Pratibha Industries Ltd: With debt running high, will the company flow steadily in future?

Pratibha Industries’ 10 YEAR X-RAY: Orange (‘Somewhat Good’)

Pratibha Industries in Brief:

Pratibha Industries, a Pratibha group company, is in the business of infrastructure development with focus on design, engineering & execution/construction of complex & integrated water transmission & distribution projects, water treatment plants, etc. The water segment plays an important role in the performance of the company and contributes 60-70% of the total turnover of the company. It has now forayed into other infrastructure segments. It caters mainly to the domestic market.

The company has 2 main business segments:

Shareholding Pattern:

The promoter shareholding in the company as on 30th Sept 2010 is 61.98% whereas 38.02% is the non-promoter holding. Foreign Institutional Investors holding stands at 8.34% and Mutual Funds/UTI hold 8.58%.

What does Pratibha’s Past Say? Here’s a review…

Good growth rates in all parameters:

The company has clocked a good CAGR of 46.9% in Net Sales over the last 6 years mainly due to the continuous increase in order inflows. A strong re-investment has helped the company clock a 6 year EPS CAGR of 47.9%. Its BVPS has registered a robust CAGR of 48.7% over the same period.

Profitability has been fuelled by consistent increase in sales growth; a 27.6% increase in other income and 55.7% increase in stock adjustments have helped it further.

Higher interest out flow (due to high debt) has led to falling net profit margins:

Pratibha Industries increased its debt by Rs. 190 Cr. in the last year which has led to a 44% rise in interest costs. Due to the continuous increase in debt, over the last 6 years, the company’s interest costs have risen by 60%. This has resulted in a fall in net profit margins from 9% to 6% over the last 6 years.

ROE & ROIC:

The company has maintained a good 6 year ROE average of 28.72%. Its 6 year ROIC average is lower at 17.43%, as a result of the high debt position of the company. Over the last 6 years the company’s debt has increased from Rs. 27 Cr. to Rs. 509 Cr (unaudited Balance Sheet as of Sept’10). This has in turn led to a high Debt-to-Net Profit ratio of 7.48.

Pratibha Industries has performed robustly in all its parameters, but its high debt is a major cause for concern. Though the company appears green on other parameters, due to its very high debt position, on the whole its 10 YEAR X-RAY is Orange (‘Somewhat Good’)

What is Pratibha Industries’ short-term outlook? Here’s the analysis…

Order wins to drive revenue growth:

Recently Pratibha Industries has bagged many orders which give good revenue visibility. Few of the orders the company recently won are:

•    Secured a Rs. 37.44 Cr. construction contract from Godavari Marathwada Irrigation Development Corporation in Aurangabad (execution period-36 months)

•    Contract for construction of residential buildings in Mumbai from Raheja Universal. The value of the contract is Rs 63 crore. (execution period – 21 months) Pratibha Industries has been witnessing a frequent inflow of orders taking its current order book to over Rs. 4000 Cr. for the next 2 years. The continuous inflow of orders is expected to strengthen its order book position further and hence gives revenue visibility for the coming quarters.

Rising debt: a cause for concern:

As of Sept’10 Pratibha Industries has a debt of Rs. 509 Cr. on its books (standalone- unaudited) and Rs. 529 Cr on a consolidated basis. The company has constantly been increasing its debt over the last 6-7 quarters; it increased its debt from Rs. 235 Cr. in FY 09 to Rs. 423 Cr. in FY 10.  Out of this Rs. 190 Cr. incremental debt, Rs. 90 Cr. has been raised for property, vehicles and construction equipment and for working capital requirements. However,  company has not provided any disclosure for the remaining Rs. 100 Cr. (raised as unsecured loan from bank) which seems to be a further cause for worry. The company also has substantially high working capital days of approx 160 days (123 days in FY09).

Now, the company has further increased its debt to Rs. 509 Cr. This has led to a rise in  its debt to net profit (TTM) ratio from 7.48 to 8.2, thus further increasing our discomfort on its debt position.

In order to pay off some portion of this debt, Pratibha Industries recently raised funds worth Rs. 150 Cr via QIP. A portion of these funds will be used for long-term working capital requirements. But, a portion of this Rs. 150 Cr. QIP will probably not provide enough respite to the high debt position of Rs. 509 Cr.

Hence, rising debt and interest cost is a cause for concern for the company and will most likely affect its margins and profitability levels in the coming quarters. Thus, though a continuous inflow of orders gives clear revenue visibility, its profitability may come under pressure. Hence, we can say that the short-term outlook of the company is Orange (‘Somewhat Good’).

What is Pratibha Industries’ Long-term outlook? Here’s the analysis…

Strong presence in the niche water segment:

Over the years, Pratibha Industries has established a firm presence in the water segment, undertaking the design, construction, operation and maintenance of large-scale water supply projects. This segment is a major contributor to its revenue and order book, contributing around 65%  and offers margins superior to those of other infrastructure segments such as roads. The company’s strength in executing large water management projects is expected to help it bag orders and drive sales in the same segment.

Strength in Order book to drive revenue growth:

Pratibha Industries has witnessed a continuous inflow of orders resulting in a robust order-book of over Rs 4,000 Cr. This order book size is about 4.6 times the revenues for FY10 and has an execution period ranging from 1 to 4 years. Pratibha has tied up with other players, both domestic and international such as Patel Engineering, Gammon Infrastructure, China State Engineering Corporation etc and has gained success in executing big orders. The company’s order book is quite well-placed geographically, ranging from Haryana, Delhi and Bihar to Karnataka and Maharashtra. Such a robust order vook gives revenue visibility for the next few years.

Pratibha Industries led consortium eyes Rs. 1200 Cr. MSRDC project:

In August’2010, The Maharashtra State Road Development Corporation or MSRDC had opened financial bids for a one-way waterway trip from Borivali to Nariman Point in Mumbai. A consortium led by Pratibha Industries, emerged as the sole bidder and submitted its bids. The consortium is likely to bag the deal. The tender is for around Rs. 1200 Cr. to be completed in 4 phases ; the 1st phase in 22mnths. The consortium would run the project for 29 years and hand it over to MSRDC. Though this project is yet on finalization stage, if the company does win the order it gives good revenue visibility for the long-term future.

Backward Integration; a competitive advantage:

The Company has set up its in-house HSAW pipe division at Wada (Maharashtra) with a capacity of 92,000 metric tons p.a, which is used for captive consumption for water management business as well as for oil and gas distribution projects. This division contributes ~18% to the company’s revenues currently and has also helped it successfully backward integrate by providing pipes for its building and construction business, especially for the water and irrigation related projects. Manufacturing saw pipes has enabled the company to bid competitively for such projects giving it an advantage over other infrastructure companies to bag orders.

Pan-India Presence & Functional Diversification to widen base:

Initially, Pratibha Industries started with its focus on infrastructure work in Maharashtra, but now it has diversified across states. Out of the total order book, 58% comes from states like Bihar, Karnataka, MP, New Delhi and Rajasthan. To curb risks of segment concentration(in Pratibha’s case-water supply management), the company has diversified into segments such as commercial and residential real estate, tunnelling, airport construction and maintenance and other urban infrastructure projects.

Increased Government spending on Infrastructure a positive catalyst for the company:

The Government is focusing more on infrastructure development and In the XIth Five Year Plan, it has allocated $500bn towards infrastructure development. Water Supply and management, Irrigation, and Sanitation together account for more than 20% of total outlay. The company which has an established strength in executing large projects (especially water management) stands to gain from the government’s focus on the Infrastructure sector particularly Water related segments.

So, after seeing all its positive points, is there anything you should be concerned about?

The major cause of concern is the company’s high debt position:

The company has a high debt position of Rs. 509 Cr. as of Sept’10 (unaudited Balance Sheet) and Rs. 529 Cr. on consolidated basis. The company has been increasing its debt position consistently over the last 2-3 years. Over a 6 year period the company’s interest costs have risen by 60%. Going forward, this increasing cost will hamper the company’s net margins & profitability levels. If the debt level increases further, this may put pressure on its profit levels in future.

High working capital requirement; another cause for concern:

A chunk of the company’s debt is basically taken to fulfill working capital requirements. Pratibha has a substantially high working capital requirement and the working capital cycle is ~160 days, indicating that it has a large sum of money locked up in its working capital cycle. This working capital requirement is fulfilled through debt, which ultimately affects profit margins due to rising interest costs.

Yes, debt is a cause for concern for Pratibha Industries and the company should work on reducing debt and working capital cycle.

Provided the company manages its debt & working capital situation, it is poised for growth in future on the back of its strong established presence, robust order book, backward integration & government’s focus on infrastructure. Hence, we can say that the long-term future prospects are Green (Very Good)

Conclusion:

Pratibha Industries is a leading player in the infrastructure segment, having special focus on water-management projects. The company is poised for good growth in future on the back of its strong presence in the water management projects, backward integration into pipes, plans of diversification and Government’s increasing focus on infrastructure segments and water management.

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