The Hindu Business Line : Pratibha Industries: Invest at cut-off

A different profile in the infrastructure space, strong order-book, attractive operating margins and a steady growth in revenues provide scope for earnings growth.

INVESTORS with a penchant for risk can consider subscribing to the initial public offer of Pratibha Industries. A strong order-book, attractive operating margins and a steady growth in revenues over the years make lend visibility to the company's earnings growth.

If Pratibha Industries is able to foray successfully into the business of engineering procurement and construction (EPC) contracts for oil and gas transmission projects, the margins from this segment could turn out to be better than from other activities. In the Rs 100-120 price band, the stock would quote at a multiple of 15-18 times its expected FY-06 per-share earnings. This does not factor in the revenues, if any, from the build-operate-transfer (BOT) project the company has bid for.

Pratibha Industries is an infrastructure company that derives a chunk of revenues from projects relating to water supply and distribution system. It is also into road construction, housing, environment engineering and design and manufacture of pre-cast concrete structures.

Most of the proceeds from the issue are to be used to fund BOT projects and for investing in its group company, Pratibha Industries Infrastructure that will manufacture spiral-welded pipes. The group company would become a 92 per cent subsidiary, consequent to the issue. Spiral-welded steel pipes are typically used in water and oil and gas transmission.

Thus, the company aims at backward integration through the welded pipe investment. The subsidiary route is likely to ensure that Pratibha Industries retains its position as a construction company and continues to enjoy income-tax benefits.

Robust order-book

Pratibha Industries' orders on hand, at Rs 560 crore, amount to about six times its FY-05 turnover. These orders are likely to convert into revenues over the next 18 months.

This should ensure that the equity expansion does not lead to any dilution in earnings. Revenues have grown at an annualised rate of 28 per cent over the past three years.

The increase in volumes has ramped up the operating profit margins. A high proportion of water-related schemes has ensured better margins compared to road projects. Water pipeline projects account for about 70 per cent of the orders on hand.

Further, owning a sizeable number of construction equipment and supplying raw materials such as arc pipes from the group company will provide cushion to the margins.

Different play in infrastructure

Though an infrastructure company, Pratibha Industries has a business profile slightly different from the slew of firms that entered the capital market recently riding the infrastructure wave, mainly in the road and irrigation sector.

The company is not active in road projects and is not a contractor for any National Highways Authority projects; only about 15 per cent of the orders on hand is from this space.

The water projects that it has so far received are from State governments or their bodies. The small-to-medium orders have, however, yielded good returns. Order flows for such projects can be expected to sustain, given the budget allocations made by States for such schemes.

With sound technical qualifications, the company is likely to get its share of business in the space in which it operates.

Risks

The company has now jointly bid with Unity Infraprojects for a BOT water project in Maharashtra. The company is the lowest bidder and hopes to make a foray into the BOT space through this project.

If successful, the company will see further accretion in revenues through the project and also receive revenues over the concession period of 30 years for operation and maintenance.

The contract is, however, only the second such water-related BOT project in the country. BOT projects have evolved well in the road sector but are at a nascent stage in the water space.

The uncertainty is likely to add an element of risk to Pratibha Industries' revenues, if the project is bagged.

The company's plan to backward integrate through a Rs 14-crore investment in spiral-welded pipes is also not a popular strategy among players in the sphere. Production of these pipes is likely to commence only in FY07-08.

Demand for the product can be expected to be robust, given the pipeline plans in the oil and gas sector.

Direct benefits from the pipe investment would accrue if Pratibha Industries is able to form joint ventures as an EPC contractor for oil and gas transmission.

The company does not have expertise in the field. Although this foray has its risks, we believe that the projects on hand are likely to sustain growth for the next couple of years.

Offer details: The initial public offer is open from February 16- 22. Vivro Financial Services is the lead manager to this book-built offer.

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