Supreme Infrastructure (one of our Street Beat picks) has posted good third quarter results, with strong sales and operating profit and got a good pipeline of orders during the third quarter. We had written about the stock when it was Rs290.80. It is now quoting at Rs205. As we had feared, is it cheap for a reason?

We had written about Supreme Infrastructure India (Supreme Infra), one of the leading infrastructure EPC companies in India, on 9 August 2012 (http://www.moneylife.in/article/supreme-infrastructure-concrete-realities/27732.html). Our article had clearly stated that “while its financial results make Supreme Infrastructure share an attractive buy at the current market price, investors should be cautious because there might be something in these numbers that we may not know and may turn out too good to be true.”
 

The company has reported impressive numbers despite the economy being sluggish for the greater part of 2012, especially during the third quarter ended December 2012. Supreme Infra reported 34% year-on-year (y-o-y) increase in net sales for the three quarter ended December 2012, at Rs550.28 crore when compared to Rs410.59 crore for the same period last year. Net profit numbers is more impressive as it recorded a 43% y-o-y jump to Rs35.92 crore for the third quarter of the 2012-13 fiscal. And yet, the stock is sharply down.
 

The company has not only exceeded its own expectations but its track record is also quite impressive. It has been reporting extremely consistent sales figures, which have been growing at double digits every successive quarter without a negative one since September 2009. Its average three quarter y-o-y average is 33% while net sales for the December 2012 quarter grew at 34%. Even more impressive is its operating efficiency. Its operating profit track record is even more impressive, growing at double digits and not one negative growth quarter. Its three-quarter y-o-y average growth rate is 31% while operating profit clock 37% growth rate. Despite a high return on net worth (29%), its valuation remains ridiculously low, with market capitalisation barely over 1x operating profit (annualised).
 

The company managed to add Rs505.25 crore worth of orders during the December 2012 quarter. Some of them are:
 

• • Order from Central Public Works Department worth Rs267 crore for construction of additional office complex for Supreme Court of India;
• • A contract from the Delhi Metro Rail Corporation worth Rs41.7 crore for construction of a rail depot-cum-workshop. The company has a 49% stake in the project;
• • A contract for building a multi-storied residential building, worth Rs94.87 crore, in Sector 66-A in Mohali;
• • A drainage contract from SPMU, ICZM Project, worth Rs41.40 crore, to develop drainage system at Digha, West Bengal.
  
  This pipeline of orders gives good revenue visibility for the next few quarters, assuming everything is executed as per contract with no delay. This is, however, anyone’s guess.

The stock price closed at Rs205 on the National Stock Exchange (NSE), down 2.29% for the day. As we had feared, the stock has disappointed despite excellent results and should be sold on the next rally.
 

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