| Summary of Contents STOCK IDEAS Pratibha Industries
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs450
Current market price: Rs326
Orders galore, more to come Key points - Strong and diversified order book: Pratibha Industries (Pratibha) is one of the fastest growing companies among the small construction companies. Its pending order book of Rs3,500 crore (over 4x FY2009 revenues) provides strong visibility 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 management projects, it is also benefiting from its efforts to diversify into high-growth segments such as urban infrastructure, power and oil & gas. Consequently, we expect its order book to grow at a CAGR of 53% over FY2009-12.
- Backward integration provides an edge: Given its dominance in the water segment, Pratibha entered into the manufacturing of HSAW pipes in FY2008. This backward integration enables the company to bid for pipeline related projects at a very competitive rate. About 90% of the production is currently used in-house for its water projects and the balance is supplied to the oil & gas segment.
- Strong impetus on irrigation and water-management projects: Infrastructure development would continue to be a secular growth story in India, and irrigations and water management projects form a key component of the overall government spending on infrastructure development in the country. As per the planning commission, irrigation and water management projects constitute a significant portion of the $500-billion worth of investments envisaged in infrastructure development in the 11th Five-Year Plan. The budgetary allocation for this segment through various schemes like the AIBP, the Rajiv Gandhi Drinking Water Project and the JNNURM has been stepped up significantly.
- 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. 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 outlook and relatively better return ratios, Pratibha is attractively valued at 6.7x FY2011E earnings as compared to its peers. We recommend a Buy on the stock with a price target of Rs450 (P/E multiple of 8x its average earnings of FY2011E and FY2012E).
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