PINC POWER PICKS: PATEL ENGG. - BUY, TP- Rs567 (45% upside)

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What’s the theme?
Patel Engineering is an attractive infrastructure and land bank story. Its infrastructure business comprising
high-margin hydro power, irrigation and micro-tunneling are already showing signs of strong order inflows
for FY11. Its L1 position has improved to Rs31bn in Q1FY11. In the Real estate segment, the Bangalore
project has been pre-sold 90% and the Noida project has been pre-sold 75%. Revenue from this project
is likely to accrue H2FY11 onward.
What will move the stock?
1) We believe the core business is undervalued, and are optimistic of enhanced valuations as we believe
the order book would grow at~20.9% CAGR over FY10-12.
2) Order flow from the hydro power segment has been below potential over the past three years at
~Rs15.7bn average. Nevertheless, the company has a total order backlog of Rs110bn and it has L1
status in hydro power projects of ~Rs15bn.
3) Faster execution of the real estate projects would stimulate stock performance.
Where are we stacked versus consensus?
Our FY11E and FY12E earnings estimates are among the lowest on the Street at Rs25.8 (12.8 %) and
Rs33, (8.5%), lower than mean consensus estimates. We expect top-line growth of ~11.1% at Rs35.4bn
for FY11 and 19.9% at Rs42.4bn vs. consensus estimate of ~11.5% at Rs35.5bn and ~22.2 at Rs43.5bn.
Our SOTP-based target price is Rs567 vs. consensus target of Rs507.
What will challenge our target price?
1) Lower-than-expected order inflow of Rs45bn in FY11; 2) Slowdown in the real estate market