Simplex reported 11% y-o-y revenue growth, which was subdued as general elections in Q1 impacted pace of work, due to fall in availability of labour.
However, operating performance was robust with 10.3% EBITDA margin (down 32bps y-o-y, up 217bps q-o-q) led by lower raw material prices. The margin has improved after downward movement in past four quarters.
Interest cost (up 27% y-o-y) was lower than expected. On qoq basis, interest expense was down 11%. PAT declined 26% y-o-y. Net working capital was marginally higher than in FY09. Net debt-to-equity was 1.2x.
In order to achieve 20% revenue growth in FY10, Simplex needs to attain 23% y-o-y growth for rest of FY10, which seems achievable given the current order backlog.
We have revised upwards our FY10 and FY11 margin assumptions by 30bps and 40bps. Our current forecasts imply EBITDA margin of 9.1% for rest of FY10.
We have adjusted tax rate estimates to exclude any benefit of Section 80IA tax exemption.
Based on above changes, we have upgraded earnings estimates by 1% for FY10 and 6% for FY11.
Government’s focus on urban infrastructure projects can result in new orders for Simplex. We expect Simplex to post 25% revenue CAGR over FY09-11. The stock trades at 13.6x FY10E and 11.5x FY11E earnings.
Lower interest cost and higher-than-expected operating margin can lead to earnings upside. Recommend BUY.
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