PATEL ENGINEERING- Stable performance;: Edelweiss

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PATEL ENGINEERING
Stable performance; progress on asset ownership ventures


􀂃 Strong topline growth, but margins decline
Patel Engineering’s (PEL) Q2FY11 revenues came in at INR 7.7 bn, up 26% Y-o-Y
and 9% Q-o-Q. However, EBITDA margins declined 350bps Y-o-Y and 170bps
Q-o-Q, to 15.2%, due to lower contribution of higher margins hydel power projects
to revenues this quarter. The company was able to contain its capital charges.
Consequently, PAT margins, at 5.7%, were flat Q-o-Q and lower 110bps Y-o-Y.
PAT, at INR 436 mn, was higher 5% Y-o-Y and 9% Q-o-Q.


􀂃 Order book at INR 105 bn including INR 22 bn L1 projects
PEL’s current order book stands at INR 105 bn (including L1 projects of INR 22
bn). This compares with the INR 85 bn order book and L1 projects of INR 15 bn
at FY10 end. L1 projects include the INR 15 bn Kotli Behal hydel project. Order
intake has been sluggish this year due to lack of big ticket awards in the hydel
power segment. The current order book is spread across hydel (50%), irrigation
(35%), roads and urban infra segments. The company expects significant order
accretion in H2FY11. The order book does not include any captive project.

􀂃 Power ventures progressing steadily
The company expects to achieve financial closure of its thermal power plant over
the next few months and is likely to start construction by FY11 end. For its hydel
power projects, it expects CEA clearance by June 2011 and execution to begin in
Q2/Q3FY12.

􀂃 Outlook and valuations: Attractive; maintain ‘BUY’
The company’s contracting business continues to perform well; revenue booking
has begun on the real estate projects as well. We expect PEL to post strong
results in future.
Our SOTP-based target price works out to INR 489. We value BOT assets at INR
17/share on DCF basis. We have valued Jogeshwari properties at INR 28/share,
Bengaluru and Noida projects at INR 48/share and investments in power
ventures at book value contributing INR 43/share. At CMP of INR 372, PEL’s
contracting business is trading at P/E of 10.9x and 9.6x FY11E and FY12E,
respectively. We believe current valuations are attractive and do not factor in
PEL’s premium position in high-margin businesses and strong growth prospects.
We maintain ‘BUY/ Sector Performer’ on the stock.