Simplex Castings -Ticket to ride the Indian Railways

Simplex Casting (Simplex), part of the Simplex group of industries manufactures heavy castings in grey cast iron, alloy cast iron, stainless steel and steel. The products of the company are used primarily in steel plants, power plants, mining and cement plants, defence and the railways.

It has a foundry capacity of 20,000 metric tonne (MT) and a steel ingot forging capacity of 5,000 MT. The company has manufacturing facilities at Bhilai, Raipur & Rajnandgaon in Madhya Pradesh. Simplex is a preferred supplier of castings to the Indian Railways (IR), with a wide product profile that includes casnub bogies, coco bogies & bolster assemblies, which are used in railway wagons. Out of the total revenues of Rs100 crore earned by the company in the last financial, around 27 per cent is billed to the Indian Railways. Simplex supplies approximately 4,000-5,000 MT of castings every year. Key Beneficiary of increased pace of IR's wagon procurement During the last few years IR's wagon procurement has been on a slower pace as compared to the growth in its freight revenues. Given the buoyant outlook for India's domestic as well as the export-import (exim) trade, IR will have to necessarily step up the pace of its wagon procurement programme, which in turn augurs well for Simplex. Simplex has been operating at close to 75-80% of its 20,000 MT capacity, and hence the company has enough headroom to meet the additional demand from IR. This in turn implies that there could be a significant increase in its free cash flows and an improvement in the return ratios.


Performance : In the first 9 months of the FY2006, Simplex recorded a 23.3% yoy increase in Sales to Rs78.7 crore. For the same period the operating profit rose by 75.8% yoy to Rs7.9 crore and the PAT surged by 275% yoy to Rs1.6 crore. The OPM has expanded by 298 basis points to 10.0% in 9MFY2006. Simplex is trading at a TTM PER of 11.6x. However, if the increased budgetary allocations of the Indian Railways are factored in for the FY 2007, not only will Simplex be able to record a stupendous surge in revenues but it will raise capacity utilization close to 100 per cent. This will help the corporate report profits in excess of Rs 6 crore or an EPS exceeding Rs 10 for FY07. At 5 times projected earnings for FY07, this is one of the cheapest stocks trading around.
Growth of Railways will be a major driver for Simplex .The higher capital expenditure of the Railways is expected to flow towards the acquisition of rolling stock ie locomotives, coaches and wagons (to support the freight traffic momentum), telecommunication and signaling projects (safety being a thrust area) and better infrastructure (to facilitate better, wider and faster connectivity). The changing face of Indian Railways with its improving financial health is a positive sign for all stakeholders..viz Simplex Castings. The suppliers of capital equipment and services like Simplex Castings could show healthy growth which coupled with a higher operating leverage (based on a hypothetical example of a 30% surge in the IR capex will result in a exponential increase in profitability during FY2007.