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Bumper quarter
Results significantly ahead of estimates, make up for faltering Q1
PEL reported an exceptional Q2FY11 registering 34% YoY growth in
revenues to INR5.4bn, thereby making up for the weak Q1. The
pleasant surprise in execution though came at the cost of operating
margins which declined by 405bps YoY to 14.3% (vs our expectation
of 17%) owing majorly to lesser implementation of relatively higher
margin hydro projects (45% of revenues). Consequently, operating
profits for the period rose by a paltry 4.4% YoY to INR772mn. Lower
interest charges at INR236mn (-19.3% QoQ) and stable depreciation
expenses, however, fuelled an attractive net profit growth of ~14%
YoY to INR296mn (vs our expectation of INR162mn).
Order book concerns loom large, no dominant fresh orders in Q2
The order backlog as of Sep’10 stands at INR105bn, including L1 jobs
worth INR20bn. The company has struggled over the past four
quarters to amass sizeable new jobs which have raised concerns on
the revenue visibility going forward. It has bagged orders only worth
INR10bn in FY11 YTD. The management, however, has guided for
internal jobs worth INR30-40bn to be booked by year end pertaining
to the in-house power projects.
Maintain estimates, rating with a revised target price of INR504
Despite the near term visibility concerns on the existing order backlog,
we remain positive on PEL’s strong execution capabilities and rich
track record of nearly six decades, making it a strong contender for
forthcoming opportunities in hydro power and irrigation segment.
Additionally, the imminent unlocking of value from the group’s power
and real estate initiatives would prove vital in converting PEL from an
EPC contractor with diverse interests to a fully integrated infrastructure
player. We roll over our valuation metrics to FY12 earnings and revise
our SOTP based price target to INR504. Maintain ‘Buy’.
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