Wednesday, August 15, 2012

Pratibha Industries- BUY

Dear Smart Investors,

Pratibha Industries declared strong set of numbers for the quarter ended June '12, which were in line with SPA Securities' estimates. While PIL reported a topline growth of 55.4% to Rs5598 mn driven by strong execution of order book, sharp surge in interest and depreciation expenses restricted the net profit growth by 22.2% to Rs228 mn. Operating margins improved by 107 bps aided by its high margin water projects. Order inflow remained strong as PIL booked orders worth Rs15 bn leading to total order book Rs66 bn (3.5x TTM revenues), thereby ensuring healthy revenue visibility for the next couple of years. SPA retains their BUY recommendation on the stock with a target of Rs68.

Superior execution driving revenues
PIL reported strong revenue growth of 55.4% to Rs5598 mn in Q1FY13 on the back of 66.3% growth in the construction segment. The growth was led by strong execution of ongoing projects and ramp up of revenue recognition from Delhi Metro and Delhi Jal Board project. The manufacturing division continued to disappoint with 57.3% decline in revenues. 50% of the revenue was from water segment, 35% from Urban Infrastructure segment and balance from building segment.

Healthy margins
EBIDTA in Q1FY13 grew at faster pace by 67.7% to Rs821 mn largely on the back of 107 bps improvement in operating margins to 14.3% owing to execution of high margin water projects. Commencement of revenue recognition from some of the large projects bagged in the last financial year also aided in margin improvement.

Higher interest & depreciation expense dents profitability
Net profit grew at slower pace of 22.2% to Rs228 mn and PAT margins plunged by 111 bps to 4.1% in Q1FY13. This was led by sharp surge of 2.2x in interest expense to Rs432 mn due to increased borrowings & 50.1% increase in depreciation expenses to Rs65 mn.

Healthy order book provides sound revenue visibility
PIL has a robust and well diversified order backlog of ~Rs66 bn (3.5x its TTM revenues) as on June '12 with an average execution period of 30 months, which offers strong revenue visibility for PIL over the next couple of years. 40% of orders are from water space, 25% from urban infra and 35% are from building. Order inflow remained strong at Rs15 bn in the last quarter (from tunnelling and building segment) PIL has placed bid for several projects and is L1 in projects worth Rs22 bn.

Going forward SPA expects PIL to maintain an order inflow run rate of ~Rs40 bn in each of the next two years, which would lead to 23% CAGR in order backlog over FY12-14E.

Merger of Pratibha Pipes & Structures - On track
The merger process is on track and PIL had convened shareholders meeting on 5th June to approve the scheme. Now the scheme is under active consideration of Bombay High Court and the whole process is expected to take another 2-3 months for completion.

Outlook & Valuations
SPA remains positive on the infrastructure sector and PIL with proven track record & efficient project delivery mechanisms is expected to be one of the prime beneficiaries of emerging opportunities in the sector. With the expected economic recovery, SPA expects sharp rerating of the stock with market pricing in its focussed approach, strong order backlog and sustainable high margins.

At the CMP of Rs48, the stock trades at a P/E and EV/EBIDTA of 3.9x and 4.5x its FY14E earnings respectively

52 week Price Movements NSE

Our Recommendation :
Buy on declines around Rs.45 for a target of Rs.68 holding period of 3-4 months.

Bought to you by

Smart Investor
Equity Research Division

Ravina Consulting
Pattamal Plaza
3rd Cross Kamanahalli

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