Pratibha Industries

Investors with a penchant for risk and a medium-term perspective can buy the stock of construction and infrastructure company Pratibha Industries. At Rs 380, the stock trades at 11.4 times per share earnings for FY-10. Valuations are at a discount to peers such as MBL Infra. However, given its small cap status, investors are advised to limit portfolio exposure to this stock.



Pratibha holds merit due to its healthy order inflow and profit margins, backward integration, diversified order book, its ability to partner with larger players to secure bigger contracts and the potential in Government spending programmes on urban infrastructure.

Diversification

Pratibha primarily undertakes construction of projects in the infrastructure space. The company has a firmly established presence in the water supply segment, undertaking the design, construction, operation and maintenance of large-scale water supply projects. This segment is the major contributor to order book, at about 64 per cent.

Pratibha's client list includes entities such as the Mumbai Municipal Corporation and Bangalore Water Supply and Sewerage Board. Water projects also offer margins superior to those of other infrastructure segments such as roads.

Even so, to mitigate risks of segment concentration, Pratibha diversified into segments such as commercial and residential real estate, tunnelling, airport construction and maintenance and other urban infrastructure projects.

For instance, it completed construction of the Ahmedabad and Amritsar airports last year. Civil and urban infrastructure projects now make up about 34 per cent of the order book. The balance is made up of transportation contracts. While retaining focus on the water segment, plans are on to move further into sewerage projects, urban infrastructure and hydrocarbon pipelines.

Besides broadening its order book, Pratibha has set up a manufacturing facility for spiral pipes, used in water, sewerage, oil and gas transmissions. The plant became functional in FY-08, with a capacity of 92,000 MTPA. Pratibha also has a pipe coating division, with current annual capacity at 1.8 million square meters. It has secured certification from the American Petroleum Institute to supply to the oil and gas segment.

Contribution of the pipes division to revenues stood at about 18 per cent for FY10, up from the 15 per cent the year before. Apart from serving to diversify revenue base, the pipes division allows backward integration for the company's water projects, helping better margins.

Order book

Pratibha belied concerns of a slowdown in order inflow, doubling its order book with the current order backlog at over Rs 4,257 crore.

Order book size is about 4.6 times the revenues for FY10 with an execution period ranging from 1 to four years, which provides medium term earnings visibility. Besides being diverse in terms of composition, the order book is also quite well-spread geographically, ranging from Haryana, Delhi and Bihar to Karnataka and Maharashtra. To qualify and secure bigger projects, besides building up on its own expertise, Pratibha has tied up with other players, both domestic and international such as Patel Engineering, Gammon Infrastructure, China State Engineering Corporation and Australia-based Ostu Stettin.

The company will also benefit from the higher government spending on development of urban infrastructure through schemes such as JNNURM.

Financials

Revenues have grown at a compounded annual rate of 47 per cent, with profits similarly growing at 41 per cent over a three-year period. Operating margins are healthy at 15 per cent for FY10, up from the 13 per cent the year before, on the backs of lower raw material costs. Most contracts have a price escalation clause built in which would help protect margins from escalations in prices of key raw materials.

However, depreciation charges and interest costs together brought net margins down to 6 per cent for FY10 and 5 per cent in FY09. Depreciation costs may be explained by Pratibha's investment in construction equipment; fixed assets grew 84 per cent in FY10 over the year before. Such ownership ensures timely availability of equipment, which may also be ferried between projects.

Concern stems from high interest costs, which grew at 40 per cent in FY10 over FY09, and 75 per cent in FY09 over FY08. Interest costs have taken out about 5 per cent of the revenues in the past two years. Debt equity ratio is also on the higher side at 1.3 times. However, strong operating profits afford a fairly reasonable interest cover of about 2.4 times.

Working capital turnover dropped marginally to 2.2 times in FY-10 from the 2.9 times a year earlier, as a result of a build-up in inventory and debtors.