Buy Supreme Infrastructure - Anagram

We initiate coverage on Supreme Infrastructure (India) Ltd (SIIL) with FY12 end target price of Rs 343 per share i.e. 32% upside from the current market price. Our SOTP based target price incorporates Rs 319 per share value of the core EPC business where it enjoys higher than industry operating margins of around 17%, Rs 20.4 per share from its Manor Wada Bhiwandi road BOT project which is expected to be benefitted from the commercial / industrial belt along the highway and Rs 3.8 per share value from its Kasheli Bridge BOT project where it is sharing 10% of the total revenue.

Solid Top-line Growth Expected Owing to Strong Order Book

Supreme Infra has registered phenomenal top line growth over the past 3 years -90% CAGR between FY07-FY10 - on the back of a solid 82% CAGR in the Order Book over the same period. The current order book of the company at Rs 2343 Cr is 4.4 times its FY10 sales providing strong revenue visibility. This coupled with impressive execution track record of the company, makes us believe that the top line will grow at 35% CAGR over FY10E-FY13E.

Benefiting From Backward Linkages of Key Construction Inputs

The company owns and operates a number of crushers, Asphalt, RMC and Wet Mix plants for captive consumption. Due to the ready availability of key raw materials, the company has been able to shorten the project cycle owing to assured and un-interrupted supply. The in house production differentiates SIIL from other construction players and results in better than average industry margins of around 18%.

Looking out for New verticals for Diversification

In order to benefit from the bigger Infrastructure scenario prevailing in the country, Supreme Infra has recently forayed into Power, Sewerage and Irrigation related work while continuing to firm up its presence further in roads and buildings. We believe that SIIL is well placed to capitalize on planned Investment in Infrastructure in the country.

Increasing BOT Projects to Provide Steady Revenue Stream

From mere being an EPC player the company has forayed into BOT space and has already bagged 3 BOT projects and is also L1 in one more project. Apart from providing a steady revenue stream from a different business vertical (toll), the BOT projects also contribute significantly to the EPC order book of the company.

Valuation

We are bullish on SIIL due to its high margin profile, growth prospects and relatively lower valuation. We believe that Infrastructure industry is to witness many folds investment over the next few years and SIIL is well positioned to benefit from this as it already has exposure to most of the Infrastructure verticals.

Our SOTP based FY12 end target price for the stock is Rs 343 implying 32% upside. We have valued EPC business of SIIL at Rs 319 based on DCF and the two BOT projects at Rs 24 based on NAV. At the target value of Rs 319, the EPC business will trade at 9.4 times and 7.1 times FY11E and FY12E earnings respectively.

Source : Equity Bulls

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