Profits in the pipeline

PENNY WISE

The thrust on water projects and urban infrastructure development augur well for Pratibha Industries.

After the budget, the infrastructure sector has gone under a complete re-rating in terms of earnings growth. This is also factored into the current share prices of most of these companies.

Infrastructure stocks have been battered by almost 20-45 per cent in the last month or so. This also offers an opportunity for investors to buy some select companies trading at low valuations and having a sound business model.

Pratibha Industries is one such small construction company, operating primarily in the water related infrastructure projects space. The company has an order book of Rs 1,700 crore, over times its FY06 sales.

At current valuations, the stock is trading at 12 times its FY07 estimated earnings and about 6 times estimated FY08 earnings. Moreover, the return on equity of 18 per cent based on FY07 numbers and 36 per cent on FY08 numbers is amongst the best in the industry.

Driven by increasing business from infrastructure projects and commissioning of steel pipe capacity in FY08, the company is expected to grow at about 50 per cent annually over the next two years.

Pratibha has evolved from being a small player handling an average project size of Rs 10-20 crore to above Rs 100 crore today. Recently, it entered into a JV with Ostu Stettin of Austria, the world's third largest tunneling company, to tap the opportunity in micro tunneling and piping projects. This partnership will help it get projects for laying pipes in high density urban areas for underground tunneling.

The company has a strong focus and expertise in handling water related projects, which account for almost 82 per cent of its total order book. With the added impetus through the Urban Renewal Mission and spending on water infrastructure in the latest budget, the company expects huge growth across the country. 

ESTIMATES
(Rs crore)	FY07	FY08
Sales	310.00	610.00
Net Profit	17.98	36.60
PBT	26.97	55.91
OPM (%)	12.30	12.30
NPM (%)	5.80	6.00
EPS (Rs)	12.59	25.63
PE (x)	11.67	5.74
ROE (%)	18.00	31.17
Figures are calculated after considering the new tax rate of 33.5 per cent applicable after the budget

Diversification
Pratibha generates about 60 per cent of its revenue from the state of Maharashtra at present. It has now started getting projects in Rajasthan, Madhya Pradesh and other parts of the country for laying water pipelines. In Rajasthan, where Pratibha already has one project to lay 136 km pipeline for water transport, it expects a huge potential in the years to come.

The outlook is rosy as the Rajasthan government is expected to spend about Rs 12,000 crore over the next three years. On the other hand, projects from Maharashtra and Mumbai continue to swell. The company has recently bid for a project of Rs 650 crore for water supply in Mumbai with only one competing bidder Hindustan Construction.

"We think that infrastructure development in India has just begun and offer a huge opportunity in port developments besides the water and road segment. Moreover, there are 44 new airports coming in for redevelopment and we are eyeing this keenly," says TR Radhakrishnan CFO, Pratibha Industries.

The company has been active in this segment and has bagged two projects recently for the development of Amritsar and Ahmedabad airports. It involves construction of building and parking space. The Amritsar airport project, costing Rs 67 crore is in a joint venture with Unitech. The Ahmedabad airport projects of Rs 133 crore is in joint venture with ITD Cementation.

Growth in pipeline
Besides, the company has also ventured into manufacturing of saw spiral pipes. These pipes will be supplied to the user industries in the oil and gas EPC (engineering, procurement and construction) contracts. Pratibha will spend Rs 81 crore to set up a capacity of 92,000 tonne a year, which is expected to be fully commissioned over the next three years.

India offers a huge opportunity in terms of higher demand for laying pipelines across the country to transport oil and gas. In India, transportation of petroleum products through pipelines accounts for about 25 per cent compared to the world average of 60 per cent. Oil and gas majors such as Reliance Industries, National Gas Pipeline Grid and GAIL are already considering huge investments in laying pipelines.

As water projects consist of laying of pipelines to transport and distribute water, Pratibha's foray into SAW pipes will also help the company in secured supply of pipes. This will also add to its margins. The SAW pipe segment will add about Rs 160 crore of revenues in FY08 at 40 per cent capacity and about Rs 240 crore in FY09 at 60 per cent capacity.

Budget impact
The company has been claiming tax benefits under the section 80IA for infrastructure projects. The withdrawal of tax benefit of 80IA in the Union Budget 2007-08 is surely a dampener. The company will have a cash outflow of Rs 5.5 crore on account of the higher tax liability computed since FY2000 including the current year.

It will also have to pay tax at a normal rate of tax at 33.5 per cent in the coming years. Going forward, the new tax structure will create about 22 per cent additional burden on Pratibha's earnings before tax. This will also have a major impact on the bottom line and net profit margins of the company.

The additional tax liability arising out of the previous years profit will be paid out of the reserves of the company. Moreover, the existing projects will continue to bear lower net profit margins on account of the increased tax liability. However, for the new projects, Pratibha is expecting to bid at increased rate and pass it on to the consumers.

Valuations
The volumes of the business has been growing at a fast pace. From an order book of Rs 700 crore a year back, it has accumulated Rs 1700 crore worth of orders today.

Although, the withdrawal of tax benefits will have an impact on its bottom line, the same has been factored into the share prices of the company. Post-budget the share price has come down by 26 per cent. On a forward basis, the share trades at about 6 times FY08 earnings, and with a strong government focus on water and infrastructure, the outlook is positive.