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PATEL ENGINEERING
RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.196
FY12E P/E: 8.9X
q We spoke to the company about status of delayed projects as well as
order inflow scenario
q Order inflow scenario continues to remain weak in the hydro power segment
q Recent news flows suggest that company is actively bidding for road
project bids
q Based on delays in order inflow and project execution, we downgrade
our estimates for the company going forward.
q We continue to maintain ACCUMULATE on the stock with a revised price
target of Rs.196 (Rs.254 earlier). We believe that stock will continue to
underperform in the near term till order inflow and project execution
ramps up.
Key highlights about the company
Recent news flow regarding NHAI banning the company for 5
years is incorrect
Company has indicated that recent news flows regarding NHAI banning the company for 5 years is incorrect. Company management specified that company had bid
for Dhankuni Kharagpur project with National Highways Authority of India (NHAI) on
Jan 10, 2011. On opening of the bids, the company was declared the lowest bidder.
However, after opening of the bid, company realized that there was an inadvertent
error during the estimation of the bid. Company brought this to the attention of
NHAI and formally requested for the withdrawal of its bid. Subsequently, the project
was awarded to some other player.
Post this, NHAI has not banned the company for 5 years for reneging on the
awarded contract since after this event, Patel Engineering had submitted bids for
Krishnagiri Tindivaram annuity project and Barwadda - Pannaagarh project and these
bids were opened later. That clearly indicated that company has not been banned
by NHAI.
Status of key projects
Patel Engineering's performance during Q3FY11 was impacted adversely by torrential rains or environmental clearance related issues. Work on two major hydro
projects - Teesta and Parvati, which were hit by torrential rains, has now commenced and revenue recognition is likely to ramp up going ahead. Company was
expecting significant revenues from Lohari Nagpala project from NTPC but this
project was cancelled and hence company has submitted claims worth Rs 2 bn to
NTPC. We believe that NTPC will be able to clear these claims once it gets it from
the government. Thus, this is likely to keep the working capital cycle higher till the
time claims are settled.
For its power projects, financial closure for Phase 1 for thermal power project in
Tamil Nadu is expected by Q1FY12 while financial closure for hydro power project in
Dongri, Arunachal Pradesh is expected by Q2FY12. Revenue recognition from real
estate projects is likely to increase from FY12 onwards. We have currently factored
in only Mumbai, Bangalore and Noida projects only to arrive at a fair valuation of
upcoming projects.
Order inflow scenario continues to remain weak for the company
Current order book of 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%).
However order inflow for the company has lagged so far from both domestic and
international front. Lack of order inflow in domestic is also due to delays seen in finalization of projects by NHPC. KotliBhel project from NHPC is still under L1 stage
and will be finalized once NHPC gets an acting Chairman. Coupled with this, delays
in financial closure of in-house power projects also led to lack of order inflows in the
power segment. This is likely to impact revenue execution going forward. Going
ahead, we expect ramping up of in-house order inflows led by waterfront project in
Mauritius, thermal and hydro IPP projects. Based on further delays seen in order
award, we reduce our order inflow and execution estimates going forward.
Financial outlook
n We revise our order inflow and execution estimates downwards for the company
based on lower than expected order inflow seen particularly in the hydro power
segment. Our FY11 estimates remain largely unchanged. Delays in getting payments from NTPC may also impact revenue growth going ahead. Along with
this, execution from US subsidiary is also nearing completion with no new order
inflows. This will also impact revenue growth going ahead on a consolidated
basis. We thus expect revenues to be Rs 20.4 bn for FY11 and grow by 15% in
FY12 to Rs 23.5 bn.
n We continue to maintain our operating margin estimates for the company based
on current order book mix towards higher margin projects. We thus expect margins to remain around 15% going ahead.
n Post revising our revenue estimates downwards, we expect net profits to be
Rs.894 mn (Rs.894 mn earlier) and Rs.1056 mn (Rs.1360 mn earlier) in FY11 and
FY12 respectively.
Valuation and recommendation
n At current price of Rs.135, stock is trading at 10.6x and 8.9x P/E multiples for
FY11 and FY12 respectively.
n Post downgrading our estimates, we arrive at a revised price target of Rs.196
(Rs.254 earlier) based on sum-of-the-parts methodology on FY12 estimates.
n We continue to maintain ACCUMULATE on the stock despite decent upside
from the current levels since we believe that stock will continue to underperform
in the near term till order inflow and project execution ramps up.
n Delays in financial closure of its power projects and higher tax provisioning going
ahead are also likely to weigh on the stock in the near term.
Sum of the parts valuation
Valuation Rs per share Parameter
Core business valuation 121 8x one yr forward P/E multiple (FY12)
Subsidiary valuation 18 Relative valuation
Land valuation 58 NPV and land bank valuation
Total 196
Source: Kotak Securities - Private Client Research
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
PATEL ENGINEERING
RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.196
FY12E P/E: 8.9X
q We spoke to the company about status of delayed projects as well as
order inflow scenario
q Order inflow scenario continues to remain weak in the hydro power segment
q Recent news flows suggest that company is actively bidding for road
project bids
q Based on delays in order inflow and project execution, we downgrade
our estimates for the company going forward.
q We continue to maintain ACCUMULATE on the stock with a revised price
target of Rs.196 (Rs.254 earlier). We believe that stock will continue to
underperform in the near term till order inflow and project execution
ramps up.
Key highlights about the company
Recent news flow regarding NHAI banning the company for 5
years is incorrect
Company has indicated that recent news flows regarding NHAI banning the company for 5 years is incorrect. Company management specified that company had bid
for Dhankuni Kharagpur project with National Highways Authority of India (NHAI) on
Jan 10, 2011. On opening of the bids, the company was declared the lowest bidder.
However, after opening of the bid, company realized that there was an inadvertent
error during the estimation of the bid. Company brought this to the attention of
NHAI and formally requested for the withdrawal of its bid. Subsequently, the project
was awarded to some other player.
Post this, NHAI has not banned the company for 5 years for reneging on the
awarded contract since after this event, Patel Engineering had submitted bids for
Krishnagiri Tindivaram annuity project and Barwadda - Pannaagarh project and these
bids were opened later. That clearly indicated that company has not been banned
by NHAI.
Status of key projects
Patel Engineering's performance during Q3FY11 was impacted adversely by torrential rains or environmental clearance related issues. Work on two major hydro
projects - Teesta and Parvati, which were hit by torrential rains, has now commenced and revenue recognition is likely to ramp up going ahead. Company was
expecting significant revenues from Lohari Nagpala project from NTPC but this
project was cancelled and hence company has submitted claims worth Rs 2 bn to
NTPC. We believe that NTPC will be able to clear these claims once it gets it from
the government. Thus, this is likely to keep the working capital cycle higher till the
time claims are settled.
For its power projects, financial closure for Phase 1 for thermal power project in
Tamil Nadu is expected by Q1FY12 while financial closure for hydro power project in
Dongri, Arunachal Pradesh is expected by Q2FY12. Revenue recognition from real
estate projects is likely to increase from FY12 onwards. We have currently factored
in only Mumbai, Bangalore and Noida projects only to arrive at a fair valuation of
upcoming projects.
Order inflow scenario continues to remain weak for the company
Current order book of 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%).
However order inflow for the company has lagged so far from both domestic and
international front. Lack of order inflow in domestic is also due to delays seen in finalization of projects by NHPC. KotliBhel project from NHPC is still under L1 stage
and will be finalized once NHPC gets an acting Chairman. Coupled with this, delays
in financial closure of in-house power projects also led to lack of order inflows in the
power segment. This is likely to impact revenue execution going forward. Going
ahead, we expect ramping up of in-house order inflows led by waterfront project in
Mauritius, thermal and hydro IPP projects. Based on further delays seen in order
award, we reduce our order inflow and execution estimates going forward.
Financial outlook
n We revise our order inflow and execution estimates downwards for the company
based on lower than expected order inflow seen particularly in the hydro power
segment. Our FY11 estimates remain largely unchanged. Delays in getting payments from NTPC may also impact revenue growth going ahead. Along with
this, execution from US subsidiary is also nearing completion with no new order
inflows. This will also impact revenue growth going ahead on a consolidated
basis. We thus expect revenues to be Rs 20.4 bn for FY11 and grow by 15% in
FY12 to Rs 23.5 bn.
n We continue to maintain our operating margin estimates for the company based
on current order book mix towards higher margin projects. We thus expect margins to remain around 15% going ahead.
n Post revising our revenue estimates downwards, we expect net profits to be
Rs.894 mn (Rs.894 mn earlier) and Rs.1056 mn (Rs.1360 mn earlier) in FY11 and
FY12 respectively.
Valuation and recommendation
n At current price of Rs.135, stock is trading at 10.6x and 8.9x P/E multiples for
FY11 and FY12 respectively.
n Post downgrading our estimates, we arrive at a revised price target of Rs.196
(Rs.254 earlier) based on sum-of-the-parts methodology on FY12 estimates.
n We continue to maintain ACCUMULATE on the stock despite decent upside
from the current levels since we believe that stock will continue to underperform
in the near term till order inflow and project execution ramps up.
n Delays in financial closure of its power projects and higher tax provisioning going
ahead are also likely to weigh on the stock in the near term.
Sum of the parts valuation
Valuation Rs per share Parameter
Core business valuation 121 8x one yr forward P/E multiple (FY12)
Subsidiary valuation 18 Relative valuation
Land valuation 58 NPV and land bank valuation
Total 196
Source: Kotak Securities - Private Client Research
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