On solid ground

How times change! In 2006-07, when infrastructure and construction activity was in full flow, the new buzzword was BOT, or build, operate and transfer. And why not. BOT projects, in an era of easy liquidity, were immensely executable and more profitable. One company that decided to ignore the BOT bandwagon is Simplex Infrastructures.

In today’s changed environment of tight credit and bear markets, it’s proving to be a wise decision as BOT operators are finding it difficult to raise cash to complete projects. Being a pure-play construction business today is more profitable. “Internal Rate of Return (IRR) for core construction business is over 20 per cent while for road BOT projects it is below 15 per cent,” says Amitabh Mundhra, Director, Simplex Infrastructures.

BOT might have been a no-no, but Simplex did something else during the up-cycle—it chose to de-risk its business model by focussing on new areas within the ambit of construction. And those initiatives are holding it in a good stead during the current slowdown. “We decided to diversify our operations from just three segments to eight segments,” says Mundhra.

Before 2002, Simplex’s activities consisted of piling work, and setting up industrial and power plants. In the following years, it stretched its wings into areas like urban infrastructure, real estate, railways, roads and water. This was accompanied by geographical diversifications too, with Simplex entering markets in West Asia like Dubai, Doha and Oman.

The benefits of Simplex’s diversifications are evident today. Example: Although real estate is in the doldrums, power is holding its own. Also, today its biggest order is just 5 per cent of the order book, which makes the company less susceptible to orders getting cancelled.

Why simplex is a winner Diversifications within construction have helped it de-risk Has moved into new geographies like West Asia Has stayed away from higher-risk BOT projects Own machines and equipment make for better profit margins

Simplex’s order book stood at a healthy Rs 10,200 crore as of end-December 2008. These orders have to be completed over the next 30 months. The worry, however, is on the profitability front. Although growth at the bottom-line level is still in double digits, net profits— which rose by 47 per cent in the September ended quarter—were up by just 15 per cent three months later. “After a period of high growth, profit numbers get into consolidation phase, after which they once again begin rising,” explains Mundhra. He says in times of huge growth the company gets conservative in taking orders. Mundhra adds that margins have come down because of higher depreciation provisions for machinery and equipment purchased last year (depreciation tends to be higher in the initial years).

More than anything else, what generates confidence about Simplex is its uninterrupted track record of profit-making and dividend-paying since 1924. Now, how many downturns would it have encountered since then!