Integrated engineering and construction service provider Simplex Projects is open for subscription with an initial public issue of 30-lakh equity shares of Rs 10 each in the price band of Rs 170-Rs 185 through a 100 per cent book building process.

The issue closes on July 13 (tomorrow). The net issue will constitute 25 per cent of the fully diluted post issue paid up capital of the company.

Recommendation - Subscribe with a medium term view

* Simplex Projects (SPL) is in the business of providing integrated engineering, procurement and construction services for civil & structural construction and infrastructure sector projects.
* With over 15 years of experience in the construction industry, it has become a significant player in Eastern and North Eastern India.
* It is estimated that infrastructure sector would grow at a CAGR of 15% over the next 5 years and would attract an investment of USD 124.65 billion during this period.
* SPL can undertake projects both on turnkey and design-build bases. Order book of around Rs 290 crore. It has a large fleet of latest construction equipments which helps it serve the technically challenging and diverse nature of construction projects. Going forward, it intends to invest in advanced technology.
* Contribution of top 10 projects increased from 60% of revenues in FY06 to 93% in FY07, on account of larger projects undertaken by the company. Control over costs led to expansion of EBITDA margins from 10.7% in FY06 to 13.8% in FY07.
* We believe the car parking segment and river embankment projects can be growth drivers, going forward. SPL has a first mover advantage in the Multi Level Car parking business, being run by its subsidiary Simpark Infrastructure Pvt. Ltd. The ongoing West Bengal river embankment project, if successfully implemented, can lead to more orders in that segment.
* Post-IPO, SPL would be able to qualify for larger contracts, with the growth in its balance sheet size, which we feel is a positive. We expect sales and net profit to grow at a CAGR of 58% and 107% respectively during FY06-09. However, impetus to topline growth is likely to come in only during FY09, with full contribution from the car parking project expected in that year.
* Presence of group flagship Simplex Infrastructure Ltd. in various similar lines of business is a concern. Simplex Infrastructure Ltd. has been in existence much before SPL and has much higher revenues and balance sheet size compared to SPL (see table on page 6). Clarity is required on the kind and size of projects each company can bid for, without competing with the other.
* The other concern is that its business is dependent on infrastructure projects undertaken by governmental authorities or government-funded entities (around 65% of the order book).
* Given its diverse portfolio of construction activities, foray into multi-level car parking and ability to bid for larger contracts going forward, we believe the IPO valuation (at 11.1x FY08 and 6.5x FY09 earnings estimates) is attractive. Investors may subscribe with a medium term view.

Investment Rationale

Diversified portfolio of construction activities

SPL is engaged in diversified construction activities like piling and foundations, civil construction, transportation engineering projects, Irrigation, water supply & sewerage schemes and Installation and operation of Multi Level Car Parking Systems. It is one of significant players in Eastern and North Eastern India. Its experience in the construction industry enables it to pre-qualify for a greater number of potentially higher margin projects.

First-mover advantage in Multi Level Car parking business

SPL's wholly owned subsidiary, Simpark Infrastructure Pvt. Ltd. is engaged in the installation, development, operation and maintenance of Multi-level Automated Car Parking Systems. With the rising population of on-road vehicles, parking problem is assuming enormous proportions in urban areas. Multi Level Car Parking system is classified as an infrastructure project whereby it is entitled for benefit under section 80IA of the Income Tax Act. Being among the first few players dedicated to the Automated Parking Systems, provides it with the confidence to win and execute such projects.

To bid for bigger projects, going forward

Currently, due to small balance sheet size, SPL does not qualify to bid for big projects. Because of this it, follows the subcontracting method for execution of bigger projects. But going forward, with the infusion of more funds through the IPO, SPL would be able to bid for bigger projects in future.

Positive outlook for construction sector

It is estimated that infrastructure sector would grow at a CAGR of 15% over the next 5 years and would attract an investment of at least $124.65bn during this period. In anticipation of the trend toward increased infrastructure investment, SPL has developed skill sets across a diverse portfolio of infrastructure projects. Therefore, with increasing demand for residential complexes, favorable FDI policy in real estate, flourishing IT/ITES sector which has been creating a demand for commercial spaces, etc, we feel SPL has a great opportunity lying ahead to cash upon.

Investment Concerns

* SPL's business is dependent on infrastructure projects undertaken by governmental authorities or government-funded entities. As of June, 2007 around 65% of the order book was from government authorities, therefore, any change in governmental policies may affect its business and results of operations.
* It is availing tax benefits, which may not be available in future, thus resulting in increased tax liabilities and reduced profit margins.
* Its subsidiary, Simpark Infrastructure Pvt. Ltd. has made losses in last 3 years.