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PATEL ENGINEERING LTD (PEL)
RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.254
FY12E P/E: 10.3X
q Patel engineering standalone revenues reported 11% de-growth for
Q3FY11 vis-à-vis same period last year. This was much lower than our expectations.
This was led by certain projects being hit by torrential rains
and cancellation of another project. Operating margin performance adjusted
with WIP adjustment was marginally better than our estimates.
Due to sharp decline seen in revenues and increase in interest cost due to
forex adjustment, net profit declined by 74% for Q3FY11 vis-à-vis same
period last year.
q Current order book of company stands at Rs 100 bn on a consolidated
basis including L1 orders of Rs 10 bn. After excluding L1 project and
projects in Andhra Pradesh which are currently not being executed, order
book provides a revenue visibility for next 2.5 years. We downgrade our
revenue estimates to factor in poor performance seen during Q3FY11 and
expect revenues to de-grow by 13% in FY11 and then grow by 30% in
FY12.
q At current price of Rs 200, stock is trading at 15.6x and 10.3x P/E multiples
for FY11 and FY12 respectively. Post downgrading our estimates,
we arrive at a revised price target of Rs.254 (Rs.461 earlier) based on sumof-
the-parts methodology on FY12 estimates. We downgrade the stock to
ACCUMULATE from BUY earlier despite decent upside from the current
levels since we believe that environmental clearance, delays in financial
closure for its power projects as well as higher tax provision going
ahead will continue to weigh on the stock.
Patel engineering standalone revenues reported 11% de-growth for Q3FY11 vis-à-vis
same period last year. This was much lower than our expectations. This was led by
certain projects being hit by torrential rains and cancellation of one project.
Company has mentioned that during Q3FY11, two major hydro projects - Teesta and
Parvati were hit by torrential rains and hence company lost nearly Rs 600 mn worth
of revenues from those projects. Along with this, Lohari Nagpala project has been
cancelled which is being executed by Patel Engineering and Hindustan Constructions
due to environmental issue. Company was expecting significant revenues to come
from this project during Q3FY11. Also, work has not yet commenced on Pranahita
Chevvalla Lift irrigation project and company has witnessed delays in new project
awards from NHPC.
Poor revenue growth is also on account of lower revenues coming in from US subsidiary
whose performance was impacted by extreme winter and snow.
Work has commenced on projects hit by torrential rains, but due to cancellation of
Lohari Nagpala project, company has submitted claims of nearly Rs 2 bn to NTPC for
the costs incurred, which are expected to be received in next 6-8 months.
We thus downgrade our revenue estimates to factor in poor performance seen during
Q3FY11 and expect revenues to de-grow by 13% in FY11 and then grow by
30% in FY12.
Order book continues to provide revenue visibility for next 2.5
years
Current order book of company stands at Rs 100 bn on a consolidated basis including
L1 orders of Rs 10 bn. After excluding L1 project and projects in Andhra Pradesh
which are currently not being executed, order book provides a revenue visibility for
next 2.5 years. Order book is diversified across hydro power (45%), irrigation (40%)
and others (15%).
This order book doesn't include the order from development of the largest waterfront
project in Mauritius. This project has not been finalized yet. Along with this,
order inflow from the domestic segment also continued to remain muted during
FY11. However, company is quite confident that future growth in order book can
very easily come from order inflows from this water front project. This project is expected
to complete in four-five phases and first phase may take nearly 5 years to
complete.
Status of key projects
Progress on key projects being executed by company
n Thermal power project in Tamil Nadu - Company is executing 1200 MW
thermal power project in Tamil Nadu. Financial closure for Phase 1 was expected
to be completed in Dec, 2010 but this has been further delayed and certain permissions
are still left.
n Hydro power project in Arunachal Pradesh - Patel engineering had signed
MoU for a 100MW hydro power project in Dongri, Arunachal Pradesh. The size
of the project had been enhanced to 140MW but financial closure is now further
delayed since clearance from CEA is still pending and is expected by July, 2011
and construction is expected to commence by Q2FY12.
n Real estate projects - Patel Realty Ltd has started recognizing revenues from its
real estate project Smondoville, Bangalore. These revenues are likely to increase
from FY12 onwards. It has also launched second and third phase of residential
project in Bangalore. It will also launch mall development by end of the year
followed by villas. We have currently factored in only Mumbai, Bangalore and
Noida projects only to arrive at a fair valuation of upcoming projects.
Operating margins boosted by one time income booked in revenues
n Operating margin performance was better than our estimates.
n Margins stood at 28.3% for Q3FY11. But this was due to additional Rs 500 mn
booked in operating income by the company due to forex adjustment. It has incurred
expenses to the tune of Rs 500 mn which has been included in WIP. Adjusted
with this income, margins stood at 17% for Q3FY11.
n We expect margins to be around 15% going forward.
Net profits impacted by sharp drop in revenues
n Due to sharp decline seen in revenues and increase in interest cost due to forex
adjustment, net profit declined by 74% for Q3FY11 vis-à-vis same period last
year.
n Net profits are also impacted by steep increase in interest outgo to Rs 814 mn.
This was due to forex loss on Lohari Nagpala project. Company had hedged receivables
from this project but since the project got cancelled, company had to
book forex losses since the underlying asset was not available. However, it has
submitted claims to the tune of Rs 2 bn to NTPC and expects to receive this
amount in next 6-8 months.
n Post revising our estimates, we now expect profits to de-grow by 33% in Fy11
and then report a growth of 52% in Fy12.
Valuation and recommendation
n At current price of Rs 200, stock is trading at 15.6x and 10.3x P/E multiples for
FY11 and FY12 respectively.
n Post downgrading our estimates, we arrive at a revised price target of Rs 254 (Rs
461 earlier) based on sum-of-the-parts methodology on FY12 estimates.
n We downgrade the stock to ACCUMULATE from BUY earlier despite decent
upside from the current levels since we believe that environmental issues, delays
in financial closure for its power projects as well as higher tax provision going
ahead will continue to weigh on the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
PATEL ENGINEERING LTD (PEL)
RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.254
FY12E P/E: 10.3X
q Patel engineering standalone revenues reported 11% de-growth for
Q3FY11 vis-à-vis same period last year. This was much lower than our expectations.
This was led by certain projects being hit by torrential rains
and cancellation of another project. Operating margin performance adjusted
with WIP adjustment was marginally better than our estimates.
Due to sharp decline seen in revenues and increase in interest cost due to
forex adjustment, net profit declined by 74% for Q3FY11 vis-à-vis same
period last year.
q Current order book of company stands at Rs 100 bn on a consolidated
basis including L1 orders of Rs 10 bn. After excluding L1 project and
projects in Andhra Pradesh which are currently not being executed, order
book provides a revenue visibility for next 2.5 years. We downgrade our
revenue estimates to factor in poor performance seen during Q3FY11 and
expect revenues to de-grow by 13% in FY11 and then grow by 30% in
FY12.
q At current price of Rs 200, stock is trading at 15.6x and 10.3x P/E multiples
for FY11 and FY12 respectively. Post downgrading our estimates,
we arrive at a revised price target of Rs.254 (Rs.461 earlier) based on sumof-
the-parts methodology on FY12 estimates. We downgrade the stock to
ACCUMULATE from BUY earlier despite decent upside from the current
levels since we believe that environmental clearance, delays in financial
closure for its power projects as well as higher tax provision going
ahead will continue to weigh on the stock.
Patel engineering standalone revenues reported 11% de-growth for Q3FY11 vis-à-vis
same period last year. This was much lower than our expectations. This was led by
certain projects being hit by torrential rains and cancellation of one project.
Company has mentioned that during Q3FY11, two major hydro projects - Teesta and
Parvati were hit by torrential rains and hence company lost nearly Rs 600 mn worth
of revenues from those projects. Along with this, Lohari Nagpala project has been
cancelled which is being executed by Patel Engineering and Hindustan Constructions
due to environmental issue. Company was expecting significant revenues to come
from this project during Q3FY11. Also, work has not yet commenced on Pranahita
Chevvalla Lift irrigation project and company has witnessed delays in new project
awards from NHPC.
Poor revenue growth is also on account of lower revenues coming in from US subsidiary
whose performance was impacted by extreme winter and snow.
Work has commenced on projects hit by torrential rains, but due to cancellation of
Lohari Nagpala project, company has submitted claims of nearly Rs 2 bn to NTPC for
the costs incurred, which are expected to be received in next 6-8 months.
We thus downgrade our revenue estimates to factor in poor performance seen during
Q3FY11 and expect revenues to de-grow by 13% in FY11 and then grow by
30% in FY12.
Order book continues to provide revenue visibility for next 2.5
years
Current order book of company stands at Rs 100 bn on a consolidated basis including
L1 orders of Rs 10 bn. After excluding L1 project and projects in Andhra Pradesh
which are currently not being executed, order book provides a revenue visibility for
next 2.5 years. Order book is diversified across hydro power (45%), irrigation (40%)
and others (15%).
This order book doesn't include the order from development of the largest waterfront
project in Mauritius. This project has not been finalized yet. Along with this,
order inflow from the domestic segment also continued to remain muted during
FY11. However, company is quite confident that future growth in order book can
very easily come from order inflows from this water front project. This project is expected
to complete in four-five phases and first phase may take nearly 5 years to
complete.
Status of key projects
Progress on key projects being executed by company
n Thermal power project in Tamil Nadu - Company is executing 1200 MW
thermal power project in Tamil Nadu. Financial closure for Phase 1 was expected
to be completed in Dec, 2010 but this has been further delayed and certain permissions
are still left.
n Hydro power project in Arunachal Pradesh - Patel engineering had signed
MoU for a 100MW hydro power project in Dongri, Arunachal Pradesh. The size
of the project had been enhanced to 140MW but financial closure is now further
delayed since clearance from CEA is still pending and is expected by July, 2011
and construction is expected to commence by Q2FY12.
n Real estate projects - Patel Realty Ltd has started recognizing revenues from its
real estate project Smondoville, Bangalore. These revenues are likely to increase
from FY12 onwards. It has also launched second and third phase of residential
project in Bangalore. It will also launch mall development by end of the year
followed by villas. We have currently factored in only Mumbai, Bangalore and
Noida projects only to arrive at a fair valuation of upcoming projects.
Operating margins boosted by one time income booked in revenues
n Operating margin performance was better than our estimates.
n Margins stood at 28.3% for Q3FY11. But this was due to additional Rs 500 mn
booked in operating income by the company due to forex adjustment. It has incurred
expenses to the tune of Rs 500 mn which has been included in WIP. Adjusted
with this income, margins stood at 17% for Q3FY11.
n We expect margins to be around 15% going forward.
Net profits impacted by sharp drop in revenues
n Due to sharp decline seen in revenues and increase in interest cost due to forex
adjustment, net profit declined by 74% for Q3FY11 vis-à-vis same period last
year.
n Net profits are also impacted by steep increase in interest outgo to Rs 814 mn.
This was due to forex loss on Lohari Nagpala project. Company had hedged receivables
from this project but since the project got cancelled, company had to
book forex losses since the underlying asset was not available. However, it has
submitted claims to the tune of Rs 2 bn to NTPC and expects to receive this
amount in next 6-8 months.
n Post revising our estimates, we now expect profits to de-grow by 33% in Fy11
and then report a growth of 52% in Fy12.
Valuation and recommendation
n At current price of Rs 200, stock is trading at 15.6x and 10.3x P/E multiples for
FY11 and FY12 respectively.
n Post downgrading our estimates, we arrive at a revised price target of Rs 254 (Rs
461 earlier) based on sum-of-the-parts methodology on FY12 estimates.
n We downgrade the stock to ACCUMULATE from BUY earlier despite decent
upside from the current levels since we believe that environmental issues, delays
in financial closure for its power projects as well as higher tax provision going
ahead will continue to weigh on the stock.
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