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Results sharply below estimates
Patel Engineering’s (PEL) Q3FY11 revenues and PAT came sharply below our and
consensus estimates. Revenue, at INR 4.3 bn (against our expectation of INR 8.9
bn), was down 31% Y-o-Y and 43% Q-o-Q. One-off claims on project cancellation
resulted in EBITDA margins coming in at ~25%. The same one-off claims led to
higher interest charges. PAT margins, at 2%, were down 370bps Q-o-Q and
500bps Y-o-Y. PAT, at INR 88 mn, was down 80% Y-o-Y and Q-o-Q.
Revenue hit by various reasons
Teesta and Parbati hydel projects were hit by torrential rains and landslides, and
Lohari Nagpala hydel project was cancelled due to environmental concerns,
which impacted revenue bookings. Further, execution on Pranahita Chevella
irrigation project was delayed due to the Telengana issue, while PEL didn’t
receive letter from NHPC to proceed on Kotli-Bhel hydel project. Work on the US
projects also suffered due to heavy snowfall.
Outlook and valuations: Multiple concerns; downgrade to ‘HOLD’
The company’s contracting business has been hurt by sluggish order intake
(which has dampened revenue visibility), project cancellations and delays and
extension in working capital cycle. Rising interest costs, with a leveraged balance
sheet, have hurt profitability. The thermal power plant has also not progressed
as per our expectations with financial closure still pending on the project. While
PEL may get the requisite approvals and financial closure on the project over the
next 1-2 quarters, we believe investors will see value only when the question of
equity infusion, along with any stake sale in the project, is addressed.
We have cut our revenue and PAT estimates for FY11 by 33% and 48%
respectively. Our SOTP-based target price works out to INR 187. This consists of
INR 104/share from construction business (valued at 7x FY12E P/E) and INR
17/share on BOT assets (on DCF basis). We value the real estate assets at INR
65/share. While we like the business model of the company with its focus on
profitable segments, we believe that near-term concerns on order intake,
leveraged balance sheet and profitable growth are likely to weigh on stock
performance. We downgrade the stock to ‘HOLD’ from ‘BUY’ and rate it ‘Sector
Underperformer’.
Other highlights
• Order book at INR 100 bn, including INR 10 bn L1 projects: PEL’s current order
book stands at INR 100 bn (including L1 projects of INR 10 bn). Order intake during
the year has been very weak and has stood at INR 12 bn in 9mFY11. With
environmental concerns rising around hydel power projects, apart from other
regulatory issues, we expect order intake and eventual execution on these projects to
remain sluggish in the near term.
• Revenue visibility a concern: Of the INR 100 bn order book, INR 10 bn is in L1
projects. Also, work has not yet started on Kotli Bhel and Pranahita projects (INR 15
bn each). This means that projects on which work is underway are only ~INR 60 bn,
which raises questions over future revenue visibility. While PEL is increasing its focus
on the overseas territories since order intake is sluggish in domestic territories, we
believe that project wins and execution in these territories will take some time.
• EBITDA margins boosted by one-off claims: Cancellation of the Lohari Nagpala
project resulted in closure of forex hedging positions (entered into by PEL to hedge
the future euro receivables). PEL’s claim for ~INR 500 mn loss on this account was
approved and was included in the topline this quarter. Since there was no
corresponding cost entry for the same, EBITDA margins came in much higher.
Adjusted for this, EBITDA margins would have been ~15%.
• The same INR 500 mn loss mentioned above was included in the interest costs; as a
result, interest charges came in much higher at INR 862 mn against INR 300 mn last
quarter.
• Order book break up: Order book is spread across hydel (45%), irrigation (40%),
roads and urban infra segments. The order book does not include any captive
project. It includes INR 5 bn projects from Michigan Engineers and USD 80-90 mn on
account of US subsidiaries.
• Revenue break up: Revenue break up for the quarter was hydro (44%), irrigation
(25%), with the balance coming from roads and micro tunneling.
• Subsidiary performance in 9mFY11: US subsidiaries contributed INR 2.5 bn to
revenues and INR 250 mn to PAT, while Michigan Engineering contributed INR 1.1 bn
to revenues and INR 50 mn to PAT. The revenue and PAT contribution from the
realty segment during the same period was INR 660 mn and INR 35 mn,
respectively.
• Andhra receivables: PEL is evaluating the Andhra scenario cautiously, while
keeping an eye on the payment cycle. Receivables on Andhra projects, which were
INR 2.0 bn at FY10 end, are currently at INR 1.5 bn.
• Power portfolio: The company has only one clearance pending for setting up the
first phase (1,050 MW) of the thermal power plant at Nagapatnam district in Tamil
Nadu. The total project cost is INR 50 bn, of which, debt is INR 37 bn and balance is
equity. The broad debt commitments from various banks have been received. The
company has already invested INR 2.5 bn as equity in the project. It has also invited
and received bids for the various packages for construction of the plant. It is
planning to dilute stake in the power venture to raise funds for project development.
PEL is also planning to develop a 144 MW hydel plant in Arunachal Pradesh. It
expects CEA clearance for the plant by July 2011 and execution to begin in FY12.
• Real estate projects: The company has launched the phase IV of its Bengaluru
township project under which it launched 126 flats under ‘Smondoville IV’. It expects
to achieve revenues of INR 1.8 bn from this phase. The first phase was of 1 mn sq ft
while the second and third phases were of 0.5 mn sq ft each.
With regards to Jogeshwari commercial project, execution is already underway. PEL
has been able to get an anchor tenant to lease 1.2 lakh sq ft at INR 120/sq ft. It
expects to complete execution on the project in two years.
Valuation
Construction
EPS FY12E (INR/Share) 14.9
P/E multiple (x) 7.0
Value per share (INR/Share) 104
BOT Projects
DCF value of projects (INR mn) 2,836
Patel's share (%) 42.0
Patel's share of value (INR mn) 1,191
Value per share (INR) 17
Real Estate
Value of Jogeshwari properties (INR mn) 1,633
Value per share (INR) 23
Value of Bangalore and Noida project (INR mn) 2,919
Value per share (INR) 42
Total 187
Current share price 182
Upside (%) 2.5
Source: Edelweiss research
Company Description
PEL is a leading civil engineering and construction company, engaged primarily in the
construction of hydel power projects, irrigation, water supply, and transportation
projects. It is one of the few Indian construction companies with a presence in the US.
Its US subsidiaries have given PEL an added advantage in terms of access to use of
sophisticated technology like RCC and micro tunneling. The company has a land bank of
1,127 acres, which it proposes to develop in a phased manner. PEL is also making inroads
in the asset ownership space with its entry into the road and power (both thermal
and hydel) space.
Investment Theme
PEL’s order book is geared towards hydel projects that are typically long gestation
projects and are mostly in difficult terrains. The average duration of the order book is
above three years. There are inherent risks in execution of such a long duration portfolio.
Also, environmental issues have led to delays in execution on under construction
projects.
The company’s venture into the power BOT and real estate segments will demand
upfront investments with returns being back-ended. PEL’s plans to set up hydel and
thermal power projects will need funding in the future, possibly leading to a rise in
leverage and/or equity dilution.
Key Risks
Higher than expected order inflows could lead to a pick-up in execution in the future.
Also, faster than expected roll out of its realty projects can give a boost to income and
profitability.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Results sharply below estimates
Patel Engineering’s (PEL) Q3FY11 revenues and PAT came sharply below our and
consensus estimates. Revenue, at INR 4.3 bn (against our expectation of INR 8.9
bn), was down 31% Y-o-Y and 43% Q-o-Q. One-off claims on project cancellation
resulted in EBITDA margins coming in at ~25%. The same one-off claims led to
higher interest charges. PAT margins, at 2%, were down 370bps Q-o-Q and
500bps Y-o-Y. PAT, at INR 88 mn, was down 80% Y-o-Y and Q-o-Q.
Revenue hit by various reasons
Teesta and Parbati hydel projects were hit by torrential rains and landslides, and
Lohari Nagpala hydel project was cancelled due to environmental concerns,
which impacted revenue bookings. Further, execution on Pranahita Chevella
irrigation project was delayed due to the Telengana issue, while PEL didn’t
receive letter from NHPC to proceed on Kotli-Bhel hydel project. Work on the US
projects also suffered due to heavy snowfall.
Outlook and valuations: Multiple concerns; downgrade to ‘HOLD’
The company’s contracting business has been hurt by sluggish order intake
(which has dampened revenue visibility), project cancellations and delays and
extension in working capital cycle. Rising interest costs, with a leveraged balance
sheet, have hurt profitability. The thermal power plant has also not progressed
as per our expectations with financial closure still pending on the project. While
PEL may get the requisite approvals and financial closure on the project over the
next 1-2 quarters, we believe investors will see value only when the question of
equity infusion, along with any stake sale in the project, is addressed.
We have cut our revenue and PAT estimates for FY11 by 33% and 48%
respectively. Our SOTP-based target price works out to INR 187. This consists of
INR 104/share from construction business (valued at 7x FY12E P/E) and INR
17/share on BOT assets (on DCF basis). We value the real estate assets at INR
65/share. While we like the business model of the company with its focus on
profitable segments, we believe that near-term concerns on order intake,
leveraged balance sheet and profitable growth are likely to weigh on stock
performance. We downgrade the stock to ‘HOLD’ from ‘BUY’ and rate it ‘Sector
Underperformer’.
Other highlights
• Order book at INR 100 bn, including INR 10 bn L1 projects: PEL’s current order
book stands at INR 100 bn (including L1 projects of INR 10 bn). Order intake during
the year has been very weak and has stood at INR 12 bn in 9mFY11. With
environmental concerns rising around hydel power projects, apart from other
regulatory issues, we expect order intake and eventual execution on these projects to
remain sluggish in the near term.
• Revenue visibility a concern: Of the INR 100 bn order book, INR 10 bn is in L1
projects. Also, work has not yet started on Kotli Bhel and Pranahita projects (INR 15
bn each). This means that projects on which work is underway are only ~INR 60 bn,
which raises questions over future revenue visibility. While PEL is increasing its focus
on the overseas territories since order intake is sluggish in domestic territories, we
believe that project wins and execution in these territories will take some time.
• EBITDA margins boosted by one-off claims: Cancellation of the Lohari Nagpala
project resulted in closure of forex hedging positions (entered into by PEL to hedge
the future euro receivables). PEL’s claim for ~INR 500 mn loss on this account was
approved and was included in the topline this quarter. Since there was no
corresponding cost entry for the same, EBITDA margins came in much higher.
Adjusted for this, EBITDA margins would have been ~15%.
• The same INR 500 mn loss mentioned above was included in the interest costs; as a
result, interest charges came in much higher at INR 862 mn against INR 300 mn last
quarter.
• Order book break up: Order book is spread across hydel (45%), irrigation (40%),
roads and urban infra segments. The order book does not include any captive
project. It includes INR 5 bn projects from Michigan Engineers and USD 80-90 mn on
account of US subsidiaries.
• Revenue break up: Revenue break up for the quarter was hydro (44%), irrigation
(25%), with the balance coming from roads and micro tunneling.
• Subsidiary performance in 9mFY11: US subsidiaries contributed INR 2.5 bn to
revenues and INR 250 mn to PAT, while Michigan Engineering contributed INR 1.1 bn
to revenues and INR 50 mn to PAT. The revenue and PAT contribution from the
realty segment during the same period was INR 660 mn and INR 35 mn,
respectively.
• Andhra receivables: PEL is evaluating the Andhra scenario cautiously, while
keeping an eye on the payment cycle. Receivables on Andhra projects, which were
INR 2.0 bn at FY10 end, are currently at INR 1.5 bn.
• Power portfolio: The company has only one clearance pending for setting up the
first phase (1,050 MW) of the thermal power plant at Nagapatnam district in Tamil
Nadu. The total project cost is INR 50 bn, of which, debt is INR 37 bn and balance is
equity. The broad debt commitments from various banks have been received. The
company has already invested INR 2.5 bn as equity in the project. It has also invited
and received bids for the various packages for construction of the plant. It is
planning to dilute stake in the power venture to raise funds for project development.
PEL is also planning to develop a 144 MW hydel plant in Arunachal Pradesh. It
expects CEA clearance for the plant by July 2011 and execution to begin in FY12.
• Real estate projects: The company has launched the phase IV of its Bengaluru
township project under which it launched 126 flats under ‘Smondoville IV’. It expects
to achieve revenues of INR 1.8 bn from this phase. The first phase was of 1 mn sq ft
while the second and third phases were of 0.5 mn sq ft each.
With regards to Jogeshwari commercial project, execution is already underway. PEL
has been able to get an anchor tenant to lease 1.2 lakh sq ft at INR 120/sq ft. It
expects to complete execution on the project in two years.
Valuation
Construction
EPS FY12E (INR/Share) 14.9
P/E multiple (x) 7.0
Value per share (INR/Share) 104
BOT Projects
DCF value of projects (INR mn) 2,836
Patel's share (%) 42.0
Patel's share of value (INR mn) 1,191
Value per share (INR) 17
Real Estate
Value of Jogeshwari properties (INR mn) 1,633
Value per share (INR) 23
Value of Bangalore and Noida project (INR mn) 2,919
Value per share (INR) 42
Total 187
Current share price 182
Upside (%) 2.5
Source: Edelweiss research
Company Description
PEL is a leading civil engineering and construction company, engaged primarily in the
construction of hydel power projects, irrigation, water supply, and transportation
projects. It is one of the few Indian construction companies with a presence in the US.
Its US subsidiaries have given PEL an added advantage in terms of access to use of
sophisticated technology like RCC and micro tunneling. The company has a land bank of
1,127 acres, which it proposes to develop in a phased manner. PEL is also making inroads
in the asset ownership space with its entry into the road and power (both thermal
and hydel) space.
Investment Theme
PEL’s order book is geared towards hydel projects that are typically long gestation
projects and are mostly in difficult terrains. The average duration of the order book is
above three years. There are inherent risks in execution of such a long duration portfolio.
Also, environmental issues have led to delays in execution on under construction
projects.
The company’s venture into the power BOT and real estate segments will demand
upfront investments with returns being back-ended. PEL’s plans to set up hydel and
thermal power projects will need funding in the future, possibly leading to a rise in
leverage and/or equity dilution.
Key Risks
Higher than expected order inflows could lead to a pick-up in execution in the future.
Also, faster than expected roll out of its realty projects can give a boost to income and
profitability.
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