[T.S.R:17570] Supreme Infrastructure (I) Ltd_IC_27-06-2011_Buy_TGT Rs 300

Supreme Infrastructure India Ltd.

Buy      Target price - Rs 300       CMP - Rs 223.60

Company Description

Supreme Infrastructure India Ltd.(SIIL), is a medium sized construction and engineering company located in Mumbai, Maharashtra. SIIL is more than 2.5 decade old and has engaged itself into various activities like construction of roads, buildings, bridges, etc.

 Investment Rationale

Þ Construction division to lead growth

Construction division has a healthy order of Rs. 24,039 mn (excluding L1 orders of Rs 7,130 mn) as on 13th May,2011, which stands at ~2.62x FY11 sales, which will be the main revenue driver for next two years. We expect the topline (standalone) to grow at a CAGR of ~31% from FY11A to FY13E as compared to CAGR of 55% for FY09A to FY11A, this provides revenue visibility for FY12E and FY13E. 

  

Þ Diversified order book and regional presence provides an edge

The order book flows from diversified segments like roads, railways, irrigations, bridges, buildings and power. This strategy has helped the company to mitigate the risk and reduce its dependence on any particular segment. SIIL, has regional office in Gurgaon, which helps them focus on the northern region and recently during Q3FY11, the company has opened another regional office in Kolkata, to focus more on the underdeveloped Eastern region. 

Þ In house execution capabilities leads to superior margins

A key differentiator for the company is its backward integration model where the company has built significant capabilities in quarrying business giving it high control over aggregates (a key raw material in construction). Its in house execution capabilities enables the company to be self reliant in terms of key inputs required for infrastructure projects. This backward integration leads to savings in tariffs and taxes due to captive material transfers and proximity to sites. It also enables SIIL to sustain above industry EBIDTA margins higher by ~300 bps to 350 bps at majority of its sites, while ensuring interrupted supply of inputs to complete projects on or before time.

Þ Moving up the value by foraying into BOT segment

SIIL has already cemented itself on the construction front and by using this experience and expertise, it is now  focusing on acquiring Built-Operate-Transfer (BOT) portfolio. The robust opportunity in the BOT space has encouraged SIIL to move up the value by foraying into this segment . At present SIIL has two BOT road projects under its belt which is Manor-Wada-Bhiwandi and Panvel-Indapur while, it is L1 in Ahmednagar-Karnala-Themburni. SIIL has also taken a 10% stake in Kasheli Bridge which will start generating revenue in FY12. Going forward BOT projects will provide steady cashflow to the company.

Outlook & Valuation

In view of the growing order book, efficient execution of ongoing projects, backward integration and improving track record, we expect the company's top line to grow at a healthy CAGR rate of ~31% during FY11A to FY13E. The company is well poised to capitalise on the opportunities and grow faster than its peers. SIIL trades at a P/E of 4.7X and 4.0X FY12E and FY13E EPS of Rs. 46.8 and Rs 56.1 per share, which we think is available at a discount to its peers considering its healthy order book, high growth rate and healthy return ratios. Recent foray into the BOT projects is another important trigger for the company  to perform going forward. We expect the valuation gap to narrow in the medium term and the company will trade at valuation in comparison to its peers. We recommend"Buy" on the stock with a target price of Rs 300, an upside of 35% from the present levels based on SOTP method.

 

 

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