Pratibha Industries: Sell

Going up in the market’s wild ride were almost all infrastructure and construction stocks. It may therefore be an opportune time to book profits in stocks of companies that may take a while to recover.

Pratibha Industries has a strong order book of ₹8,300 crore in promising segments such as water, railways, buildings and other urban infrastructure. But at 2.9 times the equity, the company’s debt load is high. The company’s working capital cycle is lengthening too, increasing debt requirements.

Investors can make hay while the sun shines and book profits in the Pratibha Industries stock after it has more than doubled in the past year. At ₹64, it trades at 17 times estimated earnings for 2014-15, above the three-year historical average of eight times. The stock is up 56 per cent from the last ‘buy’ call in 2013.

Pratibha’s current order book, at ₹8,300 crore, is up about 33 per cent from last March. The company hasn’t had too much trouble securing orders, with inflow for 2013-14 at over ₹3,000 crore.

What helped was a focus on water supply, tunnelling, buildings, and other urban infrastructure — segments which have grown faster than big ticket projects such as airports or roads. These are also segments to bet on with the Government’s focus on clearing infrastructure bottlenecks to spur growth.

But while the order book position is strong, delays in execution took a toll on revenue. In 2013-14, Pratibha’s consolidated revenue grew just 5.8 per cent, down from the 29.6 per cent in 2012-13.

But the company has managed to keep a tight control over costs. Operating profit margin has held steady at 14 per cent for the past three years.

This lengthened the working capital cycle to 184 days for 2013-14 compared with 128 days the year before. Trade receivables have also been rising in the past two years.

The lengthening working capital cycles and a negative operating cash flow have together resulted in a greater reliance on debt to fund operations. Larger projects such as the Delhi Metro tunnelling and drainage systems for the Delhi Jal Board also necessitated purchase of boring equipment, funded primarily through debt. Pratibha’s latest consolidated debt-equity ratio is high at 2.9 times, up from the 2.2 times last year. Interest accounted for 11 per cent of sales in 2013-14, compared to 7 and 6 per cent in the previous two years. Interest cover dropped from 2.8 times three years ago to 1.3 times now.

After depreciation and taxes, Pratibha’s net profit margin is just 1 per cent, below the usual 4-6 per cent. Net profit for 2013-14 dropped 81 per cent. Pratibha has said that it will divest its pipe manufacturing business, proceeds of which will be used to retire debt. It also plans to sell other non-core assets to raise ₹300-400 crore to pay off debt.

But as talk of selling the pipe business has been in the works for more than a year now, it is uncertain when the sale proceeds will flow in. Interest rates are also likely to hold steady for some time yet. The burden of higher interest may remain.