| Key Data
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| CMP | Rs 250.25 |
| Date | Aug 16th, 2007 |
| Sector | Infratructure |
| Face Value | Rs.10 |
| BSE Code | 532718 |
| 52 Week H/L | Rs 300 / 141 |
| Market Cap | Rs 357 Cr |
Investment Rationale
Pratibha Industries Ltd (PIL), is a leading infrastructure company engaged in the businesses of constructing water supply network, urban infrastructure, roads, tunneling and other construction activities. The company is specialized in integrated water transmission & distribution projects having experience of over 1800 Kms water pipeline. The company has recently entered into EPC contract in oil and gas pipeline distribution system . The order book as on August 2007 stands over Rs2100 crore which is 7x of FY07 revenue. Nearly 62% of order book is comprises of water supply management, 32% in urban infrastructure and 6% is in road segment. The company has moved one step further towards backward integration by setting up a spiral pipe manufacturing unit in Rajasthan with installed capacity of 92000 MT. The company has a JV with OSTU-STETTIN, an Austrian-German firm for tunneling in integrated water supply projects.
The company has reported 22 and 60 percent growth in sales and net profit to Rs65.94 crore and Rs5.99 crore respectively in Q1FY08 along with margin expansion by 200 bps to 12.27 percent at operating level.
According to world energy, The Indian Oil and Natural gas demand is expected to grow at CAGR of 2.7 and 4.7 percent over next 25 years. The recent gas discoveries and massive oil exploration activities across the nation would require massive net work of pipeline for oil and gas transportation. The backward integration move in pipe segment has added another feather to its high flying business. Going forward, massive investment in infrastructure activities including water supply and urban infrastructure coupled with robust order book is expected to unfold the revenue and profitability in the future.
Key Dev elopments:
Backward integration in SAW pipe manufacturing business
The company has taken new initiative towards its water supply management business by setting up a spiral pipe manufacturing unit in Rajasthan with installed capacity of 92000 MT and further scale up to 180000 MT in future. The company has already booked Rs150 crore order to supply 30000 MT of SAW pipe over next 1 year. With this, the margin for the water supply business is expected to improve considering the fact that the company has over Rs1300 crore orders booked in water supply business. The company has applied for API license in January 2007 and expected to receive the same by December 2007.
The company is also set up a coating plant with installed capacity of 1.7 million sq mtrs for 3 layer polyethylene coating situated next to pipe manufacturing unit in Rajasthan. The plant is expected to commission by December 2007.
Financials:
Net profit jump by 59.73 % Y-o-Y in Q1FY08 along with margin expansion.
The company reported a sharp increase of 60 percent in Net Profit to Rs5.99 crore. The Net Profit growth is driven by 17 percent decline in general administration and other expense. Other income is jump by 105 percent to Rs.0.56 crore. The interest expenses is declined by 37 percent to Rs0.78 crore as compare to Rs1.2 crore in Q1FY07. The net margin is improved by 214 bps to 9.08 percent in Q1FY08. The revenue grew 22 percent to Rs65.94 crore as compare to Rs54 crore in Q1FY07 where as the full year sales stands at Rs295.24 crore.
The operating profit for the quarter stands at Rs8.09 crore as compare to Rs5.54 crore in Q1FY07 where as operating profit for the full year stands at Rs36.01 crore.
Valuations
At current market price of Rs250, PIL is quoting at a PER of 15.77x. On EV/Sales and on EV/ EBIDTA basis it is quoting at 1.47x and 11.79x of its TTM earnings respectively
Industry Scenario
India is the second largest populated country in the world and carries over 16 percent of world population, where as it has mere 2.38 percent of world's total land and 4 percent of total fresh water. As mother feeds to her child Indian agriculture feeds the population of over 1 billion. Indian agriculture is over dependent upon monsoon which is highly uncertain and erratic. Nearly 2/3 rd of Indian agriculture is depend upon monsoon. Although India is very rich in terms of annual rainfall and total water resources, its uneven distributions creates regional disparity.
Rural drinking water supply is, to a large extent, dependent on ground water (85%). The Bharat Nirman Programme is a step taken towards building up a strong Rural India by strengthening the infrastructure in six areas viz. Housing, Roads, Electrification, Communication(Telephone), Drinking Water and Irrigation, with the help of a plan to be implemented in four years, from 2005-06 to 2008-09.
India's Oil and Gas industry is expected to be around $110 billion and contributes nearly 45% of total energy of the country. India is the 6th largest crude oil consumer in the world 9th largest crude oil importer in the world with refining capacity of 2.56 million barrel per day. The rising infrastructure activities would further fuel the demand in the future.
Oil Demand (Million barrel per day)
| Particulars | 2003 | 2010 | 2020 | 2030 | CAGR |
| India | 2.5 | 3.3 | 4.3 | 5.2 | 2.7 |
| China | 5.4 | 8.7 | 11.2 | 13.1 | 3.3 |
| World | 79.2 | 92.5 | 104.9 | 115.4 | 1.4 |
Source: World Energy
Natural Gas Demand (BCM)
| Particulars | 2003 | 2010 | 2020 | 2030 | CAGR |
| India | 28 | 42 | 71 | 98 | 4.7 |
| World | 2709 | 3215 | 4061 | 4798 | 2.1 |
Source: World Energy
The pipeline penetration level for oil and gas transportation is very low at 15000 Kms as compare to developed countries like US and France. Globally 75% of oil is transported through pipeline as compare to 25% in India. The pipeline is most cost effective way of oil transportation as compare to any other form of transportation.
Pipeline transportation cost Rs1.3 per KM where as railway cost Rs2.20 per KM and road transportation costs Rs3.02 per KM.
The Estimated demand for SAW pipe in India over next 5 years is as follows.
| Company | Pipe (Kms) |
| National Grid Gas | 12000 |
| Hindustan Petroleum Corp. Ltd | 1793 |
| Bharat Petroleum Corp. Ltd | 1755 |
| Indian Oil Corp. Ltd | 1686 |
| Gas Authority of India Ltd | 710 |
| Reliance Petroleum | 5895 |
| Total | 23643 |
Source: CRISINFAC
The rising population has would create a huge demand for portable water the estimated demand for water by 2010 would reach to 1100 billion cubic meters from current level of 800 billion cubic meters.
The proposed strategy for coverage in respect of rural drinking water supply under Bharat Nirman is as follows.
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India targets to achieve the global goal of water supply for all by 2015. Nevertheless, if this has to be achieved, an additional 466 million people would have to be covered under water supply and sanitation by 2015. Under Bharat Nirman India has target to provide irrigation to 10 million hectares of land and drinking water supply to 55067 habitants. Investments required for rural sanitation would be aroundRs70000cr by 2015 and Rs52000cr by 2025 where as Investments for urban water supply by 2015 and 2025 would be Rs10000cr and Rs27000cr respectively
Outlook
India is on the fast lane of economic development, the government has proposed to invest over $350 billion over next 5 years for infrastructure development. There are still 12.4 million housing shortage and rising at 9 lakh per year, rising urbanization, nuclear family coupled with more people reaching towards the threshold limit of affordability would further boost the construction sector.
The massive rural mission to provide drinking water supply to more than 55000 habitants and irrigated water to over 10 million hectares of land would continue to drive the pipe line demand. More over the entry barriers in water supply projects in terms of experience would further prevent the competition and margin split. According to Jawaharlal Nehru National Urban Renewal Mission (JNURM ) nearly Rs 3 Lakh crore is expected to be spend on water supply and environmental engineering over next 5 years. The rising demand for oil and gas at 2.7% and 4.7% respectively and proposed pipeline by above mention companies would further strengthen the SAW pipe demand.
Pratibha Industries Ltd (PIL) having presence in all above segment would be the certain beneficiary.
Developments and Impact
Backward integration in SAW pipe manufacturing business
The company has taken new initiative towards its water supply management business by setting up a spiral pipe manufacturing unit in Rajasthan with installed capacity of 92000 MT and further scale up to 180000 MT in future. The company has already booked Rs150 crore order to supply 30000 MT of SAW pipe over next 1 year with this the margin for the water supply business is expected to improve considering the fact that the company has over Rs1300 crore orders booked in water supply business. The company has applied for API license in January 2007 and expected to receive the same by December 2007.
The company is also set up a coating plant with installed capacity of 1.7 million sq mtrs for 3 layer polyethylene coating situated next to pipe manufacturing unit in Rajasthan. The plant is expected to commission by December 2007
Robust order book of Rs2100 crore
The company has robust order book of Rs2100 crore which is 7x of FY07 earning. The company, an experience players in pipeline segment, is expected to win more orders going forward.
Financials
| Pratibha Industries Ltd | Rs in crores | |||||
| Particular | Q1FY08 | Q1FY07 | % Ch | TTM FY07 | TTM FY06 | % Ch |
| Net-Sales / Income from Operations | 65.94 | 54.0 | 22.09 | 295.24 | 156.7 | 88.41 |
| Other Income | 0.56 | 0.22 | 154.55 | 0.35 | 1.33 | -73.68 |
| Total Income | 66.50 | 54.23 | 22.63 | 295.59 | 158.03 | 87.05 |
| Total Operating Expenditure | 57.85 | 48.47 | 19.35 | 259.23 | 137.45 | 88.60 |
| a) Increase/(Decrease) in stock in trade | 0.00 | 0.0 |
| 0 | 0 |
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| As % of Sales | 0.00 | 0.00 |
| 0.00 | 0.00 |
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| b) Employee Exps | 2.61 | 1.3 | 105.51 | 8.07 | 2.14 | 277.10 |
| As % of Sales | 3.96 | 2.35 |
| 2.73 | 1.37 |
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| c) General Administration and Other exp | 55.24 | 47.2 | 17.03 | 251.16 | 135.31 | 85.62 |
| As % of Sales | 83.77 | 87.39 |
| 85.07 | 86.35 |
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| Operating Profit |
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| EBDITA ( Excl OI) | 8.09 | 5.54 | 46.03 | 36.01 | 19.25 | 87.06 |
| EBDITA ( Incl OI) | 8.65 | 5.76 | 50.17 | 36.36 | 20.58 | 76.68 |
| Interest | 0.78 | 1.2 | -37.10 | 11.68 | 6.23 | 87.48 |
| As % of Sales | 1.18 | 2.30 | -48.48 | 3.96 | 3.98 | -0.49 |
| Gross Profit | 7.87 | 4.52 | 74.12 | 24.68 | 14.35 | 71.99 |
| Depreciation | 0.39 | 0.2 | 69.57 | 1.12 | 0.66 | 69.70 |
| Profit before tax | 7.48 | 4.29 | 74.36 | 23.56 | 13.69 | 72.10 |
| Provision for tax (Incl. Deferred Tax) | 1.49 | 0.54 | 175.93 | 3.12 | 1.42 | 119.72 |
| Profit after Tax | 5.99 | 3.75 | 59.73 | 20.44 | 12.27 | 66.59 |
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| Equity | 14.29 | 14.3 |
| 14.29 | 14.3 | 0.00 |
| Reserve (Excl. Revaluation reserves) |
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| Net Worth | 14.29 | 14.29 |
| 14.29 | 14.29 | 0.00 |
| Face Value | 10.00 | 10.0 |
| 10.00 | 10.0 | 0.00 |
| EPS | 4.19 | 2.62 |
| 14.30 | 8.59 | 66.59 |
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| Important Ratios |
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| Q1FY08 | Q1FY07 |
| TTM FY07 | TTM FY06 |
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| (A) Measures of Performance (%) |
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| Total Op. Exp./Sales | 87.73 | 89.74 |
| 87.80 | 87.72 | 0.09 |
| Total Op. Exp/Total Income | 86.99 | 89.38 |
| 87.70 | 86.98 | 0.72 |
| EBIDTAM (excl. O. Inc.) | 12.27 | 10.26 |
| 12.20 | 12.28 | -0.09 |
| EBIDTAM (incl. O. Inc.) | 13.12 | 10.66 |
| 12.32 | 13.13 | -0.82 |
| Interest / Sales | 1.18 | 2.30 |
| 3.96 | 3.98 | -0.02 |
| Gross Profit Margin | 11.94 | 8.37 |
| 8.36 | 9.16 | -0.80 |
| Tax/PBT | 19.92 | 12.59 |
| 13.24 | 10.37 | 2.87 |
| Net Profit Margin | 9.08 | 6.94 |
| 6.92 | 7.83 | -0.91 |
Financial Analysis:
Net Sales grew by 22 percent Y-o-Y in Q1FY08
During the quarter ended June 2007, Net Sales of MUL has jumped by 22% y-o-y to Rs65.94 crore. The full year sales for March 2007 stands at Rs295.24 crore as compare to Rs156.7 crore
EBIDTA increases by 46.03 % Y-o-Y along with 200 bps improvement in margin
The operating profit recorded a growth of 46 percent to Rs8.09 crore as compare to Rs5.54 crore in Q1FY07. The operating margin is improved by 200 bps to 12.27 percent owing to 17 percent reduction in administration and other expenses.
Net profit jump by 59 % y-o-y in Q1FY08
The company reported a sharp increase of 60 percent in Net Profit to Rs5.99 crore. The Net Profit growth is driven by 17 percent decline in general administration and other expense. Other income is jump by 105 percent to Rs.0.56 crore. The interest expenses is declined by 37 percent to Rs0.78 crore as compare to Rs1.2 crore in Q1FY07. The net margin is improved by 214 bps to 9.08 percent in Q1FY08
Valuations
At current market price of Rs250, PIL is quoting at a PER of 15.77x. On EV/Sales and on EV/ EBIDTA basis it is quoting at 1.47x and 11.79x of its TTM earnings respectively.
Risks: The risks that could hinder the earnings growth of the company in time to come are as under:
ü Any delay in project completion would result into project cost escalation.
ü Any upward in material cost like HR coil would hamper the margins in pipe segment.
ü Withdrawal of Taxation benefit following clarification on 80-IA to impact Bottomline
ü Over dependent on government projects could result in to heavy working capital requirement due to financing of these projects by state governments.
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Growth: The growth for PIL in the coming years are..
ü Robust order book of Rs2100 crore which is 7x of FY07 revenue
ü The company enjoys experience of over 1800 KM water pipe line projects in order to outpace the competition.
ü Backward integration in pipe segment with massive investment on water supply projects would drive the demand for pipe segment.
ü Oil and gas transmission to open huge opportunity on back of recent gas discoveries and massive oil refining and exploration activities
ü JV with OSTU-STETTIN, an Austrian German firm would further strengthen its expertise in tunneling
Payout:
For FY07, PIL has declared a dividend of Rs2 per share; this resulted into dividend payout ratio of 13.98 percent. At CMP of Rs250 the dividend yield is 0.80%.
Relative Valuations:
| Particulars | Pratibha Inds. | HCC | IVRCL | Nag. Const. | Patel Engg. |
| CMP (Rs) | 250.00 | 125.00 | 333.00 | 188.35 | 423.50 |
| Mcap (Rs Cr) | 357.25 | 3,202.50 | 4,317.35 | 3,927.10 | 2,528.30 |
| PE (x) | 15.77 | 36.69 | 27.17 | 23.07 | 22.08 |
| EV/Sales (x) | 1.47 | 1.81 | 1.83 | 1.62 | 2.55 |
| EV/EBITDA(x) | 11.79 | 18.28 | 18.72 | 16.40 | 18.90 |
| Mcap/Sales (x) | 1.16 | 1.27 | 1.66 | 1.32 | 2.21 |
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| OPM(%) | 12.44 | 9.89 | 9.75 | 9.86 | 13.48 |
| NPM (%) | 7.38 | 3.47 | 6.11 | 5.71 | 10.02 |
Note: Valuations based on TTM ended June 07 result
BS figures are of latest YE.
| Particulars | Pratibha Inds. | HCC | IVRCL | Nag. Const. | Patel Engg. |
| CMP (Rs) | 250.00 | 125.00 | 333.00 | 188.35 | 423.50 |
| Mcap (Rs Cr) | 357.25 | 3,202.50 | 4,317.35 | 3,927.10 | 2,528.30 |
| PE (x) | 15.77 | 36.69 | 27.17 | 23.07 | 22.08 |
| EV/Sales (x) | 1.47 | 1.81 | 1.83 | 1.62 | 2.55 |
| EV/EBITDA(x) | 11.79 | 18.28 | 18.72 | 16.40 | 18.90 |
| Mcap/Sales (x) | 1.16 | 1.27 | 1.66 | 1.32 | 2.21 |
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| OPM(%) | 12.44 | 9.89 | 9.75 | 9.86 | 13.48 |
| NPM (%) | 7.38 | 3.47 | 6.11 | 5.71 | 10.02 |
At current market price of Rs250, PIL is quoting at a PER of 15.77x. On EV/Sales and on EV/ EBIDTA basis it is quoting at 1.47x and 11.79x of its TTM earnings respectively. If compared with peer group the stock is attractively valued on all the valuations parameters. The margins would further improve due to backward integration move by the company. Hence, we recommend to buy the stock at current level.
Technicals
13 day EMA : 256.52
50 day EMA : 239.76
200 day EMA : 216.86
The stock is moving sideways The support for the stock exists at around 243 levels. The MACD indicator for the stock is moving downwards in positive zone. Investors can buy the stock at declines.
Recommendation & Investment View
Recommendation : Market Out Performer
Investment View : Buy
| Source: KR Choksey | |
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