Angel Broking - Patel Engineering - RU4QFY2012 - Result Updates - PDF link

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Patel Engineering - RU4QFY2012

Hold Patel Engineering ; Target : Rs 99 ::ICICI Securities

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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.

Patel Engineering (PEL) :Q3FY12 Result Update:ULJK

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Patel Engineering (PEL)
Lower construction costs and lower interest outgo resulted in PEL’s PAT improving 128.1% Y-o-Y
in Q3FY12 aided by a sharp 42.5% rise in sales at `6,193mn. The company was able to book
lot of sales from old projects, which got delayed in Q2FY12 due to flash floods and adverse
weather conditions.
Key Highlights:
◊ PEL posted one of its highest EBITDA margin of 18.3% in recent quarters. This was largely
due to it being able to book sales from some of its old projects, which had got stalled in
earlier quarters due to flash floods (happened in December 2010 as well as in Q2FY12) &
adverse weather conditions. The corresponding EBITDA margins of Q2FY12 & Q1FY12
were 11.8% and 15.8% respectively.
◊ Construction and raw material expense declined 1004bps aiding achieving higher EBITDA
margin.
◊ Q3FY12 EBITDA was `1,136mn, up 3% Y-o-Y and flat Q-o-Q.
◊ Interest outgoing declined 31.4% due to nil provision of MTM loss in the quarter. This resulted
in PAT margin rising 121bps Y-o-Y to 3.2% (2.0% in Q3FY11).
◊ PEL was expected to achieve financial closure and environmental clearance for its 144 MW
hydro power project located at Arunachal Pradesh and 1050 MW thermal power project
located in Tamil Nadu by the end of Q3FY12 but could not do so due to continued political
uncertainty in both the states.
◊ In the last nine months PEL has not been able to grab a single order in its core segments
like hydropower, irrigation and urban infrastructure. There is lack of clarity of fresh flow of
orders in these segments as well, going forward.
◊ We have marginally increased our PAT estimates for FY12 & FY13 as we have reduced
interest outgoings marginally.
◊ We further believe that execution would play a vital role in Q4FY12E just like it did in
Q3FY12. Since its power projects are likely to remain stalled a lot will depend on how it
executes its existing, old projects the way it did in Q3FY12.
Outlook & Valuations:
We upgrade our rating to HOLD from Sell on PEL with 12 month price target of `107
due to better results posted by the company in Q3FY12. As stock is currently available at a
cheap valuation, so we believe any new order flow would provide positive trigger which may
further improve the rating going forward. So we believe The stock is trading at 5.6x and 4.8x
FY12E and FY13E EPS of `18 and `21 respectively & 5.5x and 5.2x FY12E and FY13E EV/
EBITDA respectively. We value PEL on sum of parts methodology to arrive at a target of `107

Patel Engineering : 2QFY2012 Result Update: Angel Broking,

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For 2QFY2012, Patel Engineering’s (PEL) numbers came in above our and street
estimates. PEL posted strong revenue growth during the quarter, mainly on account
of its international subsidiaries. However, we are not revising our numbers on the
basis of this quarter’s performance, as we believe recovery to the growth path for
PEL will take time as order inflow concerns loom large and as the current order
book is plagued with delays. Also, the company is yet to provide for the hedging
loss incurred due to project cancellations, which we believe would materialize and
impact the company’s financials. Hence, we maintain our negative stance on the
company and a Neutral rating on the stock.
Numbers surprise positively due to lower depreciation and interest cost: For
2QFY2012, on a consolidated basis, PEL posted net sales growth of 23.8% yoy
primarily due to good performance of its international subsidiaries. EBITDA margin
came lower at 11.8%, as international subsidiaries enjoy lower margins. Reported
PAT for the quarter declined by mere 30.9% yoy despite a 73.2% yoy increase in
interest cost, which was offset by lower depreciation cost. Also, it is pertinent to note
that the interest cost itself has declined on a qoq basis, unlike the general trend in
the industry.
Outlook and valuation: PEL’s core C&EPC business is currently facing headwinds
with its large projects facing delays and a disappointing order inflow. Further, the
longer gestation nature of its order book, macro headwinds and increasing debt
levels put the company’s growth visibility for the next few quarters under doubt.
Hence, we maintain our Neutral rating with a revised fair value of `110/share.
Key risks to our recommendation are 1) pick-up in order inflow from the power
segment in the near term; 2) earlier-than-expected execution from its slow-moving
orders; and 3) raising of capital and the resultant decline in debt levels

Hold Patel Engineering; Target : Rs 80:: ICICI Securities

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Visibility continues to remain low…
Patel Engineering’s (PEL) Q2FY12 results were better-than-expected
largely on account of better revenue growth and lower-than-expected
depreciation & interest expenses. However, PEL’s debt position (net debt
to equity at 1.65x) and WC (305 days or 83% of revenues) continue to
remain at elevated levels, which would take a toll on the bottomline,
going ahead. Furthermore, the order inflow and order book continues to
remain sluggish. We maintain our HOLD recommendation on the stock.
ƒ Results beats expectation, WC & debt position still remain high
PEL’s Q2FY12 revenues grew 23.8% YoY to | 948.5 crore, which can be
attributed to revenue contribution from the real estate division and
international revenue growth. However, the EBITDA margin declined 340
bps  to  11.8%  and  interest  expenses  grew  73%  YoY  to  |  51.1  crore  in
Q1FY12. Consequently, the net profit declined 26% YoY to | 30.1 crore.
Nonetheless, the results were above our expectation largely on account
of better-than-expected topline growth and lower depreciation & interest
expenses. Sequentially, interest expenses declined to | 51.4 crore in
Q2FY12 from | 63.4 crore in Q1FY12 despite the rise in debt position. The
debt position has increased to | 2843 crore in H1FY12 from | 2474 crore
in FY11 taking net debt to equity to 1.65x in H1FY12 from 1.55x in FY11.
In terms of WC, it remains at 305 days (83% of revenues).
ƒ Visibility low on construction order book
The company has failed to bag any major orders since the last couple of
quarters and the order book stands at | 9,500 crore, 2.7x book to bill ratio.
However, adjusting for Andhra Pradesh (| 1,500 crore) and contentious
orders (| 1,500 crore –Kotlibel, | 300 crore from Tanzania), the order book
to bill ratio stands at 1.7x, providing low revenue visibility of less than two
years. With no clarity on the Telangana issue and uncertainty on Kotlibel
project, we do not see any traction on these orders in the near term.
V a l u a t i o n
At the CMP, PEL is trading at a P/E of 6.0x FY13E earnings. Considering
execution delays in construction segment, concerns over 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 | 80. We
now value the construction business using EV/EBITDA multiple in order to
capture the rising debt level.

Reduce PATEL ENGINEERING ; TARGET PRICE: RS.92 :: Kotak Sec

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PATEL ENGINEERING LTD (PEL)
PRICE: RS.87 RECOMMENDATION: REDUCE
TARGET PRICE: RS.92 FY13E P/E: 9.1X
q Revenue growth was marginally better than our estimates and stood at
13% YoY for Q2FY12.
q Operating margins stayed strong at 15.5% due to higher margin projects
executed during Q2FY12.
q Net profit was impacted by higher interest outgo and higher borrowings
and registered a growth of just 1% YoY.
q Borrowings and working capital of the company have witnessed a sharp
increase during FY11 and H1FY12. Along with higher interest rates, concerns
continue to remain regarding lack of order inflow as well as financial
closure of its power projects. Revenue visibility continues to remain
low and profitability is under pressure due to low margin international
projects.
q We maintain our estimates and roll forward our valuations to FY13. We
continue to remain negative on company's outlook and maintain REDUCE
on Patel Engineering with a one year price target of Rs 92 (Rs 118 earlier).
We believe that stock would continue to underperform till the time order
inflow ramps up or interest rates comes down.

Hold Patel Engineering; Target : Rs 102::ICICI Securities

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C o n s t r u c  t i o n   b u s i n e  s s   v i s i b i l i t y   l o w …
Patel Engineering Ltd’s (PEL) Q1FY12  results were better on the topline
and margins front due to stronger construction revenues. However,
despite stronger EBITDA margins of  15.5% vs. our estimates of 12.5%,
the bottomline was marred by higher interest expenses of | 63.4 crore vs.
our estimate of | 48.6 crore. With the current order book (post adjustment
of contentious orders) providing low revenue visibility of less than two
years, concerns remain on revenue visibility from the construction
segment. We maintain our HOLD recommendation on the stock.
ƒ Better margins negated by high interest cost
PEL reported better Q1FY12 results on the topline and margins front
due to stronger than anticipated construction execution. However, the
bottomline was impacted by higher interest cost of | 63.4 crore, up
~95% YoY due to high debt level and rise in interest rates.
Consequently, the company reported PAT of | 15.9 crore despite
stronger margins of 15.5% vs. our estimates of 12.5%.
ƒ Visibility low on construction order book
The company has failed to bag any major orders in the last couple of
quarters and the order book stands at | 9,500 crore, 2.7x book to bill
ratio. However, adjusting for AP (| 1,500 crore) and contentious
orders (| 1,500 crore –Kotlibel, | 300 crore from Tanzania), the order
book to bill ratio stands at 1.7x, providing low revenue visibility of less
than two years. With no clarity on the Telangana issue and
uncertainty on the Kotlibel project, we do not see any traction in these
orders in the near term. Therefore, order inflow is the need of the
hour for visibility in the construction business, going forward.
V a l u a t i o n
At  the  CMP,  PEL  is  trading  at  a  P/E  of  7.1x  in  FY13E.  Considering  the
execution delays in construction segment, concerns over margins, lower
visibility on current order book, high debt level, lack of clarity over tax
raids, etc, we recommend HOLD with SOTP price target of | 102/share.

PATEL ENGINEERING ::: REDUCE TARGET PRICE: RS.118: Kotak Sec

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PATEL ENGINEERING LTD (PEL)
PRICE: RS.102 RECOMMENDATION: REDUCE
TARGET PRICE: RS.118 FY12E P/E: 9.5X
q Revenue growth was in line with our estimates and stood at 11% YoY
for Q1FY12
q Operating margins stayed strong due to higher margin projects executed
during Q1FY12
q Net profit was impacted by higher interest outgo and registered a decline
of 60% YoY. Net profit margins declined sharply and stood at just
1.9% as compared to 5.3% in Q1FY11.
q For Patel Engineering, along with higher interest rates, concerns continue
to remain regarding lack of order inflow as well as financial closure
of its power projects. Though there is visibility in terms revenue
growth for FY12 but corresponding increase in working capital requirements
and high interest as well as visibility for FY13 and beyond continue
to remain key areas of concern.
q We thus reduce our estimates for the company and arrive at a revised
price target of Rs 118 (Rs 186 earlier). Due to lack of order inflow for
Patel engineering in the hydro power segment, we change our recommendation
to REDUCE from ACCUMULATE earlier. We believe that stock
would continue to underperform till the time order inflow ramps up or
interest rates comes down.


Revenue growth led by improved execution
n Revenue growth was in line with our estimates and stood at 11% YoY for
Q1FY12.
n Current order book of company stands at Rs 95 bn on a consolidated basis including
L1 orders. International order book stands at nearly $75 mn while Michigan
order book stands at nearly Rs 3.5 bn. Order book is diversified across hydro
power (45%), irrigation (40%) and others (15%).


n Financial closure of Phase 1 of 1200 MW thermal power project in Tamil Nadu
has further delayed. Clearances are still pending and it may be delayed till the
end of Q2FY12. Financial closure of hydro power project in Arunachal Pradesh is
expected by Dec, 2011. So till the company achieves financial closure on these
projects, order inflow from internal segment would remain muted.
n Due to lack of order inflow, company has refrained from giving any revenue
guidance.
n We thus continue to remain cautious and maintain our estimate of 10% growth
in revenues in FY12.
Operating margins in line with estimates
n Operating margins stayed strong due to higher margin projects executed during
Q1FY12
n We maintain our estimates and expect margins to be 12.5% for the company
going ahead on a standalone basis.
Net profit growth impacted adversely by higher interest rates
n Net profit was impacted by higher interest outgo and registered a decline of
60% YoY. Net profit margins declined sharply and stood at just 1.9% as compared
to 5.3% in Q1FY11.
n We increase our interest rate assumptions for the company going forward and
expect net profits to witness a decline in comparison with last year. We now
expect net profits of Rs 755 mn as against our earlier estimate of Rs 1.04 bn earlier.
Valuation and recommendation
n At current price of Rs 102, stock is trading at 9.5x P/E and 5.8x EV/EBITDA multiples
for FY12.
n Along with higher interest rates, concerns continue to remain regarding lack of
order inflow as well as financial closure of its power projects. Though there is visibility
in terms revenue growth for FY12 but corresponding increase in working
capital requirements and high interest as well as visibility for FY13 continue to
remain key areas of concern.
n We thus reduce our estimates for the company and arrive at a revised price target
of Rs 118 (Rs 186 earlier) on FY12 estimates. We take into account lower
valuation multiples for valuing core business due to lack of order inflow for Patel
engineering and also reduced valuations from real estate division since higher interest
rates would impact NPV as well as offtake from real estate division. We
thus change our recommendation to REDUCE from ACCUMULATE earlier.
n We believe that stock would continue to underperform till the time order inflow
ramps up or interest rates comes down.

Accumulate PATEL ENGINEERING : Target Rs 196; Kotak Sec

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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.

Patel Engineering - woes all around; downgrade to Hold: Edelweiss

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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.

Accumulate PATEL ENGINEERING; target Rs254; Kotak Sec,

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PATEL ENGINEERING LTD (PEL)
RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.254
FY12E P/E: 10.3X
q Patel engineering standalone revenues reported 11% de-growth for
Q3FY11 vis-à-vis same period last year. This was much lower than our expectations.
This was led by certain projects being hit by torrential rains
and cancellation of another project. Operating margin performance adjusted
with WIP adjustment was marginally better than our estimates.
Due to sharp decline seen in revenues and increase in interest cost due to
forex adjustment, net profit declined by 74% for Q3FY11 vis-à-vis same
period last year.
q Current order book of company 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. We downgrade our
revenue estimates to factor in poor performance seen during Q3FY11 and
expect revenues to de-grow by 13% in FY11 and then grow by 30% in
FY12.

Patel Engineering :Target: Rs 223 HORIZON: 1-30 Days: Anand Rathi

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Patel Engineering:  TGT: 223 HORIZON: 1-30 Days
Investment Rationale
Patel Engineering, is a civil engineering major with strong
presence in hydro-power, irrigation and transportation
projects. PEL’s core competency lies in constructing hydropower
plants and up stream irrigation projects.
It is also present in real estate with a bank of 1127 acres,
which it proposes to develop in phased manner. There are
on going projects in Bengaluru and Mumbai at Jogeshwari.
It has also started booking revenue from the Bengaluru
projects and has also received good response for the
launched projects.

Add Patel Engineering; Target :Rs 191: ICICI Securities,

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Patel Engineering: Lower visibility to weigh on core business…
Patel Engineering (PEL) reported a disappointing set of Q3FY11 results
with revenues witnessing a 31.3% YoY fall to | 435 crore on the back of
i) flash floods affecting two hydropower project (Teesta and Parvati), ii)
heavy snowfall affecting US projects, iii) delay in execution of Pranahita
and Kotlibel projects and iv) cancellation of the Loharinagpala hydro
project. Considering the slower topline growth due to execution delays
and muted order book growth, high debt level leading to higher interest
outgo and lack of clarity over tax liability on account of raids in Q3FY11,
we have assigned an ADD rating to the stock.

Macquarie Research:: Patel Engineering - Bolt out of the blue

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Patel Engineering Company
Bolt out of the blue
Event
􀂃 PEC reported disastrous 3QFY11 results which have put a big question mark
on all of our earlier assumptions. Not only did revenues and earnings decline
31% and 80% respectively on YoY basis, but a large part of the order book
has become suspect. We have cut our target price to Rs201 from Rs483 and
downgrade to Neutral. The stock is likely to remain under pressure till visibility
improves on the order book.

Patel Engineering:Building on power & real estate: ICICI Sec

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Patel Engineering



Building on power & real estate…
Patel Engineering Ltd (PEL) reported a strong set of Q2FY11 results with
revenues witnessing 26% YoY growth to | 766 crore. The EBITDA
margin declined by ~350 bps YoY and ~170 bps QoQ to 15.2% due to
lower share of revenues from the hydro segment. PAT grew at 7.2%
YoY to | 44 crore. Despite subdued order inflows, order book of | 10,500
crore provides robust revenue visibility. The company’s strong focus on
the power and real estate segments ensures consolidated revenues
CAGR of 14.7%. We recommend STRONG BUY on the stock.

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.

Patel Engineering – 2QFY2011 Result Update Angel Broking

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 Patel Engineering – 2QFY2011 Result Update

Angel Broking maintains a Buy on Patel Engineering with a Target Price of Rs565.

Patel Engineering (PEL) posted decent numbers on consolidated basis aided by

real estate revenues of `54cr from its Smondoville Bangalore project, as against

our expectation of clocking the same in 2HFY2011. PEL’s order book position

stood at `8,400cr in 2QFY2011 (2.3x FY2011E revenues) excluding L1 orders

worth `2,100cr. Given decent OB and attractive valuations of 8.0x FY2012E

earnings (adjusted for investments), we maintain a Buy on the stock.

Patel Engineering:: Bumper quarter-- Elara

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Bumper quarter
Results significantly ahead of estimates, make up for faltering Q1
PEL reported an exceptional Q2FY11 registering 34% YoY growth in
revenues to INR5.4bn, thereby making up for the weak Q1. The
pleasant surprise in execution though came at the cost of operating
margins which declined by 405bps YoY to 14.3% (vs our expectation
of 17%) owing majorly to lesser implementation of relatively higher
margin hydro projects (45% of revenues). Consequently, operating
profits for the period rose by a paltry 4.4% YoY to INR772mn. Lower
interest charges at INR236mn (-19.3% QoQ) and stable depreciation
expenses, however, fuelled an attractive net profit growth of ~14%

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.

PINC POWER PICKS: PATEL ENGG. - BUY, TP- Rs567 (45% upside)

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What’s the theme?
Patel Engineering is an attractive infrastructure and land bank story. Its infrastructure business comprising
high-margin hydro power, irrigation and micro-tunneling are already showing signs of strong order inflows
for FY11. Its L1 position has improved to Rs31bn in Q1FY11. In the Real estate segment, the Bangalore
project has been pre-sold 90% and the Noida project has been pre-sold 75%. Revenue from this project
is likely to accrue H2FY11 onward.
What will move the stock?
1) We believe the core business is undervalued, and are optimistic of enhanced valuations as we believe
the order book would grow at~20.9% CAGR over FY10-12.
2) Order flow from the hydro power segment has been below potential over the past three years at
~Rs15.7bn average. Nevertheless, the company has a total order backlog of Rs110bn and it has L1
status in hydro power projects of ~Rs15bn.
3) Faster execution of the real estate projects would stimulate stock performance.
Where are we stacked versus consensus?
Our FY11E and FY12E earnings estimates are among the lowest on the Street at Rs25.8 (12.8 %) and
Rs33, (8.5%), lower than mean consensus estimates. We expect top-line growth of ~11.1% at Rs35.4bn
for FY11 and 19.9% at Rs42.4bn vs. consensus estimate of ~11.5% at Rs35.5bn and ~22.2 at Rs43.5bn.
Our SOTP-based target price is Rs567 vs. consensus target of Rs507.
What will challenge our target price?
1) Lower-than-expected order inflow of Rs45bn in FY11; 2) Slowdown in the real estate market