Amitabh Mundhra, Whole Time Director, Simplex Infrastructures Ltd.
"The construction industry in India has the potential to become US$ 180bn industry from current worth of US$50bn."
Simplex Infrastructures Ltd., incorporated in 1924, is one of the largest infrastructure solutions providers today, with more than eight decades of successful operations and a current turnover of Rs10bn. Simplex has completed more than 3,000 successful projects in India, including the Howrah Bridge, Supreme Court, Reliance's Jamnagar refinery, Jamshedpur and Burnpur steel plants.
Amitabh Mundhra is the whole time Director of Simplex Infrastructures. As a Director, Amitabh is responsible for leading the operations of Simplex. His responsibilities include project implementation, monitoring project progress and realization of company?s vision and mission. Amitabh holds a B.Sc. Engineering Degree from Kolkata University.
Speaking to Anil Mascarenhas of India Infoline, Amitabh says that "the construction industry in India has the potential to become US$ 180bn industry from current worth of US$50bn."
Give us a brief overview of the new trends in the construction business.
The construction sector accounts for nearly 7-8% of India's GDP and is emerging as one of the key growth segments in the economy. The sector's contribution is likely to increase in the coming years. Infrastructure, road projects, highways and power constitute a significant portion in this sector. Construction firms have shot into limelight with a strong surge in order inflows. Indian companies today have strong engineering and technical capabilities to undertake complex projects. In fact, today Indian firms have the expertise to undertake projects outside the country and compete internationally. Talent pool of skilled workers and engineers has also grown over the years.
The construction industry in India has the potential to become US$180bn industry from current worth of US$50bn. Large investments in infrastructure, particularly transportation and power have almost assured the growth prospects of the business. Companies such as Simplex, L&T, and Hindustan Construction have shown tremendous growth in the past year. Smaller companies can also hope to enter these sectors through the joint venture route.
The Government's mega Golden Quadrilateral and other highway projects have thrown up fresh opportunities for construction companies. Another trend that is being witnessed is focus on specific sectors by construction companies and in the road project area; a large number of joint ventures are being formed.
The announcement regarding the financial SPV, utilising forex reserves, viability gap funding for infrastructure projects, programmes for urbanization and rural development etc, would provide an impetus to the infrastructure developers. However, we feel that these outlays should be translated into action, only then it would benefit the sector and the economy as a whole.
How big is the potential in the Middle East, Africa and South East Asia markets? What is your current presence in these areas? What kind of orders are you expecting or targeting going ahead?
Simplex has already undertaken projects worth Rs15bn abroad in the past. Presently, we are executing an EPC Contract of Qatar Petroleum that has been directly awarded from Qatar Government. Recently, Simplex has also bagged a project worth Rs1.06bn for New Doha Hotels Company for construction and completion of a 7 Star Hotel "Hilton Doha" in Qatar. The company has floated its first JV outside country in Bahrain with the local partner. The new company Almoayyed WLL, a 50:50 partnership with Simplex and Almoayyed Group (one of the largest business houses of Bahrain), would have a paid up equity capital of Rs60mn.
Simplex is rapidly strengthening its foothold in overseas market and targets 50% of turnover from overseas projects in the next five years. We are aggressively exploring the markets in Middle East, West Asia, and Africa and South East Asia and plan to capitalize on all these opportunities. We are also looking at South East Asian countries and CIS countries to explore opportunities.
Simplex has established offices in Dubai (UAE), Manama (Bahrain) and Doha (Qatar). Our company is also registered in Libya and Yemen. Apart from these we have our presence in Abu Dhabi, Oman, West Indies, Sri Lanka and Uzbekistan. The company is likely to bag few major projects mainly in sectors such as road and bridges, multi stored building and industrial complex this year. We are also planning to get into cross-country pipeline setting in oil and gas sector as well as in power transmission tower. We would also be looking for contracts in the hydroelectric and nuclear power segment.
You made a preferential allotment to Mauritius-based Beethoven Ltd. Any dilution planned going ahead?
Simplex has issued 12,85,000 equity shares of face value of Rs10 at a price of Rs726.30 per share (i.e. at a premium of Rs716.30 per share) to Beethoven Limited, a Mauritius based company on preferential allotment basis, being 14.99% of post issue equity share capital of the company. This translates into Rs933.2mn for the company; thereby strengthening the balance sheet to help fund the expansion plans. As of now there are no plans for any further dilution.
What is your revenue break-up between domestic and international?
The margins in exports are 2-3% higher than the domestic market. Out of our current order book of Rs40bn, about 90% of the orders are in domestic sector and 10% are exports. We have six strategic business units - Marine Construction, Transportation (Roads and bridges), Urban Infrastructure, Industrial Construction, Power plants and Piling. Marine Construction, Urban Infrastructure and Piling generate higher profit margins than the others. We are expecting a growth of at least 30% in each division over the next five years.
By when do you hope to become a US$1bn company? Would bulk of the contribution come from overseas? To what extent would it be organic/ inorganic?
Simplex is consciously moving up the value chain. We are today working in more valued added segments and executing large orders from profitable sectors. Simplex has already completed projects worth more than Rs100bn and our vision is to become a US$1bn company (Rs45bn) in the next five years for which we have charted a two-pronged expansion strategy through Organic and Inorganic growth.
In organic growth, we would focus on specific sectors. Simplex as a turnkey player has the expertise to undertake complex large-scale infrastructure projects and is utilizing this to focus on specific sectors, Marine Construction, Power: Thermal and Nuclear, Industrial Construction, Water Management to drive the next level of growth. We are also targeting 50% of the turnover from international markets in next five years.
Having undertaken projects worth more than Rs15bn in the Gulf countries in the past, we are increasingly exploring opportunities in overseas markets. We would continue to form joint ventures and acquisitions abroad.
Outside collaboration becomes necessary, especially to provide financial support. In terms of technology, however we are self-sufficient. Our engineering enjoys world-class reputation. Even then it is always better to partner with a foreign company when you have to take up a project in the offshore market as this results in a lot of savings in terms of resources and time and helps us to comply with that nation?s laws and legislations. Some norms set up by World Bank also forces us to have foreign collaborations. As mentioned earlier, we have also recently signed a JV in Bahrain with an equity base of 6 crores.
What is your current order book? By when will the orders be executed?
The current order book stands close to Rs40bn. Few of our projects include EPC project of Nagarjuna Thermal Power Plant (Rs9.80bn), Vedanta Aluminum Project (Rs3bn), the largest marine project from Gateway Terminal at JNPT (Rs1.08bn), Rs2.08bn contract from Jindal Power Ltd., roads and highways projects on Golden Quadrilateral, Construction of few steel plants worth Rs4.50bn and Irrigation works in Andhra Pradesh. At present, we are completing orders worth Rs1.25bn-1.50bn per month.
Comment on your financials? What kind of growth are you expecting? Could you give your outlook for the next two years?
In continuation with our last few quarters trend, we have begun the year on a healthy and positive note. The buoyant performance has also encouraged the company to achieve similar growth pattern in the monsoon quarters, which are generally considered the lean quarter in the industry. These quarters are the trendsetters for the forthcoming quarters. The improved profitability is attributed to the large number of projects undertaken domestically and internationally in nearly all the sectors of construction - Industrial, Power, Marine Construction, and Water Management and Urban Infrastructure. In case of a relatively lean phase in one or two sectors, our strong presence in all sectors helps us sustain this healthy growth rate.
In the first quarter, the net profit increased to Rs116.2mn from Rs13.7mn in the corresponding period last fiscal (Q1 FY06). Sales rose to Rs3.11bn from Rs1.73bn. In the second quarter, the company registered a jump of 526.57% in net profit, which increased to Rs89.6mn from Rs14.3mn in the corresponding period last year. Net sales registered an increase of 27.31% rising to Rs2.74bn in the second quarter from Rs2.15bn in the same period last year. Simplex clocked a turnover of Rs10bn last year, an increase of 53.04%. The net profit increased by 748% with an 8-fold increase in earnings per share. Predicting from our performance in last few years, we estimate our profit to be in the area of Rs450-500mn for FY06.
Who would you consider you?re near competitors? What would you describe as your USP?
We compete with L&T, Hindustan Construction, Gammon India among others. We are an integrated Engineering Procurement Construction company. We have developed our core competencies in these areas, as each of these sectors needs specialized skills and technology. Our strengths are our quality, world-class engineering, strong presence in all spectrums of industry, eight decades of rich experience and a high degree of builders' confidence. Our wide range of specialized services and sound technical expertise enables us to undertake projects in all sectors of construction from roads to marine to steel plants to power plants. We are capitalizing on untapped areas and opportunities in both organic and inorganic way as an infrastructure developer.
How much does piling contribute to your revenues?
We have 6 strategic business units:
1. Marine construction (ports, container terminals, jetties, breakwaters and wharves.),
2. Transportation (Roads, highways, bridges, metro etc.),
3. Urban infrastructure (sewage network, irrigation works, etc.)
4. Industrial construction (metal, cement, textile plants etc.),
5. Power plants (nuclear, thermal, hydel and cooling towers)
6. Piling and ground engineering.
The revenue share is as follows:
Marine construction- 15%
Piling and Grounding-10%
Marine construction, urban infrastructure and piling generate higher profit margins than the others.
We are expecting a growth of at least 30% in each division over the next five years.
What kind of diversification would you look at going forward? What kind of presence do you have in oil and gas sector and power transmission
There is huge potential of infrastructure development and an annual spend of US$30-40bn is expected over five years. In order to maximize these opportunities and to put Simplex in the higher orbit of growth, we are targeting acquisitions and JVs with strategic fit. This also helps us in inorganic growth and margin improvement.
We are increasingly exploring oil, gas sector and power transmission sectors where we are already working on projects in Middle East as well as in the domestic sector. This may be contributing 5% to our topline at present.
Give us details about your SPVs and joint ventures.
In the changing scenario in infrastructure sector, it has become imperative for all companies in this sector to look forward to working together. We are constantly endeavoring to find the right fit and partner. We have a number of SPVs / JVs for various projects:
Somdutt Simplex JV - For execution of Chennai Bypass Road project
- Simplex Subhash JV - For an irrigation project in Andhra Pradesh
- HoHup Simplex JV - for Road project in AP
- Simplex Gayatri Consortium - For a Road project in Maharashtra
- SPV Alliance with Al-Moayyed Group in Bahrain
How do you plan to ease your receivables and working capital position?
We are working on compressing our receivable cycle, ensuring that the RA bills are raised by 3rd of every month, incorporating strict payment terms in Agreements for executing jobs. We have also become very selective in choosing the right kind of job and client. Further, with the connectivity of all sites (after ongoing ERP implementation) there would be better control on working capital.
To what extent have you de-risked. Are you over dependent on any sector?
We have a balanced order book and are not over dependent on any particular sector. Our order mix: Piling ? 5%, power- 42%, marine and industrial construction-6%, roads and bridges-19%, buildings and urban utilities-28%.
What is your dividend policy? What is your message to your shareholders?
We follow a consistent dividend payment policy. The management is committed to further improving the bottom line and enhancing shareholders value.
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