

00

34

00

0

700

1400

2100

2800

3500

4200

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

10M

FY

18

FY

18E

NHAI completes road length of 1,566km; 4.3km per day

Length awarded (km) Length completed (km)

Roads & Highways: Gearing Up for next growth:

The Indian road space is on a secular uptrend with surging NHAI project awards

(~4,000 km YTD) and a huge bid pipeline (~7,768 km worth Rs 1.4 trn at YTD). Various

policy measures adopted by the Government saw project awards in FY17 catapulting to

~66% as compared to FY14. Buoyed by its success, Government is looking at spending

Rs 7.1 trn in the road sector to construct 83,677 km of roads over next 5 years. These

targets are a whopping ~190% higher when compared to the achievements of the past

5 years (FY13-17).

To achieve this mammoth target, Government is looking at roping in agencies like

NHAI, MoRTH, State PWDs and the National Highways & Infrastructure Development

Corporation (NHIDCL). Substantial delegation of powers has been recommended to

ensure that these works witness speedy completion. The programme comprises 2 main

components – Bharatmala and road projects under existing schemes like the Left Wing

Extremism (LWE) scheme for road development in Naxalite areas, Special Accelerated

Road Development Programme for the North-Eastern Region (SARDP-NE), National

Highways Interconnectivity Improvement Project (NHIIP), SetuBharatam, Char Dham,

etc.

Snapshot of projects under this scheme as follows:

NHAI revised expenditure of Ministry of Roads, Transport & Highways stands at Rs

610 bn for FY18 and expenditure is expected to increase by 16% to Rs 710 bn in

FY19. The ambitious Bharatmala Pariyojna scheme has been approved to develop

35,000 km of roads network in Phase I at an estimated cost of Rs 5,350 bn.

NHAI awards 2,697 km in 10MFY18 worth Rs 423 bn with ~62% on EPC, 34% on

HAM and 5% on toll mode.

NHAI invites bids for 7,768 km worth Rs 1,416 bn with 61% on HAM, 38% on EPC

and 1% on toll mode.

First tranche of ToT highways for 648 km receive bids from Brookfield, Macquarie

Group, IRB Infrastructure & NIIF and Macquarie won with a bid of Rs 97 bn.



Power Generation - Opportunity exists but will take time to materialise:

Power sector continues to face constraints in terms of: 1) soft demand recovery and low

pricing, 2) delayed policy implementation and 3) lack of long-term PPAs from state

discoms. The recent initiatives taken by the Government, e.g. UDAY, auctioning of coal

& gas linkages and supply etc might unblock the policy logjam.

As demand is expected to pick-up at 7-8% per annum and capacity addition likely to

stagnate, power deficit is set to rise in the long-term. Hence, increasingly there will be a

case for spurt in capacity addition programme from FY19 onwards which will be needed

for fresh and replacement demand (Government has identified 36,000 MW of

generating plants which are more than 25 years old).

In the near term, Government will facilitate shutting down old plants and coal linkage will

also be transferred. 36,000 MW of generating plants, if replaced, would mean order size

of Rs 2,160 bn for the EPC players. It is expected that the PSU sector would be taking a

lead in setting up these capacities leading to continuous opportunities for the

construction players.

Power -Transmission and Distribution (T&D): Gearing up for the next level of growth

While the power sector has seen remarkable accretion in generation capacities,

investments in T&D networks have lagged behind, causing network congestion and

inefficiencies. The requirement for large scale transmission gets further accentuated as

the load centers are scattered at far off places, away from generating stations located in

resource rich areas.

Industry estimates indicate that massive transmission corridors need to be built in

Northern and Southern regions for transferring power from other regions. Going

forward, substantial investments (the Government has envisaged a capex of Rs 2.6 trn

over the 13th plan) are expected in T&D systems to gain pace as utilities upgrade and

ramp up the T&D infrastructure.

Exhibit : Transmission and distribution spending over the 10th-13th plan

Description 10th Plan 11th plan 12th plan 13th plan

Rs Bn Total PGCIL Share Total PGCIL Share Total PGCIL Share Total PGCIL Share

Transmission

Inter State 200 190 95% 550 553 98% 1,250 1,100 80% 1,600 800 50%

Intra State 255 562 0% 550 112 20% 1,000 250 25%

Distribution 300 0 0% 1,000 0 0% 3,062 0 0% 2540 254 10%

Total T&D spending 755 190 25% 2112 553 26% 4862 1212 25% 5140 1304 25%

Total (transmission) 455 190 42% 1112 553 50% 1800 1212 67% 2600 1304 50%

Source: CEA, SKP Research

Railways - Provides large opportunities for EPC players:

The railways sector has a high construction intensity of ~78% which provides ample

opportunities for the EPC players. For FY19, the ministry is targeting a growth of 8% at

Rs 1.3 trn with major growth in outlay envisaged under new lines (+36%), track

renewals (+108%), and DFC. The total opportunities for the EPC players are envisaged

at over Rs 1,000 bn in FY19E.



Rs Bn FY13 FY14 FY15 FY16 FY17BE FY19BE

Rolling stock 184 175 165 194 273 252

New lines 53 58 71 202 156 212

Track renew als 54 50 54 44 40 83

Doubling 25 30 39 105 251 180

Electrif ication projects 10 13 14 23 34 35

Workshops 15 18 17 15 37 33

Invt. in non-govt. undertakings 28 40 46 54 84 168

Metros 12 12 10 13 14 14

Others 124 144 172 286 321 334

Grand Total 504 540 588 936 1,210 1,310

Source: Railway Budget, SKP Research

Exhibit: Railways - Rising trend in financial expenditure

Exhibit: Cement production on the uptrend since Nov’17

Source: Industry,SKP Research

26

23 22 23 24

21 22 22 21

25 24 25 25 2422 23 24 24

26 27

10%

1%3%

5% 6%

1%

-9%-13%

-16%

-7%-5%

-1%-3%

1% 1% 0% -1%

18%19%21%

0

5

10

15

20

25

30

-20%

-10%

0%

10%

20%

30%

Jun-1

6

Jul-1

6

Aug-1

6

Sep-1

6

Oct

-16

Nov-1

6

Dec-1

6

Jan-1

7

Feb

-17

Ma

r-1

7

Apr-

17

Ma

y-17

Jun-1

7

Jul-1

7

Aug-1

7

Sep-1

7

Oct

-17

Nov-1

7

Dec-1

7

Jan-1

8

Cement Production (mnT) YoY growth (%)

Input Indicators: Cement Volumes: Growth picks up again after a lull

Over the last 15 year period, cement demand in India has grown at 7% CAGR and

typically followed infrastructure growth closely. India’s cement industry has seen an

uptick in production over the past three months (Nov’17-Jan’18), backed by increase in

spending on affordable housing and uptick in the infrastructure sector.

Outlook

Construction industry is in a sweet spot. There are larger, more demanding projects on

the Government side. Commercial projects are picking up. The contracting community

may need to adapt, driven by the clients’ changing needs – do fewer but larger projects,

focus on execution quality and speed and protect the balance sheet. But the benefits

may be real – a natural attrition of customers towards more professional contractors, a

leaner working capital cycle and stable margins.



Exhibit: Key Milestones

1924 Pioneered cast-in-situ driven piles in Asia.

1935 Foray into construction of industrial structures.

1940 Built the prestigious King George Docks (Jawaharlal Nehru Port), Mumbai.

1947 Current promoters Mundhras take over.

1958 Designed and constructed the first RCC framed structure in Asia, the 17-storied national tower in Kolkata.

1960 Forayed into construction of thermal power plants ranging 10 to 4000 MW.

1990 Started piling jobs in UAE – Abu Dhabi.

1992 Built international class hotel at Tashkent, Uzbekistan.

1993 Becomes public listed company in 1993. Turnover crossed Rs.3000 mn.

1996 Follow on public issue of equity shares & rights Issue of POCD.

2004 Began overseas expansion.

2005 Private placement of 15% equity shares for Rs 93 Cr at Rs 726 per share of Rs 10 each.

2007 QIP Rs 400 Cr, 13% dilution at 625 per share of Rs 2.

2010 Foray into power T&D and road BOT.

2011 Entry in Ethiopia, Bangladesh & Saudi Arabia.

Completed construction of India's tallest pilgrimage.

Acquires Joy mining services to expand its footprint into underground mining services and divest the

same in Sept 2012.

2014 Completed BOOM Project.

2015 Built airport on turnkey basis.

Source: Company,SKP Research

2012

Company Profile Simplex Infrastructures Ltd (Simplex), incorporated in 1924, is one of the leading

construction players in India, executing projects in several sectors like transport, energy &

power, mining, buildings, marine, real estate etc. It was initially promoted as Simplex

Concrete Piles (India) Limited by HP Lancaster of the UK, with a focus on high-end piling

contracts and was taken over by Mundhra's (current promoters) in 1947.

Simplex is the market leader in the concrete piles business in India. Over the years, the

company has evolved as a diversified infrastructure player, with presence across the

infrastructure segments and undertakes project contracts starting from design to complete

execution and commissioning on turnkey basis.

Simplex’s operations are spread across India and overseas, with ~200+ ongoing projects.

The company has access to latest technologies and has a strong technically competent

workforce (completed ~2,900 project across business segments and geographies) to cater

to a diverse clientele, ranging from private and public institutions, Government and various

international conglomerates.

Simplex has ramped up its capabilities and currently executes projects in the power,

industrial structures, buildings, roads, railways, marine, and urban infrastructure segments

etc. It has a diversified revenue stream, which protects the company from downside in any

particular contract, vertical, client or country.



Parameter Engineering, procurement and construction (EPC) Others

Key competitors

Government spending on infrastructure development.


In urban infra, company is targeting to bid aggressively for metro projects across cities like Mumbai,

Delhi, Ahmadabad, etc. and expects huge opportunity from other urban Infra projects.

Revenue contribution

(FY17)

(1) Experienced and motivated Leadership, (2) Skilled middle management and project managers,

(3) Corporate ethos & culture to provide client satisfaction through quality and timely work, (4) Proven

strategy to be selective in choosing projects/ clients, (5) Reputation among clients enabling repeat

orders.

98%

CARE Ratings assigned CARE A rating in view of long and satisfactory track record of the company,

proven project execution capabilities, strong order book position and diversified project mix as well as

client portfolio.

98%

In buildings, the company focuses on Government orders and the company gets good order flow from

authorities such as Delhi Urban Shelter Board, NBCC, DDA etc. It has also developed goodwill

among private developers and has been getting repeat orders. The industry is highly fragmented with

a large number of un-organized players.

Key Success Factors

L&T, TATA projects, NCC Ltd, Ahluwalia Contracts, Capacit'e, JMC Projects, PSP Projects

Credit Rating

Demand drivers

Revenue contribution

(FY20E)

Market position

2%

Various initiatives such as Bharatmala, Sagarmala, Pradhan Mantri Awas Yojna, Pradhan Mantri

Sadak Yojna, Regional connectivity scheme, Freight corridors, Industrial corridors, Smart cities, etc. to

provide additional impetus to construction industry.

2%

Exhibit : SIL - Business Mix

Geographic presence The company has projects in 22 states.

The company started as a piling contractor, ramped up its capabilities and currently executes projects

in the power, industrial structures, buildings, roads, railways, marine, and urban infrastructure

segments etc. Currently buildings, urban infra, power and road comprise ~83% of the order book.

Product / service

offering

Revenue Mix:

Simplex is among the most diversified players in the India’s infrastructure space with a

presence across all construction verticals. This approach is a part of its overall strategy

towards risk mitigation ensuring that it is not overly dependent on any one vertical for its

revenues and at the same time can factor in the multiple risks of the business.

Simplex reports its revenues under two segments, namely, EPC and others. The ‘EPC’

segment contributes ~98% to the revenues. The revenue from ‘other’ segment includes

income from equipment including oil drilling rig. EPC segment is further divided into nine

sub-segments such as ground engineering, industrial, building & housing, power &

transmission, marine, roads & highways, railways and urban infrastructure etc.

In FY17, building & housing segment accounted for 38% of its revenues, followed by

urban infrastructures (13%), industrial (13%) and power (10%). It is currently working on

over ~200+ projects across 9 verticals and 6 countries. The diversified revenue stream

as well as exposure protects the company from downside in any particular contract,

vertical, client or country.



Exhibit: Revenue break-up (Segment w ise)

Building & Housing

Simplex has been involved in undertaking the design and construction

of high-end high-rise infrastructure, comprising – multi-storied

residential tow ers, institutional buildings, hotels, hospitals and mass

housing projects.

27% 38%

Urban Infrastructures

Simplex has the expertise, resources & experience to design,

construct and execute complex or critical civil backbone infrastructure

ranging from w aterw orks to sew erage, urban, transportation,

renovation and modernization of airports.

20% 13%

Industrial Structures

Closely associated w ith industrial construction in various industries –

cement, steel, aluminum, copper, engineering, automobile,

petrochemicals, oil & gas, fertilizers, paper, textiles etc.

5% 13%

Pow er-Generation &

Transmission

Involved in civil construction w ork in pow er plants like thermal-coal, gas

and oil, hydel and nuclear as w ell as ultra mega pow er projects (UMPP)

and the large transmission lines.

25% 10%

Roads & Highw ays

Simplex has leveraged its construction capabilities and has been

undertaking a variety of highw ay and urban road construction w ork

including flyovers, elevated corridors and bridges.

15% 7%

Marine

Primarily engaged in civil construction of complex marine infrastructure

w hich ranges from underw ater piling including steel piling under

adverse sea conditions to construction of ports, terminals,

breakw aters, and shipyards.

1% 4%

Railw aysInvolved w ith the Indian railw ays in laying of metro lines, elevated

overhead stations, underground tunnel and stations.3% 4%

Source: Company,SKP Research,(Based on FY17 financials)

Share of order

book

% Share of

revenuesSub- segmentsSegments

Investment Rationale

Pure play on the construction sector, a well-managed construction company in the

challenging times

Simplex is among the few construction companies which managed to efficiently counter

challenging business environment in the past 3-5 years when many large peers struggled to

sustain their businesses. Its decision of limited exposure to capital intensive build operate-

transfer (BOT) space in an era of easy liquidity and instead focus on traditional EPC format,

(in EPC, client is billed and pays for the costs incurred for the project) and geographies

within the ambit of construction space has been favorable for the company. In today's

changing environment, it's proving to be a prudent decision as BOT operators are finding it

difficult to raise cash to complete projects. As a strategy, Simplex has always given priority

to bid only for profitable EPC projects in order to keep the balance sheet light.



Regionally Diversified Across 22 States

Exhibit: Diversified Order Book

Source: Company, SKP Research,Order book- (as on 9MFY18)

Piling, 4%

Power, 24%

Industrial, 2%Marine, 4%

Road, 10%

Railways, 3%Bridges, 4%

Bldg & Hsg, 27%

Urban, 22%

Div ersified across 9 Industry Segments

Government, 73%

Private, 27%

Client wise orderbook break-up

Diversified order book and strong order inflow enhance revenue visibility

Simplex’s order book is diversified across ~200+ contracts, 9 business segments and 6

countries which reduces risk due to delay from single contract/ business segment/ country.

The order book having an average project execution period of around two and half years

consists of orders from building & housing sector (27%, including 6% for institutional

building and 21% from residential towers), power sector (24%), urban infra (22%), roads &

bridges (10%), industrial sector (2%) and ground engineering (8%), marine Sector (4%).

Domestic orders comprise ~92% and international orders comprise ~8% of the order

backlog. ~73%+ of its contracts are from Government and private sector contributes to

27%, which enhances security of payments and results in better working capital

management, given Government’s recent emphasis on timely execution of projects.

Simplex has a large fleet of owned construction equipment (Simplex owns Rs 29.9 bn worth

of construction equipment), giving it a competitive edge in terms of cost of construction and

hence, in pricing. Its top 10 orders constitute about ~30-35% of the aggregate order book,

indicating diversified order book profile.

Furthermore, Simplex has an increasing share of EPC projects in the order book

accompanied with the advantages of building a business model which is likely to result in

long-term benefits for the Company. Continued preference for pure contracting space with a

focus on short duration projects along with risk mitigation by way of geographical and

business mix diversification provides the Company with a great platform to achieve solid

growth going forward.



Exhibit: Order intake keeps revenue visibility intact


15

2.2

154

.9

152

.6

161

14

0.7

165

.2

17

6.5

18

1.2

20

8.2 242

.8

64.5

63.1

78.8

64.9

50.6

81.2

51.0

80.0

100 12

0

2.5 2.6 2.7 2.82.5

2.93.3 3.2

3.0 2.8

0.0

0.9

1.8

2.7

3.6

-30.0

30.0

90.0

150.0

210.0

270.0

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

9M

FY

18

FY

18E

FY

19E

FY

20E

Order inflows to remain strong

Total Order Book ( Rs Bn) Total Order Inflow ( Rs Bn) OB/Bill (x)

Simplex has bagged strong order inflows worth Rs 67.2 bn per year (average) during FY12-

17 which is higher than its average revenue of Rs 57.2 bn per year. Order inflows were at

Rs 51 bn for 9MFY18, taking its order book to ~Rs 176 bn, 3.1x order book to bill ratio on a

TTM basis, providing strong revenue visibility over the next few years.

Simplex has L1 position on orders worth Rs 13 bn, which should facilitate achievement of

order inflows target of Rs 70-80 bn for FY18. Other newly won orders include IIT

Bhubhaneshwar order worth Rs 5.2 bn, Chennai metro order worth Rs 4 bn, NTPC order

worth Rs 2 bn, Power Grid order worth Rs 1.55 bn, BHEL order worth Rs 1 bn, etc.

The management has guided an order intake of ~Rs 100-120 bn in FY19E & FY20E.

Consequently, we build in order inflow of Rs 100 bn and Rs 120 bn in FY19E and FY20E,

respectively. With an improvement in execution on the back of an anticipated recovery, the

order book is expected to reach Rs 208 bn and Rs 243 bn in FY19E and FY20E,

respectively.

Execution track record, a key differentiator, strong project management and execution

capabilities

Simplex is among the few construction companies which has executed several projects

ahead of schedule. In a space where project delays are the norm rather than exception,

Simplex has time and again completed projects ahead of schedule. This not only enables

completion within cost, but also entails lucrative benefits—early completion bonus. Primary

reasons behind Simplex’s successful execution track record are:

Intense preparatory work: This commences right from the bidding stage when the

company analyses whether it should bid for a project keeping in mind the progress of

land acquisition and other statutory clearances, the client’s payment ability, past

experiences of projects developed in the region/client etc. There have been many

instances when the Company has let go of an opportunity to bid for a project (even

while facing declining order book) when it felt that execution may not progress smoothly

due to lack of clearances etc.

Sourcing raw material at optimal costs: Simplex’s execution capabilities are

significantly bolstered by sourcing major raw materials required for construction like

stone aggregates, bitumen, diesel, steel and cement near project sites at optimum

costs. This enables greater cost control and promotes efficiency, reducing project

execution period.



Exhibit: Strong Execution Track Record

Details of Major Projects Executed

Details of Major Under Execution

Tata Housing Delhi Metro

Metrolinkexpress for

Gandhinagar and Ahmedabad

–6 stations

Gujarat 6.6

5.2


200+ in-house project execution teams w ith Rs29.96bn

ow ned construction equipment.

Robust planning and management systems for projects,

plants and human resources.

In house developed ERP for real-time project management and

monitoring.

Also, has a full-f ledged designing & draw ing department and

a separate R&D department as w ell

Mumbai Metro

NHAI NHIDCL Jaipur AirportConstruction of buildings for IIT

Bhubanesw ar (NBCC)Odisha

DLF NTPC NHPCMumbai Metro-Metro w ork and

11 stations (MMRDA)Maharashtra 10.8

Client Name Project Name Location Project Cost

(Rs Bn)

NBCC BHEL PGCIL

Contraction of RCC Chimney,

NDCT for 2x660 MW Super

Thermal Pow er station

Tamil Nadu 12.2

QAR 93 mn

MaithonPow er project -2 X 525

MW (Tata Group)Jharkhand 5.2

Key Clientele

Hotel Hilton Doha

MMRDA -Eastern Freew ay

BridgeMaharashtra 8.1

ICTT -Cochin DP World Kerala 5.9

Proven Execution Capabilities

Completed 2,900 project across business segments and

geographies.Project Name Location Project Cost

(Rs Bn)

Bhubanesw ar Chandikhol Raod

ProjectOdisha 9.2

In house execution team: Simplex does majority of the work in-house with minimal

sub‐ contracting. It has an in‐house execution team of 200 experienced employees,

which have boosted its execution skills.

Best placed to capitalize on the Infra opportunity, resulting in robust growth visibility

Management indicated that capex recovery is truly underway while the fundamentals

suggest the pick-up will be both reasonably robust and sustainable. All segments are

witnessing large-scale bid pipeline spearheaded by Government spending on infrastructure

build up. Over the past couple of years policy logjam, delay in clearances and aggressive

bidding by developers led to a collapse in the investment climate and stranded projects led

to the company adopting a prudent stance to conserve capital by restricting growth. As the

scenario improving on bidding pipeline and liquidity, Simplex intends to pursue growth

vigorously. It perceives huge opportunities in power T&D, urban infra, metro rail, buildings &

housing segments and road & bridges sector etc.

Buildings segment - Turning a new leaf: The past couple of years have seen

increasing opportunities in building construction like residential & commercial space and

educational & medical facilities, largely driven by public sector spending. Government

orders are larger, more complex and significantly higher than in the past. Simplex is well

placed to benefit from increasing Government outlay on the buildings space. It has

identified public sector/institutional buildings segment as a major growth driver in future.





Construction of Residential

project " Grand One“ (Bengal

Shriram Hi-techCity)

West Bengal 2.3

Client Name

Key Clientele

Lodha

Godrej

Hiranandani

Prestige

NBCC

DLF

Tata Housing

ITC The Park –project in Mumbai Maharashtra 2.2

Construction of HIG in

Dw arka(DDA)New Delhi 3.8

Project Name Location Project Cost (Rs

Bn)

Construction of buildings for IIT

Bhubanesw ar (NBCC)Odisha 5.2

DGP MAP -Siliguri

Karnataka

Haryana

4.6

3.1

West Bengal 2.9


Exhibit:Building & Housing

Project Cost (Rs

Bn)LocationProject Name

World One -Tallest Residential

BuildingMaharashtra 4.8

Palladium Building

Regal Garden

Building & Housing,

27%

Order Book (As on Dec 31, 2017)

Rs 47.7 Bn

Company traditionally works on buildings contracts of sizes Rs. 500-2,000 mn and it’s

focus will continue to remain in this segment. Simlex is amongst the top 4-5 companies

in India as far as pre-qualification (determined by net worth, revenues, equipment bank

and experience) credentials in the buildings domain are concerned. Segment’s current

order book stands at ~Rs 48 bn (~27% of total order book) which imparts healthy mid-

term revenue visibility. With increasing Government investment in housing, education

and medical services, we believe Simplex’s order inflow prospects remain bright.

Urban infra to play pivotal role in infra order inflow: Simplex’s capabilities span the

entire spectrum of urban infra space. It is one of the prominent contractors of metro rail

projects. The Company has been associated with metro rail projects in cities like

Mumbai, Delhi, Kolkata, Ahmedabad, Pune, and Bengaluru. Apart from metro projects,

Simplex also undertakes projects for water supply and sewerage works in the urban

infra domain. With India likely to have operational metro projects in ~25 cities by 2025

(compared to 10 cities today), coupled with likely increase of airport capacity by 5x, it

will throw up huge EPC opportunity for construction players.

Whilst many construction companies cater to the urban infrastructure sector, only a few

players are capable of capitalising on this opportunity. Simplex has relatively better

managed balance sheets (low debt:equity) and is, thus, better placed to bid for high-end

and complex EPC contracts, either through technology transfer or investments in

labour. Segment’s current order book stands at ~Rs 38 bn (~22% of total order book)

imparts healthy medium term revenue visibility. Furthermore, Government is likely to





Bangalore Metro -

Construction of Via duct

and 5 Metro Station

Karnataka 5.8

Client Name

Key Clientele

Delhi Metro

Bangalore Metro

Sew arage for Indore

Corporation

Jaipur Airport

Mumbai Metro

Ahmedabad Metro

Sew arage for Kolkata

Corporation

Udaipur AirportUrban Sew erage for

sew erage at HalisaharWest Bengal 2.2

Metrolink express for

Gandhinagar and

Ahmedabad – 6 stations

Gujarat 6.6


Bn)

Mumbai Metro - Metro w ork

and 11 stations (MMRDA)Maharashtra 10.8

Andal Airport

Maharashtra

Chhattisgarh

4.6

2.7

West Bengal 1.8


Exhibit:Urban Infrastructure

Project Cost (Rs


Mohali Sports Complex Punjab 7.2

Mumbai Metro

Bilaspur Sew erage

Urban Inf ra , 22%


Rs 38.8 Bn

expedite spending on its ambitious flagship programme like Smart Cities and AMRUT,

which will bring immense opportunities for the Company.

Power segment – Continue to post secular growth: Simplex is amongst the most

experienced contractors in the power projects (thermal, nuclear, hydel). In the past, it

has undertaken works for NTPC, BHEL, NHPC, Vedanta, Tata Power, Jindal, Bharat

Forge, etc. It has also made a mark in the power T&D segment. Government’s recent

initiatives such as UDAY, auctioning of coal & gas linkages and supply etc may unblock

the sector constraints such as 1) soft demand recovery and low pricing, 2) delayed

policy implementation and 3) lack of long-term PPAs from state discoms.

Moreover, substantial investments (the Government has envisaged a capex of Rs 2.6

trn over the 13th plan) expected in T&D systems to gain pace as utilities upgrade and

ramp up T&D infrastructure, which will bring incremental order inflow for the Company.

Segment’s current order book stands at ~Rs 42 bn (~24% of total order book).





BOW of main plant & off-site

civil w orks for Mejathermal

pow er plant (2x663MW)

Uttar Pradesh 2.7


Exhibit: Power

Project Cost (Rs


Maithon Pow er Plant Jharkhand 5.9

Coastal Project

Jindal Pow er Plant

Vindhyachal-NTPC

Gujarat

Chhattisgarh

4.4

3.1

Uttar Pradesh 2.4


Bn)

Contraction of RCC Chimney,

NDCT for 2x660 MW Super

Thermal Pow er station

Tamil Nadu 12.2

Construction of 400 KV , 220

KN and 132 KV substantionand

transmission lines

Madhya

Pradesh1.9

Raw w ater Reservoir for North

KaranpuraSTPP ( 3x660 MW)Jharkhand 6.2

Client Name

Key Clientele

PGCIL

NHPC

Vedanta

Gujarat UMPP

BHEL

NTPC

Bajaj Infra

Jindal

Power, 24%


Rs 42.4 Bn

Road & bridges sector, the biggest thrust area: Simplex has leveraged its

construction capabilities and has been undertaking a variety of highway and urban road

construction work including flyovers, elevated corridors and bridges. Simplex has

stayed away from plain-vanilla road EPC projects. It has concentrated on projects which

have high structural complexity and require good design skills. As a result, it has won

many projects in North East India, where a combination of difficult terrain and technical

complexity ensure that competition for projects is low.

The new umbrella program “Bharatmala” targets development of a North East Economic

corridor to enhance connectivity to state capitals and key towns. It also focuses on

ensuring seamless connectivity with neighboring countries to make North-East India a

hub of East Asia. In addition, it involves development of 2,000 km of border and

international connectivity roads, which provides enormous opportunity for the company.

For the road vertical, Simplex is among the few construction companies which had

adopted selective approach in the past 3-5 years of highly competitive and challenging

business environment and did not bid aggressively. Segment’s current order book

stands at ~Rs 18 bn (~10% of total order book). Simplex is focused on asset light EPC

business and has limited exposure to capital intensive BOT business where cash flows

are back ended. Considering robust project pipelines in road EPC segment for next two

years, the order book of the company is expected to be driven by EPC projects only.





Widening & Strengthening of

existing NH from 2 to 4 lane from

WB border to Assam

(NHAI)

Assam 1.3

Client Name

Key Clientele

NHIDCL

HMDA

NHAI

MSRDC

Upgradation and rehabilitation of

Bodla-Taregaojn-DaldaliRoad

(PWD–CG)

Chattisgarh 1.2

Fore laningof NH-37 from

Rangagarato KaliaborTinali(NHAI)Assam 2.0


Bn)

Construction of 4/6 laning of

20.683 Km of Daboka-

Dimapurbypass (NHIDCL)

Assam 3.9

Mayor Mohd Haif Bridge

Maharashtra

Telangana

8.1

4.3

Bangladesh BDT 12 bn


Exhibit: Roads

Project Cost (Rs


Bhubanesw ar –Chanikhol Odisha 9.2

Eastern Freew ay

PVNR Expressw ay

Roads, 10%


Rs 17.7 Bn

Exhibit: Road Portfolio Snapshot

State Odisha Appointed date 14-Dec-11 - BRNL* 591

NH/SH no. NH-5 First Provisional COD 12-Jan-17 - SREI 637

Concession period 26 Years - Partners** 1298

Residual life 20 Years 8 Months - Grant 1,774

Design length (Kms) 67 Project Cost 18,390 - Debt 10,404

Asset details Concession terms Sponsors Fund

Source: *Bharat Road Network Limited (BRNL), **Simplex & Galfar, Q3FY18 Presentation (BRNL), SKP Research,

Figures in Rs mn

Shareholders group Simplex - 34% ,Galfar -

26% ,SREI - 40%

Value unlocking potential of BOT business

Simplex has largely stayed away from asset ownership ventures. Currently, it has a

BOT road portfolio of only one project post amicable termination of Mahulia Kharagpur

and Jowai Meghalaya project. The road BOT project is housed in an SPV called Shree

Jagannath Expressways (SJEPL), where it has 34% stake (with balance stake held by

SREI Group and Galfar). The SPV has implemented six-laning of Chandikhol-Jagatpur-

Bhubaneswar of NH-5 (total length 67 Km) in Odisha and achieved provisional

completion certificate (PCC) on January 12, 2017.



Exhibit: Strong Upside Possibilities

Source: Bharat Road Network Limited (BRNL) - Q3FY18 Presentation, SKP Research

Loan Refinancing

Yield Arbitrage

Improvement in mining traffic and upcoming smart cities in Bhubaneshwar

& Raipur key trigger

Favourable award of Rs 1040 mn in Sept’17

Completed refinancing of SJEPL @ 9.62% (reduction 268 bps) upon

provisional completion of project and GIPL @ 9.25% resulting in reduction

of 125 bps.

Assets with fixed cash flow of long tenure can be staged on yield platform

which could result in a net differential yield.

Traffic Growth

Claims

Exhibit: Project Snapshot -Shree Jagannath Expressway Limited

Project Location Project Snapshot

Located on the NH-5 betw een Chandikhol and Bhubanesw ar

The end point of the project road at Chandikhol is a major

intersection, w here NH-200 and NH-5A cross NH-5 through an

overpass. NH-200 connects Daiteri mines and then runs

tow ards Raipur, one of the proposed smart cities.

Development activity

Expansion of Paradeep port to ramp up the overall cargo

handling capacity to 330 mn tonne.

Capacity expansion plan in Kalinga Nagar SEZ, a major steel

cluster near Chandikhol.

Revival in Iron ore cargo volume grow th at Paradeep port to

8.51 MT vs 2.27 MT a year ago.

Info valley, a JV Integrated IT Park w ith IL&FS comprising of

an IT SEZ w ith a tow nship of 500 acres land in the w estern

parts of Bhubanesw ar.

Bhubanesw ar selected for smart city project w ith a

proposal of over USD 708 mn.

ADT Growth (in terms of PCU)

Source: BRNL- Q3FY18 Presentation, SKP Research, ADT = Average Daily Traffic ; PCU = Passenger Car Unit

Traff ic grow th has seen signif icant improvement over the past

2 years, mainly driven by improvement in mining traff ic. With

the upcoming smart cities of Bhubaneshw ar and Raipur

adjacent to the project stretch, traff ic grow th is expected to be

strong going forw ard.7.7%

11.9%

6.1%3.2%

1.4%

FY16 FY17 Q1FY18 Q2FY18 Q3FY18

Over the next few years, the project offers large value unlocking potential for the company

due to following factors.

Robust traffic growth: Although the project achieved provisional completion certificate

(PCC) in January, 2017; it has a tolling track record of more than five years due to

tolling during construction period. The project has witnessed healthy traffic growth—

16% jump in FY17 in terms of passenger car units. The project stretch falls along the

busy Chennai–Kolkata corridor (part of National Highway-5 and Golden Quadrilateral)

wherein the movement of commercial traffic is high.



Exhibit: Operating Performance

Particulars (Rs Mn) FY17 Q3 FY18 9MFY18

Toll Revenue 964 379 1,103

EBITDA 122 259 921

Finance Cost 116 508 1,064

Operational Cash Flows 7 -249 -144

Sponsors’ Fund 2,419 2,527 2,527

Secured Debt 9,911 10,266 10,266

Source: Bharat Road Network Limited (BRNL) - Q3FY18 Presentation, SKP Research

Going forward, improvement in mining traffic along with development of Smart Cities in

Bhubaneswar and Raipur can further aid traffic figures. Recently, SPV has increased

toll rates in the range of ~45-50% from February, 2017 upon completion of Mahanadi

Bridge. The transition to new toll rates has been smooth with no adverse impact on

traffic flow. Currently, the SPV is collecting toll of Rs 43 lakh per day.

Refinancing of debt will boost cash flows: SPV’s project cost of Rs. 1,839 crore was

financed through debt of Rs. 1,041 crore, grant of Rs. 177 crore, toll collections of Rs.

348 crore and sponsor funds including equity of Rs. 253 crore and long term liabilities of

Rs 20 crore. Recently, the project SPV has completed refinancing of its existing debt,

resulting in a reduction of interest rate (refinanced at an interest rate of 9.62%, resulting

in a reduction of ~270 bps in interest rate) and an elongated tenure which will boost its

cash flows going ahead. Furthermore, the SPV has won arbitration award of award of

Rs 1,040 mn in Sept’17 from NHAI.

Considering the project’s strong toll collection in future, there is a high probability that

Simplex will monetise its stake and will use the proceeds to prune debt. The

management has also indicated that it will now focus on EPC, which is its forte and

expects no equity commitment going forward, given the already stretched balance

sheet.

Financial Highlights:

Revenues to gain traction on back of higher execution

Simplex’s revenue is well-diversified across nine segments. Moreover, due to its vast

experience, the Company has the ability to identify profitable segments to drive its revenue

growth. This is reflected from the fact that revenue contribution from ‘Building & Housing’

and ‘Urban Infra’ segments is increased to 27%/22% in 9MFY18 from 26%/10% in FY13,

respectively. On the other hand, Simplex has reduced its dependence on the ‘Industrial’

segment (private capex plays a significant part in driving order flow) due to high business

uncertainties in the recent years, with its revenue contribution declining to 2% in 9MFY18

from 8% in FY13.

Over the next few few years, Simplex is likely to bag incremental orders, led by the recent

surge in tendering activity and reduced competition. Lately, the business opportunities in

terms of number of fresh orders for construction players, such as Simplex, have increased

significantly. Moreover, the number of companies participating in bidding for new orders has

declined. Hence, players like Simplex have the option of choosing the best-suited orders in

terms of segment, geography, client, payment terms, etc.

We expect the company’s revenue to gain traction from FY19E onwards, due to a ramp-up

in execution and strong fresh order inflow expected over next 2-3 years. We estimate

Simplex’s revenues to grow at a CAGR of 16% during FY18-20E to Rs 87 bn.



Exhibit: Revenue to gain traction over next two years


58976

58208

55130

55816

59046

56075

57757 7

0532

86865

25.7%

-1.3%

-5.3%

1.2%

5.8%

-5.0%

3.0%

22.1% 23.2%

-10.0%

0.0%

10.0%

20.0%

30.0%

0

12000

24000

36000

48000

60000

72000

84000

96000

FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E

Total Revenue ( Rs Mn) Growth (YoY %)

Expect revenue to grow at CAGR of 16% in FY17-20E

Exhibit: EBITDA CAGR of ~16% during FY17-20E


40

85

.3

45

87

.0

468

0.9

5159

.3

56

20

.0 68

22.4

688

6.7

725

4.3 8

78

8.3 1

08

22.6

8.7%7.8% 8.0%

9.4%10.1%

11.6%12.3% 12.6% 12.5% 12.5%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

0.0

2000.0

4000.0

6000.0

8000.0

10000.0

12000.0

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E

EBITDA (Rs Mn) EBITDA Margin%

EBITDA margins to stabilize at ~12%+

Major raw materials used by Simplex in their construction activities are steel and cement.

While the input prices are generally volatile, the cost of raw materials, as a percentage of

gross billing, remained at same level during the last ~1-2 years on account of optimal usgae

and escalation clause associated with most of the contracts.

During FY11-15, the EBITDA margin remained in the range of ~8.7%-10.1%, which

improved to 12.3% in FY17. This was mainly due to muted growth in order inflow and delay

in execution primarily owing to slow payment cycle and client side delays.

Going ahead, as buoyancy is returning in ordering activity, Simplex is selectively bidding for

high margins and cost plus (inflation insulated) projects. The Company is also focused on

controlling construction costs by implementing technologically advanced procedures and

equipments, which will result in better EBITDA margins. We expect the EBITDA margin to

stabilize at ~12.5%+, translating into a CAGR of 16% in the EBITDA during FY17-20E.



Exhibit: Debt /equity trend


20938.9

26556.4

29074.4

31828.5

33644.4

32815.6

33000.6

25000.6

20000.6

1.7

2.1 2.1

2.5 2.4 2.1 2.0

1.00.7

0.0

0.7

1.4

2.1

2.8

0.0

8500.0

17000.0

25500.0

34000.0

42500.0


Gross Debt (Rs Mn) D/E (X)

Focus on fast-tracking recovery of receivables, debt reduction on cards

Over the last couple of years, one major issues which constrained Simplex’s revenue

growth is elongated working capital cycle despite the Company largely remaining a plain-

vanilla EPC contractor with minimal BOT exposure, resulting in high debt levels. Going

forward, the Company is focued on improving its working capital cycle and bringing it down

to ~150 days from ~257 days reported in FY17. Key attributes for improvement in working

capital are:

Increasing share of public sector orders

One of the major reasons behind the Company’s high working capital intensity has been

the lesser share of public sector orders. Historically, ~50%+ of the Company’s orders

came from the private sector in power generation, industrial and real estate segments.

Over the last few years, muted industrial growth led to slowdown in private sector

capex. This led to lengthening of Simplex’s working capital cycle.

However, lately Simplex has completely overhauled its bidding strategy, focusing more

on Government projects. Currently, ~73%+ of its contracts are from Government, which

enhances security of payments and results in better working capital management, given

government’s recent emphasis on timely execution of projects. Most EPC companies

with large public sector share in order book have a working capital cycle of ~120-150

days. Going ahead, the change in Simplex’s approach will lead to reduction in its

working capital levels.

Debtor recovery will lead to reduction of debt; strengthen working capital cycle

The Company is focused on improving cash collection cycle and reducing debt.

Management targeted to recover receivables worth Rs 6 bn in FY18, of which it had

recoverd Rs 2.3 bn in 9MFY18. Further with rigorous follow up with clients, the

management is hopeful of recovering old debtors worth Rs 8 bn (for FY17, total

outstanding old debtor amounting to Rs 52.9 bn, which includes unbilled revenue of Rs

32 bn and retention money of Rs 5.5 bn.) in FY19E and FY20E respectively. It also

expects to receive Rs 0.9 bn from the Bangladesh project by year end.

The Company has large amounts of arbitration claims due (as on Q3FY18, total

arbitration claims stands at Rs 22.6 bn, of which the Company had already won Rs 4.6

bn) from Government and private agencies, which it expects to receive in next few

years. Therefore, with recoveries from old debtors, the Company aims to reduce debt

by Rs 12.8 bn by FY20E, leading to better working capital levels.



Exhibit: Peer Comparison

FY15 FY16 FY17 FY15 FY16 FY17 FY15 FY16 FY17 FY15 FY16 FY17

Larsen & Toubro 1845 3.0x 11.2% 12% 10% 10% 4.6% 12% 10% 12% 10% 11% 11% 2.3x 2.0x 1.9x

NCC Ltd 79 2.5x 6.2% 11% 10% 7% -10.4% 2% 4% 1% 12% 11% 7% 1.0x 0.9x 0.7x

Ahluw alia Cont. 27 2.1x 0.9% 10.8% 12.9% 12.1% NA 19% 20% 17% 21% 22% 18% 0.5x 0.3x 0.2x

JMC Projects 20 3.0x 3.7% 8.5% 10.4% 11.2% 3.7% -6% -13% -9% 5% 8% 9% 4.8x 3.2x 3.3x

PSP Projects 19 2.1x 17.5% 8.0% 8.6% 16.4% 37.7% 30% 38% 38% 15% 19% 23% 0.7x 0.7x 0.6x

Simplex Infra 27 3.2x -1.0% 10.1% 11.6% 12.3% 6.2% 4.8% 7.4% 7.9% 10.1% 11.0% 9.9% 2.5x 2.4x 2.1x


ROE (%) ROCE (%) D/E (X)Companies

Mcap

(Rs Bn)

OB/Bill

(X)

Revenue

CAGR (%)

FY12- 17

EBITDA Margin (%) PAT

CAGR (%)

FY12- 17

Exhibit: PAT & Return ratios trend


892

598

606

624

1061

1203

1418

2785

4217

7.4%4.7% 4.3% 4.8%

7.4% 7.9%8.5%

11.3%

14.3%

8.9%8.2%

9.4%10.1%

11.0%9.9%

10.4%

10.4%

11.9%

0.0%

3.0%

6.0%

9.0%

12.0%

15.0%

-300

500

1300

2100

2900

3700

4500


PAT (Rs Mn) ROE (%) R0CE (%)

PAT to grow at a CAGR of ~52% over FY17-20E, return ratios to improve

During FY12-17, PAT grew at muted 6.2% CAGR due to an increase in debt level

mainly required to finance its stretched working capital. However, better topline growth

(mainly due to its emphasis on the EPC business, well-built diversified order book and

strong execution capabilities) and expected improvement in working capital days and

debt reduction plan (lower interest expense) will enable the Company to report a PAT

CAGR of ~52% over FY17-20E (to Rs 42 bn).

In the past, Simplex has enjoyed return ratios in the range of ~9-10%. However, it

slipped in the last couple of years mainly due to stretched balance sheet leading to PAT

de-growth. However, going forward, we expect ROE and ROCE to improve to ~14.3%

and ~12%, respectively, in FY20E on the back of stable margins and robust bottom line

growth.

Additional funding via issuance of share warrants & qualified institutional placement

(QIP) to bolster balance sheet strength:

The Company has proposed to raise to Rs 200 crores (Simplex has already received 25%

of the application money amounting Rs 50 crores) from promoter entity by issuing ~3.6 mn

warrants at Rs 554/share which can be converted at any time during the next 18 months

(we have assumed worth Rs 125 crores of warrant conversion in FY19E and remaning Rs

75 crores worth of warrant conversion in FY20E). Further, it has recently raised Rs 402

crores via QIP by issuing ~7.1 mn shares at Rs 569/share. The proceeds of the issue will

be partly used to deleverage the balance sheet and grow the core EPC business. We

have assumed the fully diluted equity for our projections

Peer Comparison:



Valuations

Government’s multi-pronged focus on infrastructure sector on the anvil coupled with

creation of robust financial and regulatory environment will provide a fillip to the

construction sector. Simplex’s diversified presence across infra verticals will enable it to

capture opportunities arising from the capex recovery spearheaded by the public sector

spending coupled with substantial fall in debt led by improvement in working capital cycle

will boost its earnings profile.

We have valued the stock on SOTP basis and recommend a BUY on the stock with a

target price of Rs 828/- (~49% upside) in 18 months.

Exhibit: SOTP based target price

Business Basis of valuation Rs/share

EPC Business at 6x FY20E EV/EBITDA 787

Shree Jagannath Expressways (BOT) DCF at COE of 13.5% 40

Raichur Sholapur (Transmission) at 0.5x P/BV 2

Total Value - SOTP 828

CMP 555

Upside 49%

Risks & Concerns

Elongated working capital: Simplex has a stretched working capital and its debtors and

unbilled revenue has increased over the years but that could reverse soon. Large portion

of retention monies also impacts the working capital. If Simplex’s working capital

continues to be stretched, then Company’s revenue and profitability could be impacted.

Delays in execution: Any execution delays remain the key risk in all large EPC

contracts, and can emanate from a number of factors including external (client-side

readiness, budget constraints, delay in clearances) and internal (delay in the mobilisation

of equipment, slow execution). Simplex has tried to address most of these factors by

ensuring that projects are secured from large and reputed clients, which do not suffer

from funding issues. As for now, most of its projects are running on schedule. However,

one cannot ignore the inherent risks associated with the business.

Slowdown in Government spending: As a substantial number of infrastructure projects

are funded by the Government and its agencies, any decrease in planned infrastructure

spending could lead to a slowdown in Government spending, which will affect future cash

flows.

Rise in competition: The massive growth in infrastructure has encouraged many new

private players to foray into different vertical of the construction industry, which has

resulted in increasing competition. Any aggressive bidding environment may negatively

impact its margin estimates.

Escalation in raw material costs: The raw material price risk is not significant in the

case of EPC contracts as they have price variation clauses, which offset the movement in

raw material prices. Commodity prices have been stable in the recent past, and hence we

do not see any immediate risk from movement in raw material prices.



Exhibit: Q3FY18 Result Review-Standalone

Particulars Q3FY18 Q3FY17 YoY % Q2FY18 QoQ % 9M-FY18 9M-FY17 YoY %

Net Sales 13,600.6 13,864.4 -1.9% 12,460.4 9.2% 41,179.9 40,574.2 1.5%

Total Income 13,600.6 13,864.4 -1.9% 12,460.4 9.2% 41,179.9 40,574.2 1.5%

Expenditure 11,815.8 12,271.1 -3.7% 10,764.8 9.8% 35,971.2 35,738.3 0.7%

(as a % of Total Income) 0.1% 0.1% 0.0% 0.1% 0.0%

Employees Cost 1,312.0 1,282.4 2.3% 1,404.0 4,118.6 3,860.4

(as a % of Total Income) 9.6% 9.2% 40 Bps 11.3% (162)Bps 10.0% 9.5% 49 Bps

Other Expenses 6,403.3 6,915.7 -7.4% 5,680.0 18,863.6 20,180.6

(as a % of Total Income) 47.1% 49.9% (280)Bps 45.6% 150 Bps 45.8% 49.7% (393)Bps

EBITDA 1,784.8 1,593.3 12.0% 1,695.6 5.3% 5,208.7 4,835.9 7.7%

EBITDA M argin (%) 13.1% 11.5% 163 Bps 13.6% (48)Bps 12.6% 11.9% 73 Bps

Depreciation 453.9 490.2 -7.4% 470.1 -3.4% 1,402.6 1,491.3 -5.9%

EBIT 1,330.9 1,103.1 20.7% 1,225.5 8.6% 3,806.1 3,344.6 13.8%

Other Income 217.3 344.4 -36.9% 294.3 -26.2% 758.4 833.9 -9.1%

Interest Expense 1,147.2 1,164.7 -1.5% 1,175.7 -2.4% 3,455.3 3,325.0 3.9%

Profit Before Tax 401.0 282.8 41.8% 344.1 16.5% 1,109.2 853.5 30.0%

Income Tax 90.1 98.8 66.4 35.7% 233.3 319.1

Effective Tax Rate (%) 22.5% 34.9% - 19.3% - 21.0% 37.4%

Profit After Tax (PAT) 310.9 184.0 69.0% 277.7 12.0% 875.9 534.4 63.9%

PAT M argins (%) 2.29% 1.33% 361 Bps 2.23% 6 Bps 2.13% 1.32% 81 Bps

Diluted EPS 6.3 3.7 69.0% 5.6 12.0% 17.6 10.8 63.9%

Figs. in Rs M illion

Source: Company Data, SKP Research

Q3 FY18 Result Update



Exhibit: Balance Sheet

Particulars FY17 FY18E FY19E* FY20E* Particulars FY17 FY18E FY19E* FY20E*

Total Income 56,075.1 57,757.3 70,531.8 86,865.4 Share Capital 99.3 99.3 117.9 120.7

Growth (%) -5.0% 3.0% 22.1% 23.2% Reserve & Surplus 15,203.7 16,592.3 24,569.6 29,410.9

Expenditure 49,188.4 50,502.9 61,743.6 76,042.0 Shareholders Funds 15,303.0 16,691.6 24,687.5 29,531.5

Material Cost 16,366.5 16,865.1 20,665.8 25,451.6 Total Debt 32,815.6 33,000.6 25,000.6 20,000.6

Traded goods 55.7 138.6 169.3 208.5 Current Liabilities & Prov 36,057.6 36,634.2 42,196.1 44,450.4

Employee Cost 5,142.9 5,313.7 6,488.9 7,991.6 Total Liabilities 84,176.2 86,326.5 91,884.2 93,982.5

Admin & Other Exp. 27,623.3 28,185.5 34,419.5 42,390.3

EBITDA 6,886.7 7,254.3 8,788.3 10,822.6 Net Block inc. Capital WIP 11844.7 10907.1 10362.9 9642.5

Depreciation 1,977.5 1,878.9 2,044.2 2,220.4 Goodwill on Consolidation - - - -

Goodwill - - - - Other Non Current Assets 5,271.1 4,909.4 4,253.1 3,796.0

EBIT 4,909.2 5,375.4 6,744.0 8,602.2 Non-Current Assets 65,420.4 68,980.3 75,362.3 78,246.1

Other Income 890.5 924.1 987.4 999.0 Inventories 7,464.4 7,024.2 8,350.9 9,671.5

Interest Expense 4,453.9 4,526.7 3,511.3 3,212.1 Sundry Debtors 52,885.5 56,302.0 59,640.7 62,208.9

Profit Before Tax (PBT) 1,345.8 1,772.9 4,220.1 6,389.0 Cash & Bank Balance 329.3 561.0 2,374.5 2,511.1

Income Tax 143.1 354.6 1,434.8 2,172.3 Other Current Assets 3,425.6 3,834.8 3,623.9 2,702.9

Profit After Tax (PAT) 1,202.7 1,418.3 2,785.3 4,216.7 Non Current Investments 1,315.6 1,258.3 1,372.3 1,151.8

Growth (%) 13.3% 17.9% 96.4% 51.4% Loans and Advances 1,640.0 1,529.7 1,906.0 2,297.9

Diluted EPS 24.3 28.6 47.2 69.9 Total Assets 84,176.2 86,326.5 91,884.2 93,982.5

Exhibit: Ratio Analysis

Particulars FY17 FY18E FY19E* FY20E* Particulars FY17 FY18E FY19E* FY20E*

Profit Before Tax (PBT) 1,345.8 1,772.9 4,220.1 6,389.0 Earning Ratios (%)

Depreciation 1,977.5 1,878.9 2,044.2 2,220.4 EBITDA Margin (%) 12.3% 12.6% 12.5% 12.5%

Finance Costs 4,293.2 4,526.7 3,511.3 3,212.1 PAT Margins (%) 2.1% 2.5% 3.9% 4.9%

Chg. in Working Capital (751.6) (2,675.4) (161.5) (2,600.1) ROCE (%) 9.9% 10.4% 10.4% 11.9%

Other Charges (458.5) - - - ROE (%) 7.9% 8.5% 11.3% 14.3%

Operating Cash Flows 6,404.8 5,503.0 9,614.2 9,221.4 Per Share Data (INR)

Capital Expenditure (999.9) (900.0) (1,500.0) (1,500.0) Diluted EPS 24.3 28.6 47.2 69.9

Sale of Assets 185.1 - - - Cash EPS (CEPS) 64.3 66.4 81.9 106.7

Others (355.1) - - - BVPS 309.3 336.2 418.6 489.5

Investing Cash Flows (1,169.9) (900.0) (1,500.0) (1,500.0) Valuation Ratios (x)

Changes in Equity - - 18.6 2.7 P/E 24.0 19.4 11.7 7.9

Inc / (Dec) in Debt (5,206.6) (4,341.7) (6,260.0) (7,464.8) Price/BVPS 1.9 1.7 1.3 1.1

Dividend Paid (inc tax) (29.9) (29.7) (59.4) (122.8) EV/Sales 1.1 1.1 0.8 0.6

Financing Cash Flows (5,236.5) (4,371.3) (6,300.7) (7,584.9) EV/EBITDA 8.9 8.6 6.5 4.9

Net Cashflow (9.5) 4,834.7 9,927.8 7,858.0 Mcap/Sales (x) 0.5 0.5 0.5 0.4

Opening Cash Balance 233.1 329.3 561.0 2,374.5 Balance Sheet Ratios

Cashflow during the year (9.5) 4,834.7 9,927.8 7,858.0 Debt - Equity 2.1 2.0 1.0 0.7

Bank Balances 97.8 - - - Current Ratio 1.1 1.2 1.3 1.4

Closing Cash Balance 329.3 561.0 2,374.5 2,511.1 Asset Turn. Ratios 0.7 0.7 0.8 0.9

Exhibit: Income Statement Figures in INR Million Figures in INR Million

Exhibit: Cash Flow Statement Figures in INR Million

Source: SKP Research, *Simplex issued preferential equity warrants of 3.6 mn shares (Face value of Rs 2), @ price of Rs 554.13, amounting Rs 200

crores.Further, it has also raised Rs 402 crores via QIP by issuing ~7.1 mn shares at Rs 569/share.We have assumed the fully diluted equity for our

projections



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