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Margin surprises but visibility remains low…
Patel Engineering’s (PEL) Q3FY12 operating performance was better than
our estimates on account of superior margins of 18% (11.8% in Q2FY12)
vs. our estimates of 13% despite lower topline of | 619.3 crore vs. our
estimate of | 793.6 crore. Consequently, PEL reported a bottomline of |
20 crore vs. our estimates of | 12.7 crore. While construction order inflow
and execution has remained sluggish in the last couple of quarters,
providing low visibility, the volatility in margins is also inexplicable. We
maintain our HOLD recommendation on the stock.
ƒ Margins surprise positively
PEL’s Q3FY12 performance positively surprised on the margin front
where the company reported an EBITDA margin of 18% on account of
superior margins in the construction & real estate division. The
construction segment registered an EBIT margin of ~13.1% vs. 9.6% in
Q2FY12 and the real estate segment clocked EBIT margins of 28.2% vs.
21.7% in Q2FY12. We highlight that the margins have been erratic for PEL
in the last couple of quarters, which is inexplicable.
ƒ But…visibility continues to remain low on construction order book
The company has failed to bag any major orders in the last couple of
quarters. Currently, the order book stands at | 9000-10,000 crore. We still
await further clarity on the exact order inflow and order book break-up.
Nevertheless, adjusting for Andhra Pradesh (~| 2200 crore) and
contentious orders (| 1,500 crore –Kotlibel, | 300 crore from Tanzania),
the order book provides low revenue visibility of less than two years.
V a l u a t i o n
At the CMP, the stock is trading at a P/E of 8.8x FY13E earnings.
Considering execution delays in the construction segment, volatility in
margins, lower visibility on the current order book, high debt level and
lack of clarity over tax raids, we recommend HOLD with an SOTP price
target of | 99. We have valued the construction business using
EV/EBITDA multiple in order to capture rising debt level.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Margin surprises but visibility remains low…
Patel Engineering’s (PEL) Q3FY12 operating performance was better than
our estimates on account of superior margins of 18% (11.8% in Q2FY12)
vs. our estimates of 13% despite lower topline of | 619.3 crore vs. our
estimate of | 793.6 crore. Consequently, PEL reported a bottomline of |
20 crore vs. our estimates of | 12.7 crore. While construction order inflow
and execution has remained sluggish in the last couple of quarters,
providing low visibility, the volatility in margins is also inexplicable. We
maintain our HOLD recommendation on the stock.
ƒ Margins surprise positively
PEL’s Q3FY12 performance positively surprised on the margin front
where the company reported an EBITDA margin of 18% on account of
superior margins in the construction & real estate division. The
construction segment registered an EBIT margin of ~13.1% vs. 9.6% in
Q2FY12 and the real estate segment clocked EBIT margins of 28.2% vs.
21.7% in Q2FY12. We highlight that the margins have been erratic for PEL
in the last couple of quarters, which is inexplicable.
ƒ But…visibility continues to remain low on construction order book
The company has failed to bag any major orders in the last couple of
quarters. Currently, the order book stands at | 9000-10,000 crore. We still
await further clarity on the exact order inflow and order book break-up.
Nevertheless, adjusting for Andhra Pradesh (~| 2200 crore) and
contentious orders (| 1,500 crore –Kotlibel, | 300 crore from Tanzania),
the order book provides low revenue visibility of less than two years.
V a l u a t i o n
At the CMP, the stock is trading at a P/E of 8.8x FY13E earnings.
Considering execution delays in the construction segment, volatility in
margins, lower visibility on the current order book, high debt level and
lack of clarity over tax raids, we recommend HOLD with an SOTP price
target of | 99. We have valued the construction business using
EV/EBITDA multiple in order to capture rising debt level.
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