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Patel Engineering Company
Bolt out of the blue
Event
PEC reported disastrous 3QFY11 results which have put a big question mark
on all of our earlier assumptions. Not only did revenues and earnings decline
31% and 80% respectively on YoY basis, but a large part of the order book
has become suspect. We have cut our target price to Rs201 from Rs483 and
downgrade to Neutral. The stock is likely to remain under pressure till visibility
improves on the order book.
Impact
Revenue decline leads to sharp earnings shortfall: Q3FY11 revenues
declined 39% on YoY basis against expectations of marginal growth. The
revenue decline of Rs2.5bn is partly explained by revenue loss of Rs0.5bn
due to flash floods in two hydro projects in Northeast India and Rs1bn due to
snow in US. PEC also had to book a forex loss of Rs0.5bn on hedges used
for the Loharinagpala hydropower project scrapped by the government.
30-40% of order book unlikely to contribute to revenues in near term:
The company’s existing order book of Rs100bn includes a Rs15bn hydro
power plant order (in L1 stage) and a Rs15bn order for Pranahita-Chevella lift
irrigation project. These projects are unlikely to generate any meaningful
revenues even in FY12 due to delays in formal award and political problems.
⇒ Our revenue projections are at substantial discount to guidance: We
believe that the current order book of ~Rs60bn cannot result in revenues
more than Rs12bn in 4QFY11. Further, guidance of 20-25% growth in
FY12 seems to be contingent on early start on projects currently stuck.
⇒ Meaningful pickup in order inflow required in FY12: In 9MFY11, PEC
booked only Rs12bn of order inflow. To sustain the current revenue runrate
of ~Rs28-30bn, PEC needs an order inflow of similar amount. It is
banking on internal order (1,000MW thermal power plant) and orders from
abroad to compensate for the softer order inflow in India.
PEC now exposed to potential risk of write-offs / claims: The company
faced tax raids in Dec’10, where liabilities will not be known for some time.
Moreover, the company has spent Rs1bn on the-NTPC project where it
expects to get fully compensated. The decision making on these disputes can
take much longer, leading to write-offs or auditor comments.
Earnings and target price revision
We have cut our FY11/FY12 EPS by 35%/56% respectively due to a revenue
decline of 24% and 35% in the same period. We have reduced our target
price to Rs201 from Rs483.
Price catalyst
12-month price target: Rs201.00 based on a Sum of Parts methodology.
Catalyst: further slowdown in execution and higher than expected tax liability
Action and recommendation
Downgrade to Neutral with revised price target of Rs201: We downgrade
the stock to Neutral with price target of Rs201 on back of sharp cuts in
earnings and continuing uncertainty on the order book. Even after a large
earnings cut, there is a downside risk if the start on large projects remains in
limbo.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Patel Engineering Company
Bolt out of the blue
Event
PEC reported disastrous 3QFY11 results which have put a big question mark
on all of our earlier assumptions. Not only did revenues and earnings decline
31% and 80% respectively on YoY basis, but a large part of the order book
has become suspect. We have cut our target price to Rs201 from Rs483 and
downgrade to Neutral. The stock is likely to remain under pressure till visibility
improves on the order book.
Impact
Revenue decline leads to sharp earnings shortfall: Q3FY11 revenues
declined 39% on YoY basis against expectations of marginal growth. The
revenue decline of Rs2.5bn is partly explained by revenue loss of Rs0.5bn
due to flash floods in two hydro projects in Northeast India and Rs1bn due to
snow in US. PEC also had to book a forex loss of Rs0.5bn on hedges used
for the Loharinagpala hydropower project scrapped by the government.
30-40% of order book unlikely to contribute to revenues in near term:
The company’s existing order book of Rs100bn includes a Rs15bn hydro
power plant order (in L1 stage) and a Rs15bn order for Pranahita-Chevella lift
irrigation project. These projects are unlikely to generate any meaningful
revenues even in FY12 due to delays in formal award and political problems.
⇒ Our revenue projections are at substantial discount to guidance: We
believe that the current order book of ~Rs60bn cannot result in revenues
more than Rs12bn in 4QFY11. Further, guidance of 20-25% growth in
FY12 seems to be contingent on early start on projects currently stuck.
⇒ Meaningful pickup in order inflow required in FY12: In 9MFY11, PEC
booked only Rs12bn of order inflow. To sustain the current revenue runrate
of ~Rs28-30bn, PEC needs an order inflow of similar amount. It is
banking on internal order (1,000MW thermal power plant) and orders from
abroad to compensate for the softer order inflow in India.
PEC now exposed to potential risk of write-offs / claims: The company
faced tax raids in Dec’10, where liabilities will not be known for some time.
Moreover, the company has spent Rs1bn on the-NTPC project where it
expects to get fully compensated. The decision making on these disputes can
take much longer, leading to write-offs or auditor comments.
Earnings and target price revision
We have cut our FY11/FY12 EPS by 35%/56% respectively due to a revenue
decline of 24% and 35% in the same period. We have reduced our target
price to Rs201 from Rs483.
Price catalyst
12-month price target: Rs201.00 based on a Sum of Parts methodology.
Catalyst: further slowdown in execution and higher than expected tax liability
Action and recommendation
Downgrade to Neutral with revised price target of Rs201: We downgrade
the stock to Neutral with price target of Rs201 on back of sharp cuts in
earnings and continuing uncertainty on the order book. Even after a large
earnings cut, there is a downside risk if the start on large projects remains in
limbo.
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