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We recently interacted with the chief executive officer of Pratibha Industries,
Mr. Yogen Lal, in relation to the saw pipe manufacturing business that has been put
on the block. The key takeaways from the meeting are presented below.
Exiting the pipe manufacturing business: Pratibha Industries is searching for
buyers for its SAW pipe manufacturing business as it plans to reduce costs and
improve the net profit margin. It has already received the board’s approval for
the same. It had entered into pipe manufacturing in 2007 in order to move up
the value chain and gain competitive advantage in its water engineering,
procurement and construction (EPC) business. It had also planned to use 50% of
the capacity for third-party contracts.
Rationale behind the exit: However, given the competitive scenario in the
pipe business, Pratibha Industries has not been able to grab any major thirdparty
contracts for its pipe manufacturing division over the last 12-18 months
as it has refrained itself from compromising on margins. The plant has so far
been catering to only internal water orders. However, of late even for its internal
orders it is finding it cheaper to buy pipes from the third party rather than
manufacture them itself. In fact, the company saves 5-7% in cost if it sources
saw pipes instead of manufacturing them. This has resulted in the plant running
at less than 50% capacity utilisation level. Thus, the cost of running the plant
has escalated and instead of giving it competitive edge in its water and oil &
gas projects, it is hitting its profitability. However, the management reiterates
that this is not a distress sale.
The pipe business valued at Rs110 crore: Pratibha
Industries has valued its SAW pipe business at more
than Rs110 crore. The SAW pipe manufacturing plant
has machines and equipment worth R50-60 crore and
is working on orders worth the equivalent number. Its
land and building are together valued at Rs50-60 crore.
So, the company is looking at a little over Rs110 crore.
Looking at full or partial exit: The company will either
sell the entire plant or sell the land and building, and
relocate the machines and equipment outside India.
It is in talk with various players for both options. If it
sells only the land and the building in India, then it
would relocate the equipment to the Middle East,
which is a net importer of pipes. There is a huge
requirement in the Middle East, thus the company will
tie up with some strategic partner over there.
Will improve balance sheet and profitability: The
proceeds from the exit will help the company in
reducing its debt and thus improve its debt-equity
ratio. It will further improve the profitability by
reducing the fixed costs and the interest burden,
resulting in better return ratios. If the company sells
the whole plant then based on our rough-cut estimates,
the debt-equity ratio will improve to 1.0x from 1.4x
in FY2013 and its earnings will improve by 7% leading
to a 100-basis-point improvement in the return on
equity (RoE) to 18%. If it partially exits the business,
then the debt-equity ratio will improve to 1.1x in
FY2013 and its earnings will improve by 3% leading to
a 50-basis-point improvement in the RoE.
Maintain Buy: The proceeds from the sale of the plant
will help the company to reduce its debt, which had
become a concern of late. Otherwise, even under the
current gloomy industry scenario, the company has
managed to bag large orders with better margins which
reinforces our confidence in the company. It bagged
Rs1,852 crore worth of orders in M9FY2012 (taking its
share only) already surpassing the total order inflow
of Rs1,425 crore seen in FY2011. The current order
book stands at about Rs4,800 crore, 3.8x its FY2011
revenue, providing healthy revenue visibility. The stock
currently trades at 5.0x and 4.0x its FY2012E and
FY2013E earnings. We maintain our Buy rating on the
stock with a price target of Rs61.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We recently interacted with the chief executive officer of Pratibha Industries,
Mr. Yogen Lal, in relation to the saw pipe manufacturing business that has been put
on the block. The key takeaways from the meeting are presented below.
Exiting the pipe manufacturing business: Pratibha Industries is searching for
buyers for its SAW pipe manufacturing business as it plans to reduce costs and
improve the net profit margin. It has already received the board’s approval for
the same. It had entered into pipe manufacturing in 2007 in order to move up
the value chain and gain competitive advantage in its water engineering,
procurement and construction (EPC) business. It had also planned to use 50% of
the capacity for third-party contracts.
Rationale behind the exit: However, given the competitive scenario in the
pipe business, Pratibha Industries has not been able to grab any major thirdparty
contracts for its pipe manufacturing division over the last 12-18 months
as it has refrained itself from compromising on margins. The plant has so far
been catering to only internal water orders. However, of late even for its internal
orders it is finding it cheaper to buy pipes from the third party rather than
manufacture them itself. In fact, the company saves 5-7% in cost if it sources
saw pipes instead of manufacturing them. This has resulted in the plant running
at less than 50% capacity utilisation level. Thus, the cost of running the plant
has escalated and instead of giving it competitive edge in its water and oil &
gas projects, it is hitting its profitability. However, the management reiterates
that this is not a distress sale.
The pipe business valued at Rs110 crore: Pratibha
Industries has valued its SAW pipe business at more
than Rs110 crore. The SAW pipe manufacturing plant
has machines and equipment worth R50-60 crore and
is working on orders worth the equivalent number. Its
land and building are together valued at Rs50-60 crore.
So, the company is looking at a little over Rs110 crore.
Looking at full or partial exit: The company will either
sell the entire plant or sell the land and building, and
relocate the machines and equipment outside India.
It is in talk with various players for both options. If it
sells only the land and the building in India, then it
would relocate the equipment to the Middle East,
which is a net importer of pipes. There is a huge
requirement in the Middle East, thus the company will
tie up with some strategic partner over there.
Will improve balance sheet and profitability: The
proceeds from the exit will help the company in
reducing its debt and thus improve its debt-equity
ratio. It will further improve the profitability by
reducing the fixed costs and the interest burden,
resulting in better return ratios. If the company sells
the whole plant then based on our rough-cut estimates,
the debt-equity ratio will improve to 1.0x from 1.4x
in FY2013 and its earnings will improve by 7% leading
to a 100-basis-point improvement in the return on
equity (RoE) to 18%. If it partially exits the business,
then the debt-equity ratio will improve to 1.1x in
FY2013 and its earnings will improve by 3% leading to
a 50-basis-point improvement in the RoE.
Maintain Buy: The proceeds from the sale of the plant
will help the company to reduce its debt, which had
become a concern of late. Otherwise, even under the
current gloomy industry scenario, the company has
managed to bag large orders with better margins which
reinforces our confidence in the company. It bagged
Rs1,852 crore worth of orders in M9FY2012 (taking its
share only) already surpassing the total order inflow
of Rs1,425 crore seen in FY2011. The current order
book stands at about Rs4,800 crore, 3.8x its FY2011
revenue, providing healthy revenue visibility. The stock
currently trades at 5.0x and 4.0x its FY2012E and
FY2013E earnings. We maintain our Buy rating on the
stock with a price target of Rs61.
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