Pratibha Industries is in the process of de-risking its business profile and moving to more lucrative segments. Better operating profit margin, the ability to forge joint-ventures to enable technical and financial qualification and the improved debt situation add to the company's earnings visibility.
We reiterate a buy after our `invest' recommendation on the company's public offer in February 2006.
At the current market price, the stock trades at 8 times its expected earnings for FY-08. We have not factored in revenues, if any, from the spiral-welded pipes business, capacities for which are expected to go on-stream from FY-08.
Moving up the value chain
Pratibha is a unique play among the small-cap infrastructure players as its revenue streams are markedly different from peers of similar size.
While a number of small players now ride on the huge spending in the road space, the company has traditionally derived a bulk of its income from water supply and distribution and waste management systems. Roads and mass housing and commercial projects contributed about 25 per cent.
The company has now moved up the value chain to more underground water tunnelling and storm water pumping stations independently and through joint-ventures.
Recent projects from the Rajasthan Government and the Airports Authority of India appear to be a way forward to becoming an integrated player in the infrastructure business.
Pratibha has already forged ties with an Austrian company for tunnelling and appears to be looking for avenues to enter the lucrative oil and gas pipeline project segment. This new segment will also be a natural extension of its existing business. As a backward integration strategy, the company is setting up a spiral-welded pipe division, which is likely to go on stream in FY-08. These pipes, typically used in water and oil and gas pipeline projects, are likely to bring better margins from the pipeline projects.
While the company had originally planned a joint venture for the spiral-welded pipes, it now intends to source the required knowhow from the equipment manufacturer itself and, therefore, proposes to retain the full profits from this unit.
Improving financials
The IPO proceeds have significantly ramped up the shareholders funds, thus financially qualifying it for bigger orders. The company's current order backlog of over Rs 1,200 crore is about seven times its revenues for FY-06. This is likely to be converted to revenues in about two-and-a-half years and lend visibility in the medium term. Operating margin, maintained at over 12 per cent, is superior to similar sized players.
Risks
Benefits from the pipe division are likely to be substantial only if the company forays into the oil and gas pipeline division. The company, however, can utilise the pipes for its water projects and to sell in the market, as the demand is high.
Further, we expect the company to benefit from its core business — water projects — on the back of water supply systems being implemented under the National Urban Renewal Mission.