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January 18, 2010

Pratibha Industries

Orders galore, more to come

Ugly Duckling

Buy; CMP: Rs326

 

Company details

 

Price target:

 

Rs450

Market cap:

Rs544 cr

52-week high/low:

Rs349/53

NSE volume:

 

1.4 lakh

(No of shares)

 

BSE code:

 

532718

NSE code:

 

PRATIBHA

Sharekhan code:

 

PRATIND

Free float:

 

0.64 cr

(No of shares)

 
 

Shareholding pattern

Institutions

 
 

18%

Public &

Public &
 

others

Promoters

 

21%

61%

 

Price chart

 

400

350

350

300

250

200

150

100

50

0

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

 

Price performance

 

(%)

1m

3m

6m

12m

Absolute 17.9 50.7

98.6 424.5

Relative

13.3

47.4

60.5 167.0

to Sensex

 

Key points

Strong and diversified order book: Pratibha Industries (Pratibha) is one of the fastest growing companies among the small construction companies. Its pending order book of Rs3,500 crore (over 4x FY2009 revenues) provides strong visibility to its revenue growth. It also has a healthy order pipeline with “L1” status in orders worth Rs900 crore. Apart from its strong position in irrigation and water management projects, it is also benefiting from its efforts to diversify into high- growth segments such as urban infrastructure, power and oil & gas. Consequently, we expect its order book to grow at a CAGR of 53% over FY2009-12. Backward integration provides an edge: Given its dominance in the water seg- ment, Pratibha entered into the manufacturing of HSAW pipes in FY2008. This backward integration enables the company to bid for pipeline related projects at a very competitive rate. About 90% of the production is currently used in- house for its water projects and the balance is supplied to the oil & gas segment. Strong impetus on irrigation and water-management projects: Infrastruc- ture development would continue to be a secular growth story in India, and irrigations and water management projects form a key component of the over- all government spending on infrastructure development in the country. As per the planning commission, irrigation and water management projects consti- tute a significant portion of the $500-billion worth of investments envisaged in infrastructure development in the 11th Five-Year Plan. The budgetary alloca- tion for this segment through various schemes like the AIBP, the Rajiv Gandhi Drinking Water Project and the JNNURM has been stepped up significantly. Cheapest among its peers: Pratibha enjoys superior operating profit margin (12-13%) and return ratios compared with its peers. Its sales and net profit have grown at a CAGR of 58% and 65% respectively over the last five years. Going forward, we expect its sales and PAT to grow at a CAGR of 37% and 33% respectively over FY2009-12 led by healthy order inflows. Given its strong growth outlook and relatively better return ratios, Pratibha is attractively valued at 6.7x FY2011E earnings as compared to its peers. We recommend a Buy on the stock with a price target of Rs450 (P/E multiple of 8x its average earnings of

FY2011E and FY2012E).

Key financials (stand-alone)

FY08

FY09

FY10E

FY11E

FY12E

Net sales (Rs cr) % y-o-y growth Adj. net profit (Rs cr) Shares in issue (cr) EPS (Rs) % y-o-y growth PER (x) P/BV (Rs) EV/EBIDTA (x) RoCE (%) RoNW (%)

565.1

805.8

1125.0

1578.9

2083.3

88.1

42.6

39.6

40.4

31.9

34.3

44.7

58.0

81.6

106.0

1.7

1.7

1.7

1.7

1.7

20.5

26.8

34.8

48.9

63.5

44.1

30.6

29.7

40.7

29.8

15.9

12.2

9.4

6.7

5.1

3.0

2.4

2.0

1.5

1.2

8.1

7.9

5.7

4.6

3.9

19.7

19.5

17.0

18.5

18.8

24.6

21.9

23.0

25.7

26.0

stock ideas

Pratibha Industries

Company background

Established in 1982 Pratibha is one of the fastest growing companies among the small construction companies with expertise in water, surface transport and civil construction. It has gradually diversified into other segments like urban infrastructure, tunneling and oil & gas.

It was initially engaged in the manufacturing of pre-cast products. In 1992, the company extended its presence in the civil construction industry by bagging an order from CIDCO, Maharashtra. In 1994, it made a foray into water related projects in joint venture with Coromondal Prescrete (P) Ltd, a Hyderabad based contractor. Since then, it has become a dominant player in the water segment, which contributes about 60% to its order book and revenues. Recently it has diversified into other segments like urban infrastructure, surface transport, oil and gas and hydrocarbon. In FY2008, it started manufacturing helically submerged arc welded (HSAW) pipes that are currently being used for its in-house water projects.

Investment arguments

Strong and diversified order book

Pratibha currently has a strong order book of Rs3,500 crore which is over 4x its FY2009 revenue. It also has a healthy order pipeline with “L1” status in orders worth Rs900 crore. We expect the order book to grow at a compounded annual growth rate (CAGR) of 53% over the three-year period FY2009-12 largely on the back of increased spending in infrastructure development and the company’s efforts to diversify into various fast-growing segments.

The company traditionally had a presence in the water segment, which still comprises 60% of its order book and revenue. It had a small presence in surface transport and mass housing projects. However, in the last couple of

years, the company has consciously diversified from being

a purely water segment company to a fully-fledged

infrastructure development company. It has diversified into other segments, such as urban infrastructure, surface transport, power projects, oil & gas, tunneling, airports and hydrocarbon. In order to get required pre- qualification and technical competence, Pratibha has entered into various joint ventures both domestically and internationally. It recently formed a joint venture with

Austria-based Ostu-Stettin to bid for tunneling projects. Ostu-Stettin is one of the leading infrastructure companies

in tunneling technologies. Pratibha has also entered into

a joint venture with ITD of Thailand in order to bid for the airport projects.

Order book and book-to-bill ratio 8000 4.5 7000 4.0 6000 5000 3.5 4000 3.0 3000
Order book and book-to-bill ratio
8000
4.5
7000
4.0
6000
5000
3.5
4000
3.0
3000
2000
2.5
1000
0
2.0
FY2007
FY2008
FY2009
FY2010E
FY2011E
FY2012E
Order book
Book to bill ratio

Orders won recently

Project

Date

Rs

Execution

 

(crore)

time

 

(months)

Comprehensive Water Supply Scheme at village Chandu Budhera, district Gurgaon, from Haryana Urban Development Authority

17-Dec-09

129.89

24

Construction of three conventional underground multi-level car parking from Municipal Corporation of Delhi

15-Dec-09

104.2

15

Comprehensive Water Supply Scheme to Guledgudda town and villages enroute from Karnataka Urban Water Supply and Drainage Board

24-Nov-09

30.37

20

Procurement, fabrication and laying of clear water main from Bangalore Water Supply & Sewerage Board

23-Nov-09

309.46

26

Circulating water and make-up water system civil works package for Mauda Super Thermal Power Project (2x 500MW) from NTPC

19-Nov-09

59

21

Meerut Water Supply Project from Uttar Pradesh Jal Nigam, Meerut

18-Nov-09

294

24

BOT project for the construction of a multi-level parking with commercial development at New Delhi Railway Station-cum-Airport terminal of Airport Express Line from Delhi Metro Rail Corporation

29-Oct-09

150

15

Supply of API grade pipes from GAIL (India)

5-Oct-09

25

N.A.

Supply, installation and maintenance of automatic meter reading water meters from Municipal Corporation of Greater Mumbai

7-Sep-09

145

12

Replacement of Tansa Main Pipeline (section I) from Municipal Corporation of Greater Mumbai

2-Sep-09

406

45

Construction of ESIC Medical College at Patna from National Buildings Construction Corporation

13-Aug-09

523

24

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Pratibha Industries

Water projects formed 60% of the company’s FY2009 order book (Rs2,100 crore) with 20% and 11% coming from urban infrastructure and surface transport segments respectively. The balance 9% comes from the SAW pipe, hydrocarbon and energy divisions.

FY2009 order book break-up

8% 1% 11% 20% 60% Water & Irrigation Urban infrastructure Surface Trasport Saw Pipe Hydro
8%
1%
11%
20%
60%
Water & Irrigation
Urban infrastructure
Surface Trasport
Saw Pipe
Hydro Carbon

Backward integration to provide an edge

Since Pratibha is predominantly present in the water segment, it made a foray into the manufacturing of HSAW pipes in FY2008 in order to reap the benefits of backward integration. HSAW pipes are mainly used in the water and irrigation, and oil & gas segments.

The company currently has a capacity of 92,000 tonne per annum. About 90% of its total production is currently used in-house by for water related projects and the balance it plans to supply to the oil & gas segment. However, going forward, with huge investments expected in the oil & gas segment, the company plans to increase its exposure to this segment to ~50%. Pratibha also commissioned its color coating plant recently with a capacity of 1.7 million square feet per annum.

Infrastructure—Deficit and 11th Plan physical targets

With this backward integration, the company is able to bid for pipeline related projects at a very competitive rate and does not have to depend on other contractors for the same. Moreover, the management also believes that the lower dependence on suppliers mitigates the execution risk to a large extent.

Strong impetus on irrigation and water-management projects

The government is committed to improve the infrastructure of the country and has earmarked substantial funds for growth of the sector. Infrastructure development would continue to be a secular growth story in India and irrigation and water management projects (the focus areas of Pratibha) form a key component of the overall government spending on infrastructure development in the country.

As per the estimates of the Planning Commission, about USD500 billion needs to be spent over the 11th Five-Year Plan period of 2007-08 to 2011-12 on building India’s infrastructure. A growth of 2.2 times in investments is expected in the key infrastructure sectors during 2007- 08 to 2011-12 as compared to that over the previous five- year period.

Pratibha’s expertise lies in areas such as water supply and irrigation, and urban infrastructure which are likely to grow at a faster rate compared with the overall infrastructure sector. The government had allocated Rs49,700 crore for the phase I of the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) scheme and is planning to launch the next phase of the project with

Sector

Deficit

11th Plan targets

Roads/ Highways

65,590km of National Highway comprise only 2% of network; carry 40% of traffic; 12% 4-laned; 50% 2-laned; and 38% single-laned

6-lane 6,500km in Golden Quadrilateral; 4- lane 6,736km NS-EW; 4-lane 20,000km; 2-lane 20,000km; 1,000km Expressway

Power

13.8% peaking deficit; 9.6% energy shortage; 40% transmission and distribution losses; absence of competition

Add 78,577MW; access to all rural households

Irrigation

1,123BCM utilisable water resources; yet near crisis in per capita availability and storage; only 43% of net sown area irrigated

Develop 16mha major and minor works; 10.25mha Common Area Development; 2.18mha flood control

Ports

Inadequate berths and rail/road connectivity

New capacity: 485mn MT in major ports; 345mn MT in minor ports

Airports

Inadequate runways, aircraft handling capacity, parking space and terminal buildings

Modernise 4 metro and 35 non-metro airports; 3 greenfield in NER; 7 other greenfield airports

Railways

Old technology; saturated routes; slow speeds (freight: 22kmph; passengers: 50kmph); low payload to tare ratio (2.5)

8,132km new rail; 7,148km gauge conversion; modernise 22 stations; dedicated freight corridors

Telecom/IT

Only 18% of market accessed; obsolete hardware; acute shortage of human resources

Reach 600mn subscribers and 200mn in rural areas; 20mn broadband; 40mn Internet

Source: Planning Commission consultation paper

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Pratibha Industries

about Rs100,000 crore of planned investments. The allocation for the JNNURM scheme continues to be on the rise. In the Budget 2010, the government had increased the spending on the JNNURM scheme by 87% to Rs12,900 crore.

In the 11th Five-Year Plan the government has increased the planned outlay in irrigation by 2.3x to Rs253,301 crore. The government had initiated major schemes such as Accelerated Irrigation Benefit Programme (AIBP), Bharat Nirman and Restoration of Water Bodies to ensure that there is an adequate supply of water for irrigation in order to maximise the performance of the agricultural sector. In the budget 2010, spending on AIBP was marked up by 75% over the last year and in the Rajiv Gandhi Drinking Water Mission the spending has been raised from Rs4,680 crore to Rs5,850 crore. Recently, even the Punjab state government has earmarked Rs4,400 crore for 131 cities in Punjab to revamp the water supply and sewerage system throughout Punjab. All this is likely to open up a glut of projects that Pratibha could bid for.

The government has proposed to develop a National Gas Grid which would facilitate the transportation of gas across the country. Thus, Pratibha with its HSAW pipe manufacturing capacity is likely to benefit from the same.

Investment concerns

Timely execution of projects

The biggest challenge for the construction companies is the timely execution of projects as they have a long gestation period and require huge capital outlay. Hence, their execution capability plays a very important role. With Pratibha’s order book 4x its FY2009 revenues, timely execution would remain the key to its success. Any delay would lead to cost overruns and affect the profitability of the company.

Cost escalation risk

Cement and steel are the key raw materials for the construction companies. Though Pratibha has a price escalation clause in all its projects, but the same protects its margins only to a certain extent. Any further increase in the prices of the raw materials would hurt the operating profit margin of the company.

Interest rate risk

Infrastructure projects are capital intensive. Thus, any increase in interest rates would put pressure on the company’s margins.

Shortage of skilled manpower

The anticipated shortage of skilled manpower could also delay the project execution, going forward. In FY2009, the company did not face any problem with skilled manpower. Going forward, with the anticipated growth in the industry, there could be again a shortage of skilled manpower, which could hinder Pratibha’s revenue growth.

Valuations and view

Pratibha enjoys superior operating profit margin (12-13%) and return ratios compared with its peers. Its sales and net profit have grown at a CAGR of 58% and 65% respectively over the last five years. Going forward, we expect its sales and profit after tax (PAT) to grow at a CAGR of 37% and 33% respectively over FY2009-12 led by healthy order inflows. Given its strong growth outlook and relatively better return ratios, Pratibha is attractively valued at 6.7x FY2011 earnings as compared to its peers. We recommend a Buy on the stock with a price target of Rs450 (price/earnings [P/E] multiple of 8x its average earnings of FY2011E and FY2012E).

Sector-wise projection of investment during 11th Five-Year Plan

 

Rs (cr)

Particular

2007-08

2008-09

2009-10

2010-11

2011-12

CAGR (%)

Electricity Road & bridges Telecommunications Railways Irrigations Water supply & sanitation Ports Airports Storage Gas Total investments As % of GDP

81,954

101,553

126,380

158,027

198,611

24.8

51,822

54,789

59,200

68,370

79,971

11.5

31,375

38,134

48,593

61,646

78,690

25.8

34,225

40,964

49,525

60,393

76,701

22.4

27,497

35,916

47,189

62,266

80,433

30.8

19,298

22,781

27,323

33,266

41,063

20.8

12,409

14,822

17,374

19,980

23,410

17.2

5,208

5,520

5,904

6,646

7,690

10.2

3,777

4,098

4,446

4,824

5,234

8.5

2,708

3,003

3,332

3,700

4,111

11

270,273

321,580

389,266

479,118

595,914

21.9

5.98

6.53

7.25

8.19

9.34

Source: Planning Commission consultation paper

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Pratibha Industries

Peer comparison

 

Company

 

CMP

EPS (Rs)

 

PE (x)

EBDITA margin (%)

 

RoE (%)

 

(Rs)

FY2010

FY2011

 

FY2010

FY2011

FY2010

FY2011

FY2010

FY2011

Pratibha Industries

 

326

35

49

9.4

6.7

12.4

12.2

23.0

25.7

Unity Infra

 

595

57

71

10.4

8.4

12.7

12.7

17.1

17.1

Madhucon

 

183

8

10

23.0

17.9

12.3

12.6

10.5

12.2

BL Kashyap

 

447

24

32

18.6

13.8

8.5

8.8

9.4

12.7

Sadbhav

 

1,287

 

55

67

23.5

19.2

11.4

12.2

17.9

18.0

Financials (stand-alone)

 

Profit & Loss a/c

 

Rs (cr)

 

Balance sheet

Rs (cr)

Particulars

 

FY08

FY09

 

FY10E FY11E

FY12E

Particulars

FY08

FY09

FY10E FY11E

FY12E

Net revenue

 

565.1

805.8

 

1125.0 1578.9

2083.3

Share capital Reserves & Surplus Shareholders fund Total debt Differed tax liability Total liabilities Gross block Net fixed assets Capital work in progress Investments Gross current assets Gross current liabilities Net current assets Miscellaneous expenditure Total assets

17

17

17

17

17

Operating expenses

 

499.1

714.2

985.5 1386.3

1833.3

167

208

262

340

442

Operating profit

 

66.0

91.6

139.5

192.6

250.0

184

225

279

357

459

Other income

 

1.4

11.5

2.3

2.4

2.1

133

248

288

388

468

Depreciation

3.6

7.1

14.2

20.0

25.2

 

2

6

7

8

9

Interest

 

23.6

40.5

44.8

58.4

75.5

318

479

574

753

936

PBT

40.2

55.4

82.9

116.6

151.4

99

168

268.32

348

428

Tax

5.9

10.7

24.9

35.0

45.4

92

154

240.19

300

355

Reported PAT

 

34.3

44.7

58.0

81.6

106.0

32

61

30

30

30

EPS

20.5

26.8

34.8

48.9

63.5

85

0

0.09

0

0

Cash flow

 

(Rs cr)

438

562

717.06

992

1,291

 

328

298

413.27

570

740

Particulars

 

FY08

FY09

 

FY10E FY11E

FY12E

110

264

303.79

422

551

Operating profit before working capital changes Change in working capital

64.7

92.7

117.6

161.0

207.9

0

0

0

0

0

82.7 -145.0

 

-72.9

-117.2

-133.3

318

479

574

753

936

   

Net cash from operations 147.4

-52.4

44.8

43.8

74.6

 

Key ratios

Capital expenditure

 

-77.9

-98.6

-69.3

-80.0

-80.0

Particulars

FY08

FY09

FY10E FY11E

FY12E

Sale/Purchase of

 

-82.5

88.6

-

-

-

Sales growth (%) PAT growth (%) EPS growth (%) EBIDTA margin (%) PAT margin (%) RoCE (%) RoNW (%)

88.1

42.6

39.6

40.4

31.9

investments Net cash from investing -160.4 Increase in share capital 58.8

 

68.3

30.6

29.7

40.7

29.8

-10.0

 

-69.3

-80.0

-80.0

 

44.1

30.6

29.7

40.7

29.8

-

-

-

-

 
 

11.7

11.4

12.4

12.2

12.0

Increase in debt Others Net cash from financing Net change in cash

-3.5

115.6

 

40.0

100.0

80.0

 

6.1

5.6

5.2

5.2

5.1

-25.8

-38.0

-48.7

-62.3

-79.4

19.7

19.5

17.0

18.5

18.8

29.5

77.7

-8.7

37.7

0.6

24.6

21.9

23.0

25.7

26.0

16.5

15.3

-33.2

1.5

-4.8

 

0.7

1.1

1.0

1.1

1.0

 

One-year forward PE (x)

 

Debt equity (X) Working capital days

48.4

99.1

98.7

99.7

100.7

40.0

40.0   Key valuations
 

Key valuations

35.0

Particulars

FY08

FY09

FY10E FY11E

FY12E

30.0

PER (x)

15.9

12.2

9.4

6.7

5.1

25.0

P/BV (x)

3.0

2.4

2.0

1.5

1.2

20.0

EV/EBITDA (x)

8.1

7.9

5.7

4.6

3.9

15.0

 

10.0

5.0

0.0

Mar-06

Jun-06

Sep-06

Dec-06

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

 

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

   

The author doesn’t hold any investment in any of the companies mentioned in the article.

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Any comments or statements made herein are those of the analyst and do not necessarily reflect
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