Pratibha Industries (PIL) has had an excellent historical growth trajectory. The company backward integrated into HSAW Pipe manufacturing during H2FY08, which would help improve or sustain margins in the current high commodity price regime.
Post amalgamation, we estimate the company’s consolidated pipe division to clock a turnover of Rs378 crore and EBIDTA margins of 9.5% in FY10.
However, we believe that going ahead, though PIL’s pipe division’s contribution to total consolidated revenues will increase, the business commands lower multiple as compared to its core construction business.
Concerns and valuation
India is currently witnessing a slowdown in GDP growth. Moreover, deteriorating government finances and political risks owing to the upcoming elections could lead to a slowdown in the government capex plans.
Considering that the Equity markets are currently not conducive for fund-raising, there is a possibility of slippages for project owners in achieving financial closures resulting in slowdown in order inflow. However, despite these constraints, India’s medium-to-long-term growth story remains intact.
We have valued PIL on SOTP methodology and have assigned its core construction business a PE of 10x FY2010E FDEPS of Rs20.1. For the Pipes Division, we have assigned 4x EV/EBIDTA on FY2010E.
At the current price of Rs222, the stock is trading at 14.8x FY2009E and 11.0x FY2010E EPS of Rs15.0 and Rs20.1 respectively, on a standalone basis.
Owing to the lower multiple commanded by the pipe division, pending dilution for PIL and higher interest costs, we are revising our target price downwards to Rs248 (Rs299). Consequently, we also downgrade our rating on the stock from Buy to ACCUMULATE.