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January 18, 2010Visit us at www.sharekhan.com
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A-206, Phoenix House, 2nd Floor, Senapati Bapat Marg, Lower Parel, Mumbai - 400013, India.
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)
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
Price chart
Shareholding pattern
Pratibha Industries Ugly DucklingOrders galore, more to come Buy; CMP: Rs326
Key points
Strong and diversified order book: Pratibha Industries (Pratibha) is one of thefastest growing companies among the small construction companies. Its pendingorder book of Rs3,500 crore (over 4x FY2009 revenues) provides strong visibilityto its revenue growth. It also has a healthy order pipeline with L1 status inorders worth Rs900 crore. Apart from its strong position in irrigation and watermanagement 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. Thisbackward integration enables the company to bid for pipeline related projectsat 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, andirrigations and water management projects form a key component of the over-all government spending on infrastructure development in the country. As perthe planning commission, irrigation and water management projects consti-
tute a significant portion of the $500-billion worth of investments envisaged ininfrastructure development in the 11th Five-Year Plan. The budgetary alloca-tion for this segment through various schemes like the AIBP, the Rajiv GandhiDrinking 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 profithave 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 growthoutlook and relatively better return ratios, Pratibha is attractively valued at6.7x FY2011E earnings as compared to its peers. We recommend a Buy on thestock 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) 565.1 805.8 1125.0 1578.9 2083.3
% y-o-y growth 88.1 42.6 39.6 40.4 31.9
Adj. net profit (Rs cr) 34.3 44.7 58.0 81.6 106.0
Shares in issue (cr) 1.7 1.7 1.7 1.7 1.7
EPS (Rs) 20.5 26.8 34.8 48.9 63.5
% y-o-y growth 44.1 30.6 29.7 40.7 29.8
PER (x) 15.9 12.2 9.4 6.7 5.1
P/BV (Rs) 3.0 2.4 2.0 1.5 1.2
EV/EBIDTA (x) 8.1 7.9 5.7 4.6 3.9
RoCE (%) 19.7 19.5 17.0 18.5 18.8
RoNW (%) 24.6 21.9 23.0 25.7 26.0
Promoters
61%
Public &
others
21%
Institutions
18%
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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 helicallysubmerged 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 companys
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.
Orders won recently
Project Date Rs Execution(crore) time
(months)
Comprehensive Water Supply Scheme at village Chandu Budhera, district Gurgaon, 17-Dec-09 129.89 24from Haryana Urban Development Authority
Construction of three conventional underground multi-level car parking 15-Dec-09 104.2 15from Municipal Corporation of Delhi
Comprehensive Water Supply Scheme to Guledgudda town and villages enroute 24-Nov-09 30.37 20from Karnataka Urban Water Supply and Drainage Board
Procurement, fabrication and laying of clear water main 23-Nov-09 309.46 26from Bangalore Water Supply & Sewerage Board
Circulating water and make-up water system civil works package for 19-Nov-09 59 21Mauda Super Thermal Power Project (2x 500MW) from NTPC
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 29-Oct-09 150 15at New Delhi Railway Station-cum-Airport terminal of Airport Express Linefrom Delhi Metro Rail Corporation
Supply of API grade pipes from GAIL (India) 5-Oct-09 25 N.A.
Supply, installation and maintenance of automatic meter reading water meters 7-Sep-09 145 12from Municipal Corporation of Greater Mumbai
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
Order book and book-to-bill ratio
0
1000
2000
3000
4000
5000
6000
7000
8000
FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E
2.0
2.5
3.0
3.5
4.0
4.5
Order book Book to bill ratio
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Water projects formed 60% of the companys 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
60%20%
11%
8% 1%
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 increaseits 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.
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-managementprojects
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 Indias
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.
Pratibhas 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 allocatedRs49,700 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
InfrastructureDeficit and 11th Plan physical targets
Sector Deficit 11th Plan targets
Roads/ Highways 65,590km of National Highway comprise only 2% of network; 6-lane 6,500km in Golden Quadrilateral;carry 40% of traffic; 12% 4-laned; 50% 2-laned; 4- lane 6,736km NS-EW; 4-lane 20,000km;and 38% single-laned 2-lane 20,000km; 1,000km Expressway
Power 13.8% peaking deficit; 9.6% energy shortage; Add 78,577MW; access to all rural households40% transmission and distribution losses;absence of competition
Irrigation 1,123BCM utilisable water resources; yet near crisis Develop 16mha major and minor works; 10.25mhain per capita availability and storage; only 43% of Common Area Development; 2.18mha flood controlnet sown area irrigated
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, Modernise 4 metro and 35 non-metro airports;parking space and terminal buildings 3 greenfield in NER; 7 other greenfield airports
Railways Old technology; saturated routes; 8,132km new rail; 7,148km gauge conversion;slow speeds (freight: 22kmph; passengers: 50kmph); modernise 22 stations; dedicated freight corridorslow payload to tare ratio (2.5)
Telecom/IT Only 18% of market accessed; obsolete hardware; Reach 600mn subscribers and 200mn in rural areas;acute shortage of human resources 20mn broadband; 40mn Internet
Source: Planning Commission consultation paper
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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 increasedthe 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 seweragesystem 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 longgestation period and require huge capital outlay. Hence,
their execution capability plays a very important role.
With Pratibhas 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
companys 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 growthin the industry, there could be again a shortage of skilled
manpower, which could hinder Pratibhas 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 attractivelyvalued 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 81,954 101,553 126,380 158,027 198,611 24.8
Road & bridges 51,822 54,789 59,200 68,370 79,971 11.5Telecommunications 31,375 38,134 48,593 61,646 78,690 25.8
Railways 34,225 40,964 49,525 60,393 76,701 22.4
Irrigations 27,497 35,916 47,189 62,266 80,433 30.8
Water supply & sanitation 19,298 22,781 27,323 33,266 41,063 20.8
Ports 12,409 14,822 17,374 19,980 23,410 17.2
Airports 5,208 5,520 5,904 6,646 7,690 10.2
Storage 3,777 4,098 4,446 4,824 5,234 8.5
Gas 2,708 3,003 3,332 3,700 4,111 11
Total investments 270,273 321,580 389,266 479,118 595,914 21.9
As % of GDP 5.98 6.53 7.25 8.19 9.34
Source: Planning Commission consultation paper
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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 12.7Sadbhav 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)
Particulars FY08 FY09 FY10E FY11E FY12E
Net revenue 565.1 805.8 1125.0 1578.9 2083.3
Operating expenses 499.1 714.2 985.5 1386.3 1833.3
Operating profit 66.0 91.6 139.5 192.6 250.0
Other income 1.4 11.5 2.3 2.4 2.1
Depreciation 3.6 7.1 14.2 20.0 25.2
Interest 23.6 40.5 44.8 58.4 75.5
PBT 40.2 55.4 82.9 116.6 151.4
Tax 5.9 10.7 24.9 35.0 45.4
Reported PAT 34.3 44.7 58.0 81.6 106.0
EPS 20.5 26.8 34.8 48.9 63.5
Balance sheet Rs (cr)
Particulars FY08 FY09 FY10E FY11E FY12E
Share capital 17 17 17 17 17
Reserves & Surplus 167 208 262 340 442
Shareholders fund 184 225 279 357 459
Total debt 133 248 288 388 468
Differed tax liability 2 6 7 8 9
Total liabilities 318 479 574 753 936
Gross block 99 168 268.32 348 428
Net fixed assets 92 154 240.19 300 355
Capital work in progress 32 61 30 30 30
Investments 85 0 0.09 0 0
Gross current assets 438 562 717.06 992 1,291
Gross current liabilities 328 298 413.27 570 740
Net current assets 110 264 303.79 422 551
Miscellaneous expenditure 0 0 0 0 0
Total assets 318 479 574 753 936
One-year forward PE (x)
The author doesnt hold any investment in any of the companies
mentioned in the article.
Cash flow (Rs cr)
Particulars FY08 FY09 FY10E FY11E FY12E
Operating profit before 64.7 92.7 117.6 161.0 207.9working capital changes
Change in working capital 82.7 -145.0 -72.9 -117.2 -133.3
Net cash from operations 147.4 -52.4 44.8 43.8 74.6
Capital expenditure -77.9 -98.6 -69.3 -80.0 -80.0Sale/Purchase of -82.5 88.6 - - -investments
Net cash from investing -160.4 -10.0 -69.3 -80.0 -80.0
Increase in share capital 58.8 - - - -
Increase in debt -3.5 115.6 40.0 100.0 80.0
Others -25.8 -38.0 -48.7 -62.3 -79.4
Net cash from financing 29.5 77.7 -8.7 37.7 0.6
Net change in cash 16.5 15.3 -33.2 1.5 -4.8
Key ratios
Particulars FY08 FY09 FY10E FY11E FY12ESales growth (%) 88.1 42.6 39.6 40.4 31.9
PAT growth (%) 68.3 30.6 29.7 40.7 29.8
EPS growth (%) 44.1 30.6 29.7 40.7 29.8
EBIDTA margin (%) 11.7 11.4 12.4 12.2 12.0
PAT margin (%) 6.1 5.6 5.2 5.2 5.1
RoCE (%) 19.7 19.5 17.0 18.5 18.8
RoNW (%) 24.6 21.9 23.0 25.7 26.0
Debt equity (X) 0.7 1.1 1.0 1.1 1.0
Working capital days 48.4 99.1 98.7 99.7 100.7
Key valuations
Particulars FY08 FY09 FY10E FY11E FY12EPER (x) 15.9 12.2 9.4 6.7 5.1
P/BV (x) 3.0 2.4 2.0 1.5 1.2
EV/EBITDA (x) 8.1 7.9 5.7 4.6 3.9
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The information contained herein is from publicly available data or other sources believed to be reliable. While we would endeavour to update the information herein on reasonable basis, SHAREKHAN, its subsidiaries and associatedcompanies, their directors and employees (SHAREKHAN and affiliates) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance, or other reasons that may prevent SHAREKHAN andaffiliates from doing so. We do not represent that information contained herein is accurate or complete and it should not be relied upon as such. This document is prepared for assistance only and is not intended to be and must not alonebetaken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigations as it deems necessary to arrive at an independentevaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investmentdiscussed or views expressed may not be suitable for all investors. We do not undertake to advise you as to any change of our views. Affiliates of Sharekhan may have issued other reports that are inconsistent with and reach different
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SHAREKHAN & affiliates may have used the information set forth herein before publication and may have positions in, may from time to time purchase or sell or may be materially interested in any of the securities mentioned or relatedsecurities. SHAREKHAN may from time to time s olicit from, or perform investment banking, or other services for, any company mentioned herein. Without limiting any of the foregoing, in no event shall SHAREKHAN, any of its affiliatesor any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. Any comments or statements made herein are those of the analyst and do not necessarily reflect thoseof SHAREKHAN.