Growth in the 'Pipeline

Pratibha Industries (PIL) engaged in the business of infrastructure development with focus on water supply, sewerage, road construction, etc., is backward integrating into HSAW pipes. This move will result in margins improving from 12.2% in FY 2007 to 13.4% by FY 2009. Further, we estimate PIL’s Net Sales and Net Profit to grow at a CAGR of 45% and 48% respectively, over FY 2007-09E on the back of a robust order book of Rs2,000cr, which gives visibility for the next three years. At the CMP, the stock trades at 10x FY 2009E earnings. PIL, being a mid-size construction company, we have assigned a P/E multiple of 12x FY 2009E earnings, which is at a 30-35% discount compared to its peers like HCC, NCC, etc. We initiate coverage with a Buy recommendation on the stock and Target Price of Rs 288.

Robust order book provides visibility over the next three years

PIL has a robust order book of 7x FY2007 turnover. Of the total order book, 62% of the orders are in the core competence area of the company, which is designing to distribution of water covering laying of pipelines, WTPs, pump house, etc. Urban infrastructure (32%) and Roads (6%) account for the balance portion of the order book. Buoyancy in order book gives visibility over the next three-four years.

Backward integration to improve margins

PIL plans to backward integrate by setting up a HSAW pipe plant with a capacity of 92,000metric tpa at a total cost of Rs81cr. This plant is expected to manufacture 30,000metric tonnes in FY 2008, which will be used for captive consumption. Backward integration will help the company improve margins going ahead.

Maintaining above average operating margins

Operating in a niche business, PIL enjoys higher operating margins of 12%. The HSAW pipe plant will further bolster OPMs.The company has been maintaining these margins due to substantial order inflow, which has been buoyed by a robust infrastructure sector.

Signing JVs to foray into new businesses

PIL is venturing into new businesses by entering into joint ventures (JVs). PIL will be bidding for water tunneling projects in JV with OSTU-STETTIN, the world's number three company in the water tunneling business. The JV will provide access to superior technology required for the specialised water tunneling projects and augment PIL’s margins.