SANJAY CHHABRIA's WEEKLY STOCK IDEA(S) -13th August 2007
Vol IV No 48
Please read the disclaimer at the end of this page.
"Don't try to buy at the bottom and sell at the top. This can't be done - except by liars". - Bernard Baruch
"People tend to see past events as confirmation of what they already believe. The general rule is that people learn as little as possible from the past and use their personal views to try to prove things"- Daniel Kahneman
This Week's Stock Idea(s)- Pratibha Industries Ltd(Rs 252)
Given the current market conditions, Investors would do well to accumulate gradually on declines.
Pratibha Industries Ltd(Rs 252)(BSE Code- 532718 NSE Code-PRATIBHA)- Earlier mentioned as a buy in WSI dated October 2, 2006 at Rs 179, Pratibha Industries (PIL), promoted by Ajit Kulkarni and his family, is into building and developing infrastructure projects in core areas of water supply and distribution system, environmental engineering, pre-cast design & construction. It also undertakes projects in road construction, housing etc. PIL proposes to enter the lucrative engineering, procurement and construction (EPC) business for executing oil and gas transmission contracts. The company, through its subsidiary Pratibha Infrastructure, plans to diversify through backward integration by installing a manufacturing and coating facility to produce spirally-welded steel pipes for transmission of water, oil and gas. The company came with an IPO at Rs 120 per share in February 2006 to largely fund its BOT/BOOT projects and spiral pipes project. The post-issue, FII-holding in the company is 4.4% . The equity capital is Rs 14.29 cr.. The post-issue promoters' holding is 70.4%. Currently, water segment accounts for nearly 70% of the company's revenues and roughly 60% of the order book. Hence going forward, the water segment will continue to be a major growth driver for the company. The other major segment for the company is the road segments, which accounts for 10 to 15% of the revenues.
PIL is engaged in the infrastructure development business with a niche in the water management projects, providing one stop solution for design, engineering, construction, commissioning and operation of water supply projects. In FY07, water segment accounted for about 70% of the company's revenues. Besides, PIL also has presence in mass housing projects, commercial complexes, airport terminals, railway stations, road construction and tunneling projects. The company is setting up a saw pipes manufacturing facility with an initial capacity of 90,000 TPA (tonnes per annum). The facility is expected to become operational by July 2007 and will supplement PLL's ongoing water projects. These pipes are extensively used in the oil & gas transmission projects. With newer gas discoveries, latent gas demand and emphasis on import of LNG brings good scope for oil & gas transmission projects. Backward integration into Spiral welded pipes a major raw material would also help PIL to bid for higher margin yielding oil & gas transmission projects. The Spirally Welded Pipes plant set up in April-May 2007 will have capacity of 90000 tonnes in first year and quoting unit will have capacity of 200000 sq.mts per year.
The thrust by the Central and state governments on infrastructure development including water, environmental engineering, roads and other infrastructure sectors augurs well for PIL. Consolidated sales have grown at a CAGR of 51% between FY 2002 to FY 2005 to Rs 121.39 cr. and the net profit at a CAGR of 88% to Rs 8.09 cr.. PIL has been awarded more than 50 projects in last seven years by various government and semi-government authorities. PIL's current order book stands at Rs 1800 cr.. For the Q1 ended June 2007, PIL has posted net profit of Rs 6 cr.(up 60%) on net sales of Rs 65.9 cr. (up 22.1%). Operating margins expanded by 1.5% to 12.3% due to increased profitability on the new orders booked. For the year ended March 2007, RML's figures were net sales of Rs 295 cr. (up 89%) and net profit of Rs 20.4 cr.(up 66%).. The EPS stood at Rs 14.3 and the dividend declared was 20%. With current level of orders in hand, PIL expects to post turnover of around Rs 400 cr. in FY 08. Net Profits in FY08 is likely to around Rs 32-33.. By 2009-2010 PIL's target is to achieve Rs 1000 cr. turnover.
The current order book stands at Rs 1800 cr. which are expected to be executed over the next three years. Other positive for the company is the expansion in margins on account of the in-house manufacturing of water pipes. Pratibha is a unique play among the small-cap infrastructure players as its revenue streams are markedly different from peers of similar size. While a number of small players now ride on the huge spending in the road space, the company has traditionally derived a bulk of its income from water supply and distribution and waste management systems. The company has now moved up the value chain to more underground water tunnelling and storm water pumping stations independently and through joint-ventures. Recent projects from the Rajasthan Government and the Airports Authority of India appear to be a way forward to becoming an integrated player in the infrastructure business. At the current market price of Rs 252, the stock is available at PE of 11.2x its FY08(E) of Rs 22-23. Investors can accumulate the PIL stock at this level and add more on declines in the range of Rs 220- Rs 245 for a target of Rs 350-Rs 375 in the medium-long term.
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