Buy patel engineering recommends ICICI Securities,

Huge potential from real estate and power…
Patel Engineering Limited (PEL) is a leading construction player with a
significant presence in the hydro power and irrigation sectors. With an
order book of ~Rs 11,100 crore (including L1 bids of Rs 3,100 crore) in
Q1FY11, the company enjoys robust revenue visibility (adjusted TTM
order book-to-bill ratio of 2.6x). Furthermore, we believe that PEL’s
venture in the real estate and power generation businesses would act
as a key catalyst, with significant value unlocking potential. We are
initiating coverage on the stock with a BUY rating.
Strong order book; AP exposure may limit topline growth
PEL currently has an order book of ~Rs 11,100 crore (including L-1 bids)
implying order book-to-bill ratio of 3.5x. Adjusting for contentious orders
(largely in AP; contributing ~18% of order book), the ratio drops to 2.6x,
in line with its peers. We expect the company’s order book to grow at
16.3% CAGR in FY10-FY12E, fuelled by captive order inflows in the power
vertical. Revenues are expected to grow at a slower rate of 12.8% CAGR
in FY10-12E to Rs 4,049 crore due to substantial exposure in AP.
Value unlocking opportunities in real estate business
We believe that substantial value unlocking opportunities exist from the
real estate business as PEL develops its vast land bank (~1100 acres),
acquired at a low cost several years back. With the development of
projects in Bangalore, Mumbai and Noida, the visibility of the real estate
business is improving. This would act as a key catalyst for the stock in the
future. We value this business at Rs 69/share with huge upside potential.
Handsome captive orders from power venture
PEL plans to develop 2,650 MW thermal and 140 MW hydro power plants.
Financial closure for phase I of the thermal power plant and hydro power
plant is expected later in FY11E. The company is exploring the option of
selling a minority stake in the thermal power project to private equity
players for funding a part of its equity investment. These projects are
expected to provide captive order inflow of Rs 3,750 crore in FY11E.
Valuation
At the CMP, the stock is trading at a P/E of 11.7x in FY11E and 8.9x in
FY12E (adjusted for subsidiaries value). With a robust order book and
sustained momentum of order intake, we value the construction
business at FY12E P/E of 12x at Rs 352/share. PEL’s real estate business
is valued at Rs 65/share. Road BOT projects are valued at Rs 8/share
while power ventures are valued at Rs 36/share. Our SOTP target price
is Rs 460/share. We initiate coverage on the stock with a BUY rating.