Patel Engineering Ltd. (PEL) - KRC Stock Recommendation
Patel Engineering Ltd. (PEL)
Q3 FY08 Result update
Key Data
CMP Rs 560
Date April 9th 2008
Sector Infrastructure
Face Value Re.1
BSE Code 531120
52 Week H/L Rs 1070/ 316
Market Cap Rs 3341 Cr
Patel Engineering Ltd (PEL) is a leading civil construction company engaged in construction of power plants, dams, tunnels, bridges, marine works, flyovers and highways etc. PEL has also specialized in micro tunneling which is high margin business requiring sophisticated technology. Besides this the company also master in technology of RCC (Roller Compact Concrete) required for construction of dams.
Investment Rationale
Strong order book
PEL currently has a strong order-book position of Rs5500 crore (4.9x FY07 and 4.5x TTM sales) providing revenue visibility over the next 2 years. The order book is spread across 3 verticals namely Power projects (56%), Transportation (23%) and Irrigation and Water supply (21%).
Foray into different areas
PEL’s recent foray into real estate through its wholly owned subsidiary Patel Realties India Ltd (PRIL) is planning to have phase wise development of 987 acres. The company’s entire land bank is fully paid and is purchased at a nominal cost. The company has also forayed into Independent Power Producer (IPP) business model of generating power. It has signed a MOU with the Government of Gujarat to set up thermal power plant aggregating 1200 MW in four phases of 300 MW each in Bhavnagar, entailing an investment of Rs6000 crore. The electricity generated will be sold to power traders, captive consumers and state governments. The company is looking for a coal linkage outside India for the said project.
Market share of 21% in Hydro power segment
PEL is enjoying approximately 21% market share in Hydro power segment which is well poised to register robust growth over the next few years. Government of India is planning to add 20,000 and 50,000 MW in 11th and 12th five year plan. This is expected to create significant business opportunity for PEL going forward.
Use of sophisticated technology
PEL uses RCC technology for constructing dams, where 70% of cement is replaced with flyash. This method is 30% less expensive than traditional ways and hastens the process by approx 40%. It also uses Micro-tunneling for urban development which avoids troubling traffic and circumvents the need to dig up roads. PEL also uses Double Lake Tap method which quickens implementation of hydro-power project by almost a year as one need not deplete the reservoir for installing another lake tap. Therefore considering the strong order book, significant market share in high margin hydropower segment and venture into other attractive areas along with the use of modern technology, we expect PEL to post robust performance going forward.
Key Developments
Robust order book of Rs5500 crore
The company has robust order book of Rs5500 crore (4.9x FY07 and 4.5x TTM sales). Recently it entered into 50:50 joint ventures with KNR Constructions. The new Patel-KNR JV has bagged an order valued at Rs206 crore towards balance works of widening 4/6 laning and strengthening of existing 2 lane carriageway of NH-7 between Madhurai & Kanniyakumari in Tamil Nadu by NHAI.
Foray into Independent power producer (IPP) business project to set up 1200 MW thermal plant
The company has forayed into Independent Power Producer (IPP) business project. It has signed a MOU with the Government of Gujarat to set up thermal power plant of 1200 MW in four phases of 300 MW each in Bhavnagar, entailing an investment of Rs6000 crore. The electricity generated will be sold to power traders, captive consumers and state governments. The company is in advanced stage of acquiring coal mines in Indonesia and South Africa with sufficient reserves.
Floated wholly owned subsidiary, PRIL, to foray into real estate development
PEL has floated a subsidiary, PRIL to enter into margin l ucrative real estate business. The company has a land bank of 987 acres which is fully paid and purchased at a nominal cost. PEL has transferred development rights to its subsidiary and plans to add more land in its kitty. The company plans to develop an integrated township in Bangalore and commercial property in Mumbai and Hyderabad.
Land bank details
Place Area (acres)
Hyderabad 650
Chennai 190
Bangalore 100
Panvel 20
Mumbai 6.5
Mysore 20
Total 986.5
Financial Performance
Top-line increased 33.3% y-o-y in Q3 FY08.
The company reported 33.3 percent and 25.6 percent growth in net sales and EBDITA to Rs379 crore and Rs59.2 crore respectively in Q3 FY08. The EBDITA margin declined 90 bps yo-y to 15.6 percent due to higher operating expenses; however net profit margin improved 34 bps to 10.85 percent due to lower interest and depreciation expenses.
Valuations
At current market price of Rs559.6 the stock is quoting at PER 26.15x, On EV/Sales and EV/EBITDA it is available at 3.04x and 20.17x of TTM December 07 earning respectively.
Click Here for In-depth Patel Engineering Ltd. (PEL) research report by KR Choksey, company profile along with stock recommendations, Patel Engineering Ltd. (PEL) target price and for making informed investment decisions.
Kisan Ratilal Choksey Shares and Securities Pvt. Ltd.
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