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Saturday, February 11, 2006

Prathibha Industries IPO


But unexciting diversification and undisclosed incomes are disconcerting

Pratibha Industries (PIL), promoted by Ajit Kulkarni and his relatives, has developed expertise in building and developing infrastructure projects in core areas of water supply and distribution system, environmental engineering, pre-cast design & construction. It also undertakes projects in road construction, housing (mass and real estate development).

PIL proposes to enter the lucrative engineering, procurement and construction (EPC) business for executing oil and gas transmission contracts. The company, through its subsidiary Pratibha Infrastructure, plans to diversify through backward integration by installing a manufacturing and coating facility to produce spirally-welded steel pipes used in the transmission of water, oil and gas.

The proceeds from the current issue are to be invested in: (a) BOT/BOOT projects; (b) the capex for the spiral pipes project through investment in Pratibha Infrastructure, which does not carry on any business at the moment; (c) the long- term working capital; and (d) repaying part of existing high-cost debt.

Strengths

  1. The thrust by the Central and state governments on infrastructure development including water, environmental engineering, roads and other infrastructure sectors augurs well for PIL.
  2. Consolidated sales have grown at a CAGR of 51% between FY 2002 to FY 2005 to Rs 121.39 crore and the net profit at a CAGR of 88% to Rs 8.09 crore.
  3. PIL has been awarded more than 50 projects in last seven years by various government and semi-government authorities. Its order book on 31 December 2005 was Rs 516 crore, with a backlog of Rs 316 crore (75% water-based and environmental engineering projects), i.e., 2.6x FY 2005 consolidated revenue.

Weaknesses

  1. Income-tax searches resulted in the promoters and group companies to admit undisclosed income of Rs 3 crore. Thus, the returns for the past many years will have to be re-filed and penalty may be levied.
  2. The logic behind investing Rs 14 crore to diversify into spirally welded pipes is not convincing.
  3. The cash flows at the operating levels were negative Rs 10.19 crore, Rs 8.19 crore and Rs 10.35 crore in FY 2004, FY 2005 and nine months ended December 2005. This indicates very high working capital requirement due to government projects.

Valuation

In the nine months ended December 2005, PIL reported consolidated sales of Rs 105.19 crore, a net profit of Rs 6.99 crore. The annualised EPS is Rs 6.5 on post-issue equity. The offer price band of Rs 100 to Rs 120 gives a PE range of 15.4 to 18.5. Due to the mad frenzy for construction scrips, the sector TTM P/E stands at 32.3. However companies engaged in making pipes and related projects trade at TTM P/E of 20.

PIL’s financial track record and reasonably large order book in this scenario are comforting.