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Pratibha Industries: Margins do the trick - Views on News from Equitymaster

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Pratibha Industries: Margins do the trick
Jul 25, 2007

Performance summary
  • Bottomline registers a strong 60% YoY growth on the back of 22% YoY growth in topline.

  • Operating margins expand by 1.5% to 12.3% due to increased profitability on the new orders booked.

  • Current order book position at around Rs 18 bn.

Performance Snapshot
Particulars (Rs m) 1QFY07 1QFY08 Change
Net Sales 540 659 22.1%
Expenditure 482 578 20.0%
Operating Profit (EBIDTA) 58 81 39.2%
EBITDA margin (%) 10.8% 12.3%  
Other income 2 6 155.9%
Interest 12 8 -36.6%
Depreciation 2 4 70.8%
Preliminary expenses 3 - -
Profit before tax 43 75 74.1%
Tax 5 15 174.0%
Net profit 38 60 59.6%
Net profit margin (%) 7.0% 9.1%  
Effective tax rate 12.7% 20.0%  
No. of Shares (m)      
Diluted earnings per share (Rs)*      
Price to earnings ratio (x)*      
*Trailing twelve months

What is the company’s business?
Pratibha Industries Ltd. (PIL) is engaged in the infrastructure development business with a niche in the water management projects, providing one stop solution for design, engineering, construction, commissioning and operation of water supply projects. In FY07, water segment accounted for about 70% of the company's revenues. Besides, PIL also has presence in mass housing projects, commercial complexes, airport terminals, railway stations, road construction and tunneling projects. The company is setting up a saw pipes manufacturing facility with an initial capacity of 90,000 TPA (tonnes per annum). The facility is expected to become operational by July 2007 and will supplement PLL's ongoing water projects.

What has driven the performance in 1QFY08?
Topline growth remains modest: PIL reported a 22% YoY growth in revenues for the quarter. For construction and engineering companies, first quarter performances generally tend to be a bit modest when compared to the third and fourth quarter results. Current order book position (unexecuted part) for PIL is around Rs 17 bn, which is nearly 6x the FY07 sales. Strong order book position provides good revenue visibility for the company in the coming years.

Margin expansion lead to higher operating profits: Operating margins for 1QFY08 expanded by 1.5% to 12.3% led by lower construction cost (refer table below). As a result, operating profits managed to outpace the growth in topline. Over the past few years the company has been continuously able to increase its operating margins by foraying into new areas of infrastructure development (read higher margin segments).

In order to cater to the growing requirement of pipes for captive consumption as well as for oil and gas distribution, the company has set up a manufacturing facility for spiral pipes in Wada (Thane) with an estimated cost of Rs 810 m. The entry into SAW pipes gives added advantage in terms of margins, as the company is currently buying the entire requirements from outside.

Cost break-up
as a % of sales 1QFY07 1QFY08
Construction cost 82.0% 78.3%
Staff Cost 2.3% 4.0%
Establishment, selling and other expenses 4.8% 5.5%

Profitability rides on margin expansion: The benefits of margin expansion were visible in company’s profitability, with net profit for the quarter recording a 60% YoY growth. The net margins during the same period stood at 9.1% compared to 7.0% in 1QFY07, an expansion of 210 basis points.

What to expect?
At the current price of Rs 256, the stock is trading at a multiple of 5.9 times its FY10 earnings. The current order book stands at Rs 17 bn which are expected to be executed over the next three years. Other positive for the company is the expansion in margins on account of the in-house manufacturing of water pipes. We have a positive view on the stock from a three year perspective.

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