pratibhaind 18 jan 2010

8/8/2019 PratibhaInd 18 Jan 2010

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January 18, 2010Visit us at www.sharekhan.com

Sharekhan Ltd

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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2 January 2010Sharekhan

stock ideas Pratibha Industries

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)


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)


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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Disclaimer

This document has been prepared by Sharekhan Ltd.(SHAREKHAN) This Document is subject to changes without prior notice and is intended only for the person or entity to which it is addressed to and may contain confidential and/orprivileged material and is not for any type of circulation. Any review, retransmission, or any other use is prohibited. Kindly note that this document does not constitute an offer or solicitation for the purchase or sale of any financialinstrument or as an official confirmation of any transaction.

Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. SHAREKHAN will not treat recipients as customers by virtue of their receiving this report.

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

conclusion from the information presented in this report.This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability oruse would be contrary to law, regulation or which would subject SHAREKHAN and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in alljurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.

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.

pratibhaind 18 jan 2010

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