Pratibha Industries

Construction and infrastructure development company Pratibha Industries, is likely to emerge as one of the key beneficiaries of the Budget spending on urban infrastructure.

The company’s strength in water sanitation/transport projects and its success in other urban development projects are likely to ensure that it translates the above opportunity into revenues. That the company has weathered the slowdown far better than most of its peers is discernable from its robust 31 per cent growth in consolidated net profits for FY 2009.

Investors with a two-year perspective can consider investing in the stock, which currently trades at 4.5 times its estimated per share earnings for FY 2010. Given the order book, the sector prospects and Pratibha’s track record of 53 per cent annualised earnings growth over the last three years, the company should be able to comfortably beat the expectations. Small-cap stocks tend to be quite vulnerable to market corrections; investors can therefore consider a strategy of booking profits, on achieving target returns in this stock.

For the fourth quarter ended March 2009, Pratibha’s order intake witnessed a slowdown, perhaps on the back of fewer projects awarded before the elections. We expect this scenario to reverse over the next two quarters as order flows are likely to revive once the Budget charts out the spending plan on urban development.

The current order book of Rs 2,100 crore already lends revenue visibility over the next couple of years. With strong presence in the high margin water supply project, Pratibha has traditionally enjoyed superior operating profit margins. Besides, backward integration through in-house SAW pipe division (used in water, sewerage and oil and gas transport) has ensured a better cost structure that enables superior profitability.

While commodity price hikes last year did impact the company’s margins, softening of input prices ensured a 3 percentage-point expansion in margins to 12 per cent in the March 2009 quarter, compared to a year ago.

While water-related projects account over 60 per cent of the company’s current order book, Pratibha has made an earnest attempt to diversify its business profile. As a result, the company has been bagging tunnel and airport projects as well as road and other urban municipal works.

While water projects would continue to remain a key driver for earnings, the diversification could mean lower exposure to projects that hold lucrative profit margins. However, this could well be offset by high volumes, given the spending expected (Rs 11,842 crore for 2009-10) under the Jawaharlal Nehru Urban Renewal Mission.

via BL