Pratibha Industries: Buy

A steady increase in order pipeline, an established presence in construction of water and sanitation works and building projects, and the ability to forge partnerships for high-value projects make construction contractor Pratibha Industries a good buy.

At Rs 41, the stock trades at 5.4 times the trailing 12-month earnings and 3.9 times the estimated earnings for FY-13. Investors with a two-three year perspective can buy the stock. Given its small capitalisation, investors are advised against investing heavily in the stock.

Rosy order picture

Unlike many peers, the order pipeline for Pratibha has not dried up. The company operates predominantly in the water and sanitation segment for State governments and municipalities and does not have an exposure to beleaguered segments such as roads. Operating cash flows have been healthy on the back of timely execution and steady order inflow.

In the first nine months of this fiscal, the company secured Rs 3,350 crore in new orders, to catapult its order book to Rs 6,568 crore. The average order execution period is 24-36 months while the order book is 5.2 times revenues of 2010-11, providing earnings visibility over the medium term.

It has also moved overseas, executing a water project in Dubai. While the West Asian region may not be forthcoming in orders in the near term, international exposure will help Pratibha secure orders from other promising regions such as Africa.

Geographically too, the order book is fairly well-diversified. Hitherto a contractor for construction of projects, Pratibha has stepped into the developer mode, although in a small way. It has one road project on an annuity basis, and a multi-level car park from Delhi Metro Rail Corp. Given the competition that abounds in smaller road projects, projects such as operating a multi-level car park holds more promise.

About 64 per cent of the order book is from water management and other urban infrastructure, while the balance is from buildings.

Strength in partnerships

While the size of most orders ranges between Rs 100 and Rs 360 crore, Pratibha has teamed up with other players to qualify for larger projects. For instance, in the current fiscal, it won Rs 1,249 crore in orders from the Delhi Jal Board with a Russian infrastructure company. This order also calls for maintenance of the sewer system to be constructed for a period of 11 years. Besides providing a regular revenue stream, it could mean further such maintenance contracts for the company.

In other partnerships to secure big-ticket orders, it partnered China Rail First Group for underground tunnelling and station work from the Delhi Metro Rail Corporation. The company has previously partnered infrastructure majors such as Gammon.

Margins maintained

Consolidated revenue over the past three years has grown at a compounded annual rate of 31 per cent. Net profits in the same period have grown 27 per cent. For the half-year ended September '11, the company grew consolidated revenues by 19 per cent and net profits by 17 per cent to Rs 696 crore and Rs 35 crore.

An improving working capital cycle has helped maintain margins at 13-15 per cent over the past several quarters. The company has backward integration with the manufacture of saw pipes. It, however, plans to sell this division, which could tell on operating margins in the coming quarters. Still, since it plans to use the sales proceeds to retire debt, net margins, hovering around 5 per cent, could improve.

Consolidated debt, as of end-September, stands at Rs 768 crore. A limited number of development projects have also helped the company avoid heavy debt for initial investments, as has been the case with a few other peers. Consolidated debt-equity of the company stands at a manageable 1.1 times.

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