>PRATIBHA INDUSTRIES: PPSL merger and rights issue

Going strong in tough environment; we reiterate a Buy


We met the management of Pratibha Industries recently. Its order book is `56bn, up 55% yoy, with a strong L1 position. Management has guided to an order inflow of `40bn during FY13 and is confident of maintaining the OPM at the current level. We retain our estimates and iterate our Buy, with a price target of `73.


 Robust order book. Pratibha’s order book is a sound `56bn (3.9x FY12 revenue). Water (52%), Buildings (36%) and Urban Infra (12%) continue to dominate the order book. L1-stage projects and those being negotiated with private parties amount to `29bn. For future orders, the focus is on the metro-rail, water and real-estate sub-segments in India and overseas (mainly the Middle East and Sri Lanka). The company secured orders worth `34bn during FY12 and aims to bag orders of ~`40bn in FY13.


 Revenue growth intact, margin to be stable. We expect to see good execution in major projects (that of the Delhi Jal Board, DMRC and some in real-estate and water) during FY13. Work on the Bhopal-Sanchi road BOT project has begun. Pratibha is one of the few construction companies to have met FY12 revenue guidance. Given its strong order book, it is bidding for new orders at higher margins. We expect a 22% revenue CAGR over FY13-14 (management is confident of surpassing that) and a 32% PAT CAGR, with a stable EBITDA margin of 14-15%.


 PPSL merger and rights issue. On 5 Jun’12, shareholders approved the amalgamation of the pipe division with Pratibha Pipes & Structurals, likely to be completed by Sep’12. The Board has passed an enabling resolution to a rights issue, though it will tap the market only if required.


 Valuation. Our price target of `73 is based on 7x FY13e earnings, at a 20% discount to other midcap construction companies’ target multiples (`69) and 1x book value for equity invested in BOT projects (`4/share). 


Risks: slowdown in order inflows, margin squeeze.