The Hindu Business Line : Simplex Projects

Investors can avoid the Initial Public Offer of construction company Simplex Projects for now. At the offer price of Rs 170-185, the price-earnings multiple works out to 19-21 times FY-07 earnings on an expanded equity base. The pricing of the offer appears stiff, in relation to the size and current line of business. The sector features other small-cap peers, which are now available at attractive valuations.

Investors can adopt a wait-and-watch approach to the IPO and consider investments after listing, based on improved earnings visibility and on positive developments in its wholly-owned subsidiary, which is into building automated car parking systems.

Business

Simplex Projects is engaged in civil construction, road and bridge projects, piling and foundation work, as also water supply and sewerage projects. The company is better classified as a contractor rather than an infrastructure outfit and, therefore, cannot be compared to players such as Gammon India or Nagarjuna Construction. Simplex also has a subsidiary, Simpark Infrastructure, which instals, operates and maintains multi-level automated car parking systems.

Simplex Projects plans to raise Rs 50-55 crore through this offer. The proceeds are to be used primarily for working-capital needs and for procuring machinery and investing in the above-mentioned subsidiary. Post-issue, the company’s market capitalisation would be Rs 200-220 crore in the offer price.

Presence in north-eastern region

Simplex has a number of projects in Kolkata and in the North-East spanning Meghalaya, Manipur and Imphal. With the Government focussed on improving infrastructure and with Asian Development Bank’s funding for roads in these regions, business opportunities appear bright.

Further, with the small size of orders from these regions, bigger players are unlikely to bid for such projects or may prefer to sub-contract the same to local corporates. Companies such as Tantia Constructions and Simplex Projects, together with a number of other smaller players, may receive a share of business in this region.

Simplex Projects now has an unexecuted order value of close to Rs 300 crore (two times the FY-07 revenues). This consists of about 35 projects across various segments such as building and housing, piling and foundations and roads and bridges. Of the order mix, while the majority is contributed by the roads and bridges segement, only 10 per cent comes from the more lucrative and high-margin piling and foundations segment.

The company’s revenue also reflects that the contribution from roads and bridges have risen from 13 per cent to 25 per cent over 2006-07. While the company has managed to ramp up operating profit margins to 14 per cent as a result of increased volumes, it may not be able to better it until its revenue mix is changed.

In the event of a hike in raw material prices, the roads and bridges segment is likely to face a higher impact than piling work. Further, although the size of individual orders bagged by Simplex is small, the number of projects (at close to 35) calls for a significant resource pool (such as machinery and labour) at every project site. This can lead to challenges on timely execution of the projects.

Capital Infusion

The company is also infusing fresh capital into its subsidiary, which operates automated car parking systems at Kolkata, and is evaluating project viability in Delhi through an agreement with the local Municipal Corporation.

This subsidiary is highly geared (at four times after capital infusion of Rs 6 crore), and made losses in 2005 and 2006. In 2007, it derived a majority of revenue from lease premium, which is income to be realised from transfer of commercial space to shop-owners (under an agreement with Kolkata Municipal Corporation). On the back of few disclosures on the same, it is unclear if such income will be of a recurring nature.

Nevertheless, the automated car parking systems business may hold much potential with increasing space constraints in malls and commercial buildings. This subsidiary, which has also bagged an order from DLF, may offer bright earnings prospects provided it is able to attain a more comfortable debt position and derives sustainable revenues from its primary business.

UTI Securities is the lead manager to the issue. The offer is open from July 10-13.

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