Pratibha Industries: Buy

Diversification into new segments within infrastructure, backward integration and strategic tie-ups make Pratibha Industries a good investment option among the mid-sized infrastructure players. These moves have improved the earnings visibility of the company compared to what was prevailing at the time of its IPO in February 2006. At the current market price of Rs 324, the stock trades at nine times its expected earnings for FY-09. Investors with a two-three year horizon can consider exposure to the stock.
De-risking without losing focus

Pratibha derived 70 per cent of its revenues from water management projects when it made its IPO; but it has rapidly diversified its area of operations. Of the Rs 2,300-crore order book now, about 52 per cent comes from water projects, while urban infrastructure accounts for about 40 per cent.

Going by the nature of its bids, it is evident that the company would continue to play to its strengths in managing water projects. Its long-term contracts such as the one which involves public private partnership with a local municipality for water projects, not only indicates its focus on the segment, but also its early initiative in the PPP model for such projects.

While Pratibha has a minor presence in road projects (intra-city), it has stayed away from inter-city road projects that have been the major revenue driver for similar sized peers. As the National Highways Authority of India (NHAI)-awarded road projects require a chunk of capital to be locked in, Pratibha appears to have consciously avoided bidding for such projects and instead has focused on relatively high-margin segments such as water and urban infrastructure.
Strategic tie-ups

Pratibha has entered into urban infrastructure through long-term tie-ups with global players. In the tunnel segment, for instance, it has partnered OSTU STETTIN of Austria, one of the leading players in tunnels. It has similar tie-ups with other global players for urban projects such as car park facilities and airports. The ramp up in urban infrastructure orders procured over the last one year indicates that Pratibha has chosen the right partners to qualify technically.

To pay more attention to this sector without losing focus on the water segment, the company has incorporated Pratibha Infrastructure, a wholly-owned subsidiary that would explore opportunities in the urban space.
Dual benefit

At the time of raising IPO funds, one of Pratibha’s objectives was to have its own SAW pipe division. The facility, which has a capacity of 92,000 tonnes of spiral welded pipes, commenced production last quarter. It is also planning a coating plant to be commissioned before the close of FY-08.

Apart from supplying pipes for its own water-related projects, the above facility would be able to cater to the oil and gas industry. As a move towards this, the company has sought certification from the American Petroleum Institute (API); this would enable the company’s pipes to be eligible for supplies to oil and gas EPC contracts. Thus, while the backward integration is likely to provide cost benefits, successful foray into pipes business may add to revenues. Profit margins could also improve as pipes offer lucrative margins.

Pratibha has so far managed a healthy operating profit margin in the 12 per cent range. The last quarter however saw a sudden spike perhaps attributable to a change in business mix. Interest cost has increased over the last quarter on the back of an expanding order-book. Volume growth has however, ensured that interest coverage is adequate.

The company’s planned capacities for saw pipes have undergone an increase since its original plan during the IPO. In this context, the company has approved plans for raising further funds through foreign currency convertible bonds (FCCBs).

Should this materialise, one may see debt levels increase or an expansion in the equity base, at a later stage. However, if the company sustains its current earnings growth (58 per cent CAGR over the last two years), earnings should grow at a reasonable pace despite higher interest obligations or a larger equity base.