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Pratibha Industries Ltd
PRICE : RS.74 RECOMMENDATION : BUY
TARGET PRICE : RS.101
CONS. FY12E PE: 6.9X
Pratibha industries is a well established player in the construction
industry with its core expertise in water supply and environment
engineering, urban infrastructure, road related projects as well as
manufacturing of saw pipes. Saw pipe division provides backward
integration for the company and enables the company to maintain better
margins. Company has a diversified business model across segments as
well as geographies and we expect it to benefit from expected order
inflows in water, urban infrastructure as well as road segment.
With an order book of Rs 36 bn, we expect revenues to grow at a CAGR
of 32% between FY10-FY12. Inhouse fleet of equipments, focus towards
higher margin segments as well as backward integration enables the
company to maintain better margins. Net profits are expected to grow at
a CAGR of 39% between FY10-FY12. At current price of Rs.74, stock is
trading at very attractive valuations of 9.8x and 6.9x P/E multiples on
FY11 and FY12 respectively. We recommend a BUY on the stock with a
price target of Rs.101 on FY12 estimates.
Key investment arguments
q One of the leading players in the infrastructure segment. Pratibha Industries
has emerged as one of the leading players in the infrastructure segment
in past 28 years with its focus towards a wide range of projects in water
supply, surface transport, urban infra as well as BOT projects. With its
expertise in executing diverse projects, we expect Pratibha industries to benefit
from the upcoming opportunities in the infrastructure segment.
q Healthy order book provides revenue visibility for next 2 years. Company
has an order book of Rs 36 bn diversified across water and irrigation
(60%) and urban infrastructure (40%). It is also lowest bidder in Rs.9 bn
worth of new projects which are likely to be awarded soon. Company will
continue to remain focused on water supply but will also simultaneously diversify
into other segments such power, hydro carbon etc going forward. We
thus expect order book to grow at a CAGR of 26% between FY10-FY12.
q Diversification in other geographies. Pratibha Industries initially started as
a focused player in Maharashtra but has now diversified across different
states in past few years. Out of the total order book, 58% comes from states
like Bihar, Karnataka, MP, UP, New Delhi and Rajasthan while the rest is being
contributed by Maharashtra. We expect company to continue to expand
across geographies and maintain its order book growth
q Excellent growth trajectory. Company has been on a high growth trajectory
since past few years and has managed to grow revenues at a CAGR of
34% and profits at a CAGR of 29% between FY08-FY10. With a robust order
book and strong order pipeline, we expect revenues of the company to
grow at a CAGR of 32% between FY10-FY12. Net profits are expected to
grow at a CAGR of 39% between FY10-FY12 primarily led by excellent revenue
growth and healthy operating margins.
q Margins likely to be sustained at current levels. Operating margins of the
company stood around 13.6% in FY10 and company expects to improve margins
by 0.5% going forward due to its focus towards high margin segment of
water supply and irrigation as well as backward integration. We thus expect
company's operating margins to be around 13.5% for FY11 and 14% for
FY12.
q Backward integration aids better margins. Saw pipe manufacturing division
of company provides backward integration for water and oil&gas pipeline
projects and has a capacity of 92,000 TPA. Company is planning to enhance
its focus in the hydro carbon segment going forward and thus the saw pipe
division will cater to the huge demand of pipes for inhouse projects and will
also enable the company to meet pre-qualification criteria for upcoming tenders.
q Joint ventures with international players to bag larger sized projects.
Pratibha industries has gained technical expertise for executing large and complex
projects by entering into joint ventures or alliances with international or
domestic players. This had enabled the company to achieve necessary prequalifications
for bidding for complex projects. We believe that company will
continue to enter into JV's to bag bigger as well as complex projects.
q BOT segment to add further value to order book. Company has also ventured
into BOT segment in road - toll and annuity as well as multi-level car
parking. Post completion of construction of these BOT projects, company
would achieve desired expertise to bid for large sized projects on its own. It
would continue to enhance its presence across PPP projects especially in the
road segment.
q Healthy balance sheet. Company has been able to enhance its networth in
past few years with IPO as well as QIP issue along with ploughing back of the
profits. Funds raised through QIP will be deployed to reduce high cost borrowings,
meet capex and working capital requirements of the company going forward.
We thus expect leverage for the company to come down going forward
post this fund raising. Company also has excellent return ratios with ROE expected
to be around 19.9% and 20% for FY11 and FY12 and ROCE expected
to be around 21.6% and 23.0% for FY11 and FY12 respectively.
q Future growth strategy. Pratibha Industries will continue to focus on increasing
the order book across diverse segments. Company has identified new
growth areas such as hydro carbon as well as power projects and would continue
to tap opportunities in this space. It would also continue to expand its
presence across geographies as well as segments to maintain a hedged business
model going forward
q Attractive valuations. At current price of Rs.74, stock is trading at 9.8x and
6.9x P/E and 5.4x and 4.4x EV/EBITDA multiples for FY11 and FY12 respectively.
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. Our
target valuations are based on 30% discount to the core business valuations
of larger and diversified players to factor in relatively smaller size. We thus recommend
BUY on the stock.
Key risks and concers
q Slowdown in order inflows - Any kind of slowdown in order inflows is likely
to impact order book growth as well as revenue growth for the company going
forward.
q Delays in execution - Execution delays related to land acquisition as well as
environmental clearance may impact project completion schedule and thereby
impact revenue growth.
q Increase in interest rates - Increase in interest rates may result in increasing
the overall borrowing cost for the company and hence may impact profitability
adversely.
ABOUT THE COMPANY
Pratibha Industries, established in 1982 by Mr Ajit B Kulkarni, as a manufacturing
company for pre-cast products, has now diversified into one of the leading players
in infrastructure sector. Company is an established player in water supply, water
treatment and water distribution related projects and has also enhanced its presence
across urban infrastructure as well as road segment. It also proposes to have
a strong presence in road, urban, oil and gas transmission and power segment,
apart from water supply segment going forward. Company’s pipe division Pratibha
Pipes and Structural Ltd also provides backward integration for water and oil and
gas related projects.
With its diversified order book of Rs.36 bn and geographical presence across regions,
we expect company to be a key beneficiary of upcoming projects in water
supply and urban infrastructure and maintain a high growth trajectory going forward.
BUSINESS OVERVIEW
Company’s business can be classified in two categories – Infrastructure and saw
pipe division. Infrastructure division carries out projects in water and irrigation segment,
surface transport, urban infrastructure, hydro carbon and BOT projects. Details
of these divisions are mentioned below –
n Infrastructure – Company has an order book of Rs.36 bn in the infrastructure
segment, diversified across water and irrigation (60%) and urban infrastructure
(40%). Surface transportation forms a very small portion of the order book. In
the water segment, company has executed a range of projects such as laying
of water pipelines, sewerage treatment plant, water reservoirs, water storage
systems, tunnelling etc. Though water segment contributes a significant proportion
of the order book, company had also ventured into new segments such
as building and modernisation of airports, construction of high rises and shopping
malls as well as BOT/BOOT projects. Going forward, company plans to
capture the upcoming opportunities in thermal and hydro power as well as oil
and gas transmission. Key projects executed by company in the infrastructure
segment include –
l Water supply - NMMC Pipeline project, Sarita Vihar Water Supply project,
Barve Ambernath Pipeline project, Indore water supply and Gujarat water
supply project
l Urban infra - Mumbai, Delhi and Amritsar airport, Airoli and Ghansoli Railway
station, Nirmal Lifestyle mall, Lanco mall, Imperial Height building at
Andheri,
l Surface transport - Pune Solapur Highway road, Sangamwadi bridge,
Katraj road and bibewadi to Kondhwa Road etc
n Saw pipes – The saw pipe division of the company has an installed capacity of
92000 TPA which caters to requirements from water and oil and gas related
projects. The pipe division also has a crucial coating division viz 3 LP coating
plant having capacity of 1.7 mn sq meters per annum. This division operated at
nearly 47% capacity utilization in FY10 and produced 42470 TPA, out of which
55% were being used for internal consumption and remaining is supplied for
outside orders. Current output capacity is approximately 60000 TPA. The company
has also obtained various certification including prestigious American Petroleum
Institute (API) certifications for its manufacturing facilities which enables
it to meet qualification criteria of various upcoming projects. For Saw
Pipes division, company had also secured contract from GAIL for supply of API
Grade Pipes for its Bawana Nangal pipeline project.
KEY INVESTMENT POSITIVES
Leading player in the infrastructure segment
Pratibha Industries has emerged as one of the leading players in the infrastructure
segment in past 28 years with its focus towards a wide range of projects in water
supply, surface transport, urban infra as well as BOT projects. Company has successfully
executed a wide range of projects such as pipeline, water supply, bridges,
flyovers, tunnels, high rise structures and shopping malls, construction of airport
and railway stations. Thus we believe that Pratibha Industries has the required expertise
to tap upcoming opportunities in the infrastructure segment going forward.
Healthy order book provides revenue visibility for next 2 years
Company has an order book of Rs.36 bn diversified across water and irrigation
(60%) and urban infrastructure (40%). Surface transportation form a very small
portion of the order book. It is also lowest bidder in Rs.9 bn worth of new projects
which are likely to be awarded in this financial year. It has been able to grow its
order book at a CAGR of 35% between FY08-FY10 and with strong order pipeline,
we expect order book to grow at a CAGR of 26% between FY10-FY12. Company
will continue to remain focused on water supply but will also simultaneously
diversify into other segments such power, hydro carbon etc going forward.
Strong order pipeline
Pratibha industries places bids worth Rs 25 bn every month. Company is currently
L1 in Rs 9 bn worth of orders - Rs 6 bn from Middle East and Rs 3 bn from India.
It is trying to tap upcoming opportunities in Middle East and has placed the bids in
Oman, Abu Dhabi, Dubai electricity and water authority etc. It is currently L1 in
project worth nearly Rs 3.6 bn from Al Ghafat reservoirs and in another project
worth Rs 3.6 bn in water supply pipeline project.
Along with this, 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. This project would entail construction
of waterway between Nariman Point to Versova in Mumbai and company
would be required to run the catamarans for transporting passengers. Project
would be awarded to the company after getting cabinet approvals and will be developed
in four phases. As per initital estimates, company expects 30,000 passengers
daily with an average toll rate of Rs 250. Along with this, the consortium will
also get 40 acres of water development – out of which 4-5 acres will be required
for the ferry services while remaining would be leased out for commercial and retail
development.
Diversification in other geographies
Pratibha Industries initially started as a focused player in Maharashtra but has now
diversified across different states in past few years. Out of the total order book,
58% comes from states like Bihar, Karnataka, MP, UP, New Delhi and Rajasthan
while the rest is being contributed by Maharashtra. We expect company to continue
to expand across geographies and maintain its order book growth.
Excellent growth trajectory
Company has been on a high growth trajectory since past few years and has managed
to grow revenues at a CAGR of 34% and profits at a CAGR of 29% between
FY08-FY10. With a robust order book and strong order pipeline, we expect revenues
of the company to grow at a CAGR of 32% between FY10-FY12. Net profits
are expected to grow at a CAGR of 39% between FY10-FY12 primarily led by
excellent revenue growth and healthy operating margins.
Margins likely to be sustained at current levels
Operating margins of the company stood around 13.6% in FY10 and company
expects to improve margins going forward due to its focus towards high margin
segment of water supply and irrigation as well as backward integration. Urban infrastructure
segment also entails good margins where company has in the past executed
and completed projects in airport, tunnelling, high rise buildings segment.
Water supply related projects have operating margins in the range of 16% while
urban infra related projects have margins between 10-13%.
Along with this, company also owns a large fleet of owned machinery and equipment
such as tunnel boring machines, batching plants, concrete mixers, transit
mixers, heavy mobile cranes, tower cranes, loaders, compressors, DG sets etc. This
enables the company to complete projects on time and also achieve higher operating
margins. Along with this, with completion of low margin road projects, company
expects margins to improve by 0.5% going forward. We thus expect
company’s operating margins to be around 13.5% for FY11 and 14% for FY12.
Backward integration also aids better margins
Saw pipe manufacturing division of company provides backward integration for
water and oil&gas pipeline projects and has a capacity of 92000 TPA. Company is
planning to enhance its focus in the hydro carbon segment going forward and
thus the saw pipe division will cater to the huge demand of pipes and thus will
also enable the company to meet pre-qualification criteria for upcoming tenders.
Saw pipe facility is currently operating at nearly 65% capacity utilization and we
expect it to continue to operate at similar utilization levels going forward. We expect
significant proportion of production to be used internally for its projects and
thus it will help in maintaining better margins.
Fund raising to boost networth
Company has raised funds through QIP by issuing 12.195 mn shares at a price of
Rs 82 per share thereby raising Rs 1 bn. It has also approved a preferential allotment
of equity shares and compulsorily convertible participatory preference shares
amounting to approximately Rs. 500 mn to "Van Dyck" a subsidiary of
"ChrysCapital V, LLC", upto Rs. 92 per equity share and CCPPS of face value upto
Rs. 92/-. Thus total fund raising would stand at nearly Rs 1.5 bn which is likely to
be utilized for core construction activities such as capex, retiring high cost debt as
well as to meet working capital requirements.
We believe that this fund raising has enhanced company's networth and hence
would enable it to participate in larger ticket size orders.
Future growth strategy
Pratibha Industries will continue to focus on increasing the order book across diverse
segments. Company has identified new growth areas such as hydro carbon
as well as power projects and would continue to tap opportunities in this space. It
would also continue to expand its presence across geographies as well as segment
to maintain a hedged business model going forward.
Attractive valuations
At current price of Rs.74, stock is trading at 9.8x and 6.9 P/E and 5.4x and 4.4x
EV/EBITDA multiples for FY11 and FY12 respectively. 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. Our target valuations are based on 30% discount
to the core business valuations of larger and diversified players to factor in
relatively smaller size. We thus recommend BUY on the stock.
Key Risks and concerns
n Slowdown in order inflows – Any kind of slowdown in order inflows is likely
to impact order book growth as well as revenue growth for the company going
forward.
n Delays in execution – Execution delays related to land acquisition as well as
environmental clearance may impact project completion schedule and thereby
impact revenue growth.
n Increase in interest rates - Increase in interest rates may result in increasing
the overall borrowing cost for the company and hence may impact profitability
adversely.
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