Engineered For Growth - Simplex Castings

The economic scenario over the last one fiscal has changed drastically, thus making it a tough environment for corporate India to perform. But despite this, a few companies still continue to post consistent performance results year after year. Thus, considering the fact that these companies are able to perform well even during times of adversity, it makes sense for investors to pick them up as they could give better returns in the long-term.

Simplex Castings (SCL) is one such company which has been a silent performer over the years and after a conversation with the company’s Chairman Arvind Shah about the business, we feel it is worth recommending it as our low price scrip. Simplex Castings (SCL) is engaged in the manufacturing of engineering products, castings and equipments and caters to sectors such as railways, steel, power, cement, sugar, construction etc. Though a very small company, what differentiates it from the rest is the consistent performance it has shown. SCL has been growing steadily in the topline and the bottomline over the last seven years. What’s commendable here is that despite the gloomy economic scenario the company has managed to perform well even in FY09. SCL’s topline in FY09 grew by 16 per cent to Rs 173.22 crore (Rs 149.50 crore), while its bottomline during the same period grew by 24 per cent to Rs 9.17 crore (Rs 7.41 crore). In fact, SCL’s operating margins increased by 128 basis points, while net margins increased by 33 basis points in FY09. That apart, we believe that SCL has good earning visibility for FY10 considering the fact that it has orders worth more than Rs 100 crore in hand. To be executed in the current fiscal. Going forward, SCL would continue to bid and win new orders during the fiscal and that would help SCL to strengthen its order book position even further.

SCL's major revenues comes from the Indian Railways and the steel sector, which together contribute almost 70-75 per cent of the total inflows. Indian Railways contributes around 45-50 per cent. This we believe is a good sign as regardless of the slowdown, Indian Railways will continue to place orders with companies such as SCL. That apart, 25 per cent of its revenues come from steel and the balance from other sectors. Though the steel sector itself is facing a tough time, SCL believes that things are changing and the domestic demand for its products is increasing continuously. This augurs well for the company as it would help it get good orders in the coming future. Apart from Indian Railways, SCL also has good clientele in the steel segment with companies such as SAIL, Tata Steel, Jindal Steel, Arcelor Mittal, Egyptian Iron and Steel etc. The management expects its FY10 revenues to be around Rs 190 crore and though it may look a bit conservative, we believe SCL could surpass this in FY10. At these estimates, SCL generates market cap to sales of a mere 0.13x, which is very low. In terms of its EV/EBDITA, SCL still looks attractive at 4x. That apart, we also expect that SCL might declare dividend for FY09, which could be in line with its FY08 dividend of 15 per cent. Assuming this its dividend yield works out to be 3.7 per cent. Thus investors can grab this SCL with a one year price target of Rs 57.