Diversified play makes Pratibha Industries a buy

Pratibha Industries, a mid-sized infrastructure player, is set to benefit from its presence in diversified and niche segments along with its timely execution capabilities derived from backward integration.

Business: Pratibha engages in design, engineering and execution of integrated water transmission and distribution projects, water treatment plants, elevated and underground reservoirs, tunnelling, road construction, developing airports and real estate projects.

It has an expertise in water supply projects, which contribute more than 50% to its current order book. Urban infrastructure projects form the rest. Pratibha has bagged a few big projects in last two months taking its order book from Rs3,600 crore as at end of fiscal 2011 to Rs4,300 crore now, to be executed over 2-3 years.     

It recently won water projects in Dubai and intends to further make its presence felt in mid-eastern and South Asian countries. Pratibha’s infrastructure development segment contributes nearly 91% to overall revenues and around 93% to profit before tax.
The company is also involved in manufacturing and coating of saw pipes from where it gets the remaining 10% revenues and 7% profits. The saw pipe division provides backward integration advantage while bidding for of water supply and oil & gas projects.

Investment rationale: The company is well poised to benefit from increasing government spend on water supply and sanitation systems. Also, Pratibha is likely to gain from its diversified portfolio of urban infrastructure development, road and underground rail projects, housing and real estate. The order book provides a decent revenue visibility over the next 2-3 years. Also, Pratibha is the lowest bidder in projects worth `600 crore, which may lead to further order inflows in the near term. The company’s management expects to close the fiscal 2012 with order book of `5,500 crore.  It recently doubled its helical saw pipes manufacturing capacity to 180,000 metric tonne and is looking at bigger oil & gas projects. The company enjoys decent operating profit margins. It has a comfortable leverage position with current net debt to equity ratio closer to 0.80. Pratibha which has reported strong return ratios closer to 20% over last two years is likely maintain the same.

Concerns: The company being into highly competitive and capital intensive construction segment faces risks related to delays in payments from government and other private clients. Also, increase in commodity prices and higher interest rates pose a threat to margins.

Valuations: Led by a healthy order book and a decent execution record, Pratibha’s revenues are expected to grow at a compounded annual growth rate (CAGR) of 21% over fiscals 2011-13 while its net profits are expected to rise at a CAGR of 24% during the same period on back of lower interest expenses. At current market price of `51.80, the stock trades at 5.99 times its expected fiscal 2012 earnings and 4.70 times its expected fiscal 2013 EPS. Investors with a longer-term perspective can consider the stock at current levels for decent returns.

Disclaimer: The writer does not hold any share in the company