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PRATIBHA INDUSTRIES LTD
PRICE: RS.64
RECOMMENDATION: BUY
TARGET PRICE: RS.101
FY12E P/E: 6.0X
q Company is confident of increase in order award activity in Q4FY11
q Recent award of order worth Rs 3.5 bn indicates company's strength in
the water segment
q We maintain our estimates and expect revenues to grow at a CAGR of
32% and net profits to grow at a CAGR of 39% between FY10-FY12.
q We continue to maintain BUY recommendation on the stock with a price
target of Rs 101 on FY12 estimates
We recently met with the management of Pratibha Industries and present
below the key highlights about the company -
Order inflow from Dubai
Pratibha Industries has recently announced an order worth Rs 3.5 bn from M/s Dubai
Electricity & Water Authority, Government of Dubai. This order involves construction
of Al Ghafat Water Reservoirs Phases I & II and other associated works in Dubai to
be completed in a time frame of 24 months. Thus, post the award of this order, L1
status of the company would now stand at Rs 5.5 bn.
This award marks the entry of the company in the Middle East market and company
expects to tap the growth potential from Middle East and African markets with its
expertise in infrastructure and pipe manufacturing. It has already placed the bids in
Oman, Abu Dhabi, Dubai electricity and water authority etc.
Thus with strong order pipeline, we expect order book of the company to grow at a
CAGR of 26% between FY10-FY12.
Status of BOT project in water transportation
Pratibha industries in consortium with Kakade Infrastructure and Malaysia-based Inai
Kiara is also the lowest bidder in Rs 12 bn worth of BOT project for water transportation from MSRDC. Company was earlier expecting cabinet approvals for this
project to come by Sep-Oct, 2010. But now with the change of Chief Minister of
Maharashtra, this process has been delayed. We have not factored in order inflows
or equity investments from this project currently in our estimates.
Preferential allotment
Pratibha Industries had also announced sometime back that it has completed the
preferential allotment of equity shares and compulsorily convertible participatory
preference shares amounting to approximately Rs. 500 mn to "Van Dyck" which is a
subsidiary of "ChrysCapital V, LLC", upto Rs. 92 per equity share and CCPPS of face
value upto Rs. 92 per share. Along with this company had also raised Rs 1 bn
through QIP issue at a price of Rs 82 per share. Key investors for company's QIP issue were Warhol Ltd (a Chryscapital group company), Citigroup, Merril Lynch and
various other domestic investors.
We believe that this fund raising has enhanced company's overall networth and
would also enable company to bid for relatively larger sized projects. Company has
indicated that they intend to use these proceeds primarily to retire their high cost
debt. We had already factored in this fund raising and corresponding equity dilution
in our estimates.
Future outlook
Company would continue to look at water and water supply related projects such as
pipeline replacement, construction of dams and reservoirs, water treatment plants
etc Along with this, it would also diversify into other segments such power, hydro
carbon etc going forward. It has also formed JV's with some Turkish and Israel based
companies to venture into water desalination project.
Financial outlook
n We continue to maintain our estimates for the company. With a strong order
book of Rs 40 bn, we expect revenues to grow at a CAGR of 32% between
FY10-FY12.
n We expect improvement in operating margins in FY12 due to its focus towards
higher margin segments such as water supply and irrigation. We thus expect
margins to be 13.5% for FY11 and 14% for FY12.
n Thus, with excellent growth in revenues and strong operating margins, we expect net profits to grow at a CAGR of 39% between FY10-FY12.
Valuation and recommendation
n At current price of Rs.64, stock is trading at 8.5x and 6.0x P/E and 4.9x and 4.0x
EV/EBITDA multiples for FY11 and FY12 respectively.
n We value the company at 9x FY12 estimated earnings and add value of BOT
investments and arrive at a target price of Rs.101 on FY12 estimates.
n Our target valuations are based on 30% discount to the core business target
valuations of larger and diversified players to factor in relatively smaller size.
n We thus recommend BUY on the stock.
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