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com January 18, 2010

Pratibha Industries Ugly Duckling

Orders galore, more to come Buy; CMP: Rs326

Company details Key points

 Strong and diversified order book: Pratibha Industries (Pratibha) is one of the
Price target: Rs450
fastest growing companies among the small construction companies. Its pending
Market cap: Rs544 cr order book of Rs3,500 crore (over 4x FY2009 revenues) provides strong visibility
52-week high/low: Rs349/53 to its revenue growth. It also has a healthy order pipeline with “L1” status in
orders worth Rs900 crore. Apart from its strong position in irrigation and water
NSE volume: 1.4 lakh management projects, it is also benefiting from its efforts to diversify into high-
(No of shares)
growth segments such as urban infrastructure, power and oil & gas. Consequently,
BSE code: 532718 we expect its order book to grow at a CAGR of 53% over FY2009-12.
NSE code: PRATIBHA  Backward integration provides an edge: Given its dominance in the water seg-
ment, Pratibha entered into the manufacturing of HSAW pipes in FY2008. This
Sharekhan code: PRATIND
backward integration enables the company to bid for pipeline related projects
Free float: 0.64 cr at a very competitive rate. About 90% of the production is currently used in-
(No of shares) house for its water projects and the balance is supplied to the oil & gas segment.
Shareholding pattern  Strong impetus on irrigation and water-management projects: Infrastruc-
ture development would continue to be a secular growth story in India, and
irrigations and water management projects form a key component of the over-
Institutions all government spending on infrastructure development in the country. As per
18% the planning commission, irrigation and water management projects consti-
tute a significant portion of the $500-billion worth of investments envisaged in
infrastructure development in the 11th Five-Year Plan. The budgetary alloca-
Public & tion for this segment through various schemes like the AIBP, the Rajiv Gandhi
others Promoters
Drinking Water Project and the JNNURM has been stepped up significantly.
21% 61%
 Cheapest among its peers: Pratibha enjoys superior operating profit margin
(12-13%) and return ratios compared with its peers. Its sales and net profit
have grown at a CAGR of 58% and 65% respectively over the last five years.
Price chart Going forward, we expect its sales and PAT to grow at a CAGR of 37% and 33%
respectively over FY2009-12 led by healthy order inflows. Given its strong growth
400 outlook and relatively better return ratios, Pratibha is attractively valued at
350
300
6.7x FY2011E earnings as compared to its peers. We recommend a Buy on the
250 stock with a price target of Rs450 (P/E multiple of 8x its average earnings of
200
FY2011E and FY2012E).
150
100
50
Key financials (stand-alone) FY08 FY09 FY10E FY11E FY12E
0 Net sales (Rs cr) 565.1 805.8 1125.0 1578.9 2083.3
Jul-09
Jan-09

Jan-10
Oct-09
Apr-09

% y-o-y growth 88.1 42.6 39.6 40.4 31.9

Adj. net profit (Rs cr) 34.3 44.7 58.0 81.6 106.0
Price performance Shares in issue (cr) 1.7 1.7 1.7 1.7 1.7
EPS (Rs) 20.5 26.8 34.8 48.9 63.5
(%) 1m 3m 6m 12m % y-o-y growth 44.1 30.6 29.7 40.7 29.8
PER (x) 15.9 12.2 9.4 6.7 5.1
Absolute 17.9 50.7 98.6 424.5 P/BV (Rs) 3.0 2.4 2.0 1.5 1.2
Relative 13.3 47.4 60.5 167.0 EV/EBIDTA (x) 8.1 7.9 5.7 4.6 3.9
to Sensex RoCE (%) 19.7 19.5 17.0 18.5 18.8
RoNW (%) 24.6 21.9 23.0 25.7 26.0

Sharekhan Ltd
A-206, Phoenix House, 2nd Floor, Senapati Bapat Marg, Lower Parel, Mumbai - 400013, India.
 stock ideas Pratibha Industries

Company background The company traditionally had a presence in the water

Established in 1982 Pratibha is one of the fastest growing
companies among the small construction companies with
expertise in water, surface transport and civil construction.
It has gradually diversified into other segments like urban
infrastructure, tunneling and oil & gas.
It was initially engaged in the manufacturing of pre-cast
products. In 1992, the company extended its presence in
the civil construction industry by bagging an order from
CIDCO, Maharashtra. In 1994, it made a foray into water
related projects in joint venture with Coromondal Prescrete
(P) Ltd, a Hyderabad based contractor. Since then, it has
become a dominant player in the water segment, which
contributes about 60% to its order book and revenues.
Recently it has diversified into other segments like urban
infrastructure, surface transport, oil and gas and
hydrocarbon. In FY2008, it started manufacturing helically
submerged arc welded (HSAW) pipes that are currently being
used for its in-house water projects.
Investment arguments
Strong and diversified order book
segment, which still comprises 60% of its order book and
revenue. It had a small presence in surface transport and
mass housing projects. However, in the last couple of
years, the company has consciously diversified from being
a purely water segment company to a fully-fledged
infrastructure development company. It has diversified
into other segments, such as urban infrastructure, surface
transport, power projects, oil & gas, tunneling, airports
and hydrocarbon. In order to get required pre-
qualification and technical competence, Pratibha has
entered into various joint ventures both domestically and
internationally. It recently formed a joint venture with
Austria-based Ostu-Stettin to bid for tunneling projects.
Ostu-Stettin is one of the leading infrastructure companies
in tunneling technologies. Pratibha has also entered into
a joint venture with ITD of Thailand in order to bid for
the airport projects.
Order book and book-to-bill ratio
8000 4.5
7000
4.0
6000

Pratibha currently has a strong order book of Rs3,500 crore 5000 3.5
which is over 4x its FY2009 revenue. It also has a healthy 4000

3000 3.0
order pipeline with “L1” status in orders worth Rs900
crore. We expect the order book to grow at a compounded 2000
2.5
annual growth rate (CAGR) of 53% over the three-year 1000

period FY2009-12 largely on the back of increased 0 2.0

FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E
spending in infrastructure development and the company’s
Order book Book to bill ratio
efforts to diversify into various fast-growing segments.

Orders won recently

Project Date Rs Execution
(crore) time
(months)
Comprehensive Water Supply Scheme at village Chandu Budhera, district Gurgaon, 17-Dec-09 129.89 24
from Haryana Urban Development Authority
Construction of three conventional underground multi-level car parking 15-Dec-09 104.2 15
from Municipal Corporation of Delhi
Comprehensive Water Supply Scheme to Guledgudda town and villages enroute 24-Nov-09 30.37 20
from Karnataka Urban Water Supply and Drainage Board
Procurement, fabrication and laying of clear water main 23-Nov-09 309.46 26
from Bangalore Water Supply & Sewerage Board
Circulating water and make-up water system civil works package for 19-Nov-09 59 21
Mauda Super Thermal Power Project (2x 500MW) from NTPC
Meerut Water Supply Project from Uttar Pradesh Jal Nigam, Meerut 18-Nov-09 294 24
BOT project for the construction of a multi-level parking with commercial development 29-Oct-09 150 15
at New Delhi Railway Station-cum-Airport terminal of Airport Express Line
from Delhi Metro Rail Corporation
Supply of API grade pipes from GAIL (India) 5-Oct-09 25 N.A.
Supply, installation and maintenance of automatic meter reading water meters 7-Sep-09 145 12
from Municipal Corporation of Greater Mumbai
Replacement of Tansa Main Pipeline (section I) from Municipal Corporation of Greater Mumbai 2-Sep-09 406 45
Construction of ESIC Medical College at Patna from National Buildings Construction Corporation 13-Aug-09 523 24

Sharekhan 2 January 2010

 stock ideas Pratibha Industries

Water projects formed 60% of the company’s FY2009 order
book (Rs2,100 crore) with 20% and 11% coming from urban
infrastructure and surface transport segments
respectively. The balance 9% comes from the SAW pipe,
hydrocarbon and energy divisions.
FY2009 order book break-up
8% 1%
11%
20% 60%
Water & Irrigation Urban infrastructure Surface Trasport
Saw Pipe Hydro Carbon
Backward integration to provide an edge
Since Pratibha is predominantly present in the water
segment, it made a foray into the manufacturing of HSAW
pipes in FY2008 in order to reap the benefits of backward
integration. HSAW pipes are mainly used in the water and
irrigation, and oil & gas segments.
The company currently has a capacity of 92,000 tonne
per annum. About 90% of its total production is currently
used in-house by for water related projects and the
balance it plans to supply to the oil & gas segment.
However, going forward, with huge investments expected
in the oil & gas segment, the company plans to increase
its exposure to this segment to ~50%. Pratibha also
commissioned its color coating plant recently with a
capacity of 1.7 million square feet per annum.
With this backward integration, the company is able to
bid for pipeline related projects at a very competitive
rate and does not have to depend on other contractors
for the same. Moreover, the management also believes
that the lower dependence on suppliers mitigates the
execution risk to a large extent.
Strong impetus on irrigation and water-management
projects
The government is committed to improve the
infrastructure of the country and has earmarked
substantial funds for growth of the sector. Infrastructure
development would continue to be a secular growth story
in India and irrigation and water management projects
(the focus areas of Pratibha) form a key component of
the overall government spending on infrastructure
development in the country.
As per the estimates of the Planning Commission, about
USD500 billion needs to be spent over the 11th Five-Year
Plan period of 2007-08 to 2011-12 on building India’s
infrastructure. A growth of 2.2 times in investments is
expected in the key infrastructure sectors during 2007-
08 to 2011-12 as compared to that over the previous five-
year period.
Pratibha’s expertise lies in areas such as water supply
and irrigation, and urban infrastructure which are likely
to grow at a faster rate compared with the overall
infrastructure sector. The government had allocated
Rs49,700 crore for the phase I of the Jawaharlal Nehru
National Urban Renewal Mission (JNNURM) scheme and is
planning to launch the next phase of the project with

Infrastructure—Deficit and 11th Plan physical targets

Sector Deficit
Roads/ Highways 65,590km of National Highway comprise only 2% of network;
carry 40% of traffic; 12% 4-laned; 50% 2-laned;
and 38% single-laned
Power 13.8% peaking deficit; 9.6% energy shortage;
40% transmission and distribution losses;
absence of competition
Irrigation 1,123BCM utilisable water resources; yet near crisis
in per capita availability and storage; only 43% of
net sown area irrigated
Ports Inadequate berths and rail/road connectivity
Airports Inadequate runways, aircraft handling capacity,
parking space and terminal buildings
Railways Old technology; saturated routes;
slow speeds (freight: 22kmph; passengers: 50kmph);
low payload to tare ratio (2.5)
Telecom/IT Only 18% of market accessed; obsolete hardware;
acute shortage of human resources
Source: Planning Commission consultation paper
11th Plan targets
6-lane 6,500km in Golden Quadrilateral;
4- lane 6,736km NS-EW; 4-lane 20,000km;
2-lane 20,000km; 1,000km Expressway
Add 78,577MW; access to all rural households
Develop 16mha major and minor works; 10.25mha
Common Area Development; 2.18mha flood control
New capacity: 485mn MT in major ports;
345mn MT in minor ports
Modernise 4 metro and 35 non-metro airports;
3 greenfield in NER; 7 other greenfield airports
8,132km new rail; 7,148km gauge conversion;
modernise 22 stations; dedicated freight corridors
Reach 600mn subscribers and 200mn in rural areas;
20mn broadband; 40mn Internet

Sharekhan 3 January 2010

 stock ideas Pratibha Industries

about Rs100,000 crore of planned investments. The Cost escalation risk

allocation for the JNNURM scheme continues to be on
the rise. In the Budget 2010, the government had
increased the spending on the JNNURM scheme by 87% to
Rs12,900 crore.
In the 11th Five-Year Plan the government has increased
the planned outlay in irrigation by 2.3x to Rs253,301 crore.
The government had initiated major schemes such as
Accelerated Irrigation Benefit Programme (AIBP), Bharat
Nirman and Restoration of Water Bodies to ensure that
there is an adequate supply of water for irrigation in order
to maximise the performance of the agricultural sector.
In the budget 2010, spending on AIBP was marked up by
75% over the last year and in the Rajiv Gandhi Drinking
Water Mission the spending has been raised from Rs4,680
crore to Rs5,850 crore. Recently, even the Punjab state
government has earmarked Rs4,400 crore for 131 cities
in Punjab to revamp the water supply and sewerage
system throughout Punjab. All this is likely to open up a
glut of projects that Pratibha could bid for.
The government has proposed to develop a National Gas
Grid which would facilitate the transportation of gas
across the country. Thus, Pratibha with its HSAW pipe
manufacturing capacity is likely to benefit from the same.
Investment concerns
Timely execution of projects
The biggest challenge for the construction companies is
the timely execution of projects as they have a long
gestation period and require huge capital outlay. Hence,
their execution capability plays a very important role.
With Pratibha’s order book 4x its FY2009 revenues, timely
execution would remain the key to its success. Any delay
would lead to cost overruns and affect the profitability
of the company.
Cement and steel are the key raw materials for the
construction companies. Though Pratibha has a price
escalation clause in all its projects, but the same protects
its margins only to a certain extent. Any further increase
in the prices of the raw materials would hurt the operating
profit margin of the company.
Interest rate risk
Infrastructure projects are capital intensive. Thus, any
increase in interest rates would put pressure on the
company’s margins.
Shortage of skilled manpower
The anticipated shortage of skilled manpower could also
delay the project execution, going forward. In FY2009,
the company did not face any problem with skilled
manpower. Going forward, with the anticipated growth
in the industry, there could be again a shortage of skilled
manpower, which could hinder Pratibha’s revenue growth.
Valuations and view
Pratibha enjoys superior operating profit margin (12-13%)
and return ratios compared with its peers. Its sales and
net profit have grown at a CAGR of 58% and 65%
respectively over the last five years. Going forward, we
expect its sales and profit after tax (PAT) to grow at a
CAGR of 37% and 33% respectively over FY2009-12 led by
healthy order inflows. Given its strong growth outlook
and relatively better return ratios, Pratibha is attractively
valued at 6.7x FY2011 earnings as compared to its peers.
We recommend a Buy on the stock with a price target of
Rs450 (price/earnings [P/E] multiple of 8x its average
earnings of FY2011E and FY2012E).

Sector-wise projection of investment during 11th Five-Year Plan Rs (cr)

Particular 2007-08 2008-09 2009-10 2010-11 2011-12 CAGR (%)
Electricity 81,954 101,553 126,380 158,027 198,611 24.8
Road & bridges 51,822 54,789 59,200 68,370 79,971 11.5
Telecommunications 31,375 38,134 48,593 61,646 78,690 25.8
Railways 34,225 40,964 49,525 60,393 76,701 22.4
Irrigations 27,497 35,916 47,189 62,266 80,433 30.8
Water supply & sanitation 19,298 22,781 27,323 33,266 41,063 20.8
Ports 12,409 14,822 17,374 19,980 23,410 17.2
Airports 5,208 5,520 5,904 6,646 7,690 10.2
Storage 3,777 4,098 4,446 4,824 5,234 8.5
Gas 2,708 3,003 3,332 3,700 4,111 11
Total investments 270,273 321,580 389,266 479,118 595,914 21.9
As % of GDP 5.98 6.53 7.25 8.19 9.34
Source: Planning Commission consultation paper

Sharekhan 4 January 2010

 stock ideas Pratibha Industries

Peer comparison
Company CMP EPS (Rs) PE (x) EBDITA margin (%) RoE (%)
(Rs) FY2010 FY2011 FY2010 FY2011 FY2010 FY2011 FY2010 FY2011
Pratibha Industries 326 35 49 9.4 6.7 12.4 12.2 23.0 25.7
Unity Infra 595 57 71 10.4 8.4 12.7 12.7 17.1 17.1
Madhucon 183 8 10 23.0 17.9 12.3 12.6 10.5 12.2
BL Kashyap 447 24 32 18.6 13.8 8.5 8.8 9.4 12.7
Sadbhav 1,287 55 67 23.5 19.2 11.4 12.2 17.9 18.0

Financials (stand-alone)
Profit & Loss a/c Rs (cr) Balance sheet Rs (cr)
Particulars FY08 FY09 FY10E FY11E FY12E Particulars FY08 FY09 FY10E FY11E FY12E
Net revenue 565.1 805.8 1125.0 1578.9 2083.3 Share capital 17 17 17 17 17
Operating expenses 499.1 714.2 985.5 1386.3 1833.3 Reserves & Surplus 167 208 262 340 442
Operating profit 66.0 91.6 139.5 192.6 250.0 Shareholders fund 184 225 279 357 459
Other income 1.4 11.5 2.3 2.4 2.1 Total debt 133 248 288 388 468
Depreciation 3.6 7.1 14.2 20.0 25.2 Differed tax liability 2 6 7 8 9
Interest 23.6 40.5 44.8 58.4 75.5 Total liabilities 318 479 574 753 936
PBT 40.2 55.4 82.9 116.6 151.4 Gross block 99 168 268.32 348 428
Tax 5.9 10.7 24.9 35.0 45.4 Net fixed assets 92 154 240.19 300 355
Reported PAT 34.3 44.7 58.0 81.6 106.0 Capital work in progress 32 61 30 30 30
EPS 20.5 26.8 34.8 48.9 63.5 Investments 85 0 0.09 0 0
Gross current assets 438 562 717.06 992 1,291
Cash flow (Rs cr)
Gross current liabilities 328 298 413.27 570 740
Particulars FY08 FY09 FY10E FY11E FY12E
Net current assets 110 264 303.79 422 551
Operating profit before 64.7 92.7 117.6 161.0 207.9 Miscellaneous expenditure 0 0 0 0 0
working capital changes
Total assets 318 479 574 753 936
Change in working capital 82.7 -145.0 -72.9 -117.2 -133.3
Net cash from operations 147.4 -52.4 44.8 43.8 74.6 Key ratios
Capital expenditure -77.9 -98.6 -69.3 -80.0 -80.0 Particulars FY08 FY09 FY10E FY11E FY12E
Sale/Purchase of -82.5 88.6 - - - Sales growth (%) 88.1 42.6 39.6 40.4 31.9
investments
PAT growth (%) 68.3 30.6 29.7 40.7 29.8
Net cash from investing -160.4 -10.0 -69.3 -80.0 -80.0
EPS growth (%) 44.1 30.6 29.7 40.7 29.8
Increase in share capital 58.8 - - - -
EBIDTA margin (%) 11.7 11.4 12.4 12.2 12.0
Increase in debt -3.5 115.6 40.0 100.0 80.0
PAT margin (%) 6.1 5.6 5.2 5.2 5.1
Others -25.8 -38.0 -48.7 -62.3 -79.4
RoCE (%) 19.7 19.5 17.0 18.5 18.8
Net cash from financing 29.5 77.7 -8.7 37.7 0.6
RoNW (%) 24.6 21.9 23.0 25.7 26.0
Net change in cash 16.5 15.3 -33.2 1.5 -4.8
Debt equity (X) 0.7 1.1 1.0 1.1 1.0
One-year forward PE (x) Working capital days 48.4 99.1 98.7 99.7 100.7
40.0
Key valuations
35.0
Particulars FY08 FY09 FY10E FY11E FY12E
30.0
PER (x) 15.9 12.2 9.4 6.7 5.1
25.0 P/BV (x) 3.0 2.4 2.0 1.5 1.2
20.0 EV/EBITDA (x) 8.1 7.9 5.7 4.6 3.9
15.0
10.0

5.0
0.0
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The author doesn’t hold any investment in any of the companies

mentioned in the article.

Sharekhan 5 January 2010

 stock ideas Pratibha Industries

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Sharekhan 6 January 2010