Patel Engineering – BUY- Strong 2Q; real estate contributes:: IIFL

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Patel Engineering – BUY
Strong 2Q; real estate contributes


Construction business on track
• Patel Engineering is one of the few contractors within our coverage
universe which had better-than-expected execution and whose PAT
came in line with our estimates in 2QFY11.
• Patel Engineering’s 2Q consolidated revenues grew 26% YoY, helped
by a 34% YoY growth in the parent company. Growth in subsidiaries
was muted at 10% YoY, despite contribution from the real estate
subsidiary. Ramp-down in the US subsidiary may have pulled down
consolidated growth.


• Consolidated EBITDA margin contracted 352bps YoY from a high base
of 18.7%. As a result, consolidated EBITDA was flat YoY.
• We had expected abatement in interest expenses during the quarter;
the savings were higher than expected. Interest cost at Rs300m was
lower than our estimates, increasing 5% YoY (down 7.8% QoQ).
• Depreciation declined 17.1% YoY. 2QFY10 depreciation costs were
higher, as the company capitalised the cost of equipment used for a
large US hydro project over the execution period of the project.
• YoY decline in minority interest helped drive PAT growth at 7.2%
YoY—8% higher than our estimates.

Real estate starts contributing to revenues
• Patel Engineering’s real estate project in Bangalore, Smondoville has
started contributing revenues from this quarter.
• With construction work on track, the revenue contribution is likely to
increase going forward.
• Importantly, cash flow from real estate projects would help the
company meet its equity contribution needs for the power project. It
would also help lower temporary fund mismatches and the consequent
need for short-term debt.