Patel Engineering: On firm ground

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Patel Engineering’s growth prospects are improving on the back of the company bagging new orders, which provides strong visibility. Very recently, the company’s subsidiary was awarded the largest waterfront development project in Mauritius. Notably, the company’s other segments like power and real estate business have also witnessed significant traction leading to improved outlook. In light of these developments and considering the valuations pegged by analysts, there are gains to be made from this stock.

Opportunities galore
Patel Engineering, which is a Mumbai-based company specialising in the construction of irrigation and hydro power projects (over 85 per cent of revenue), has been a key beneficiary of the opportunities in these segments. In fact, the company commands a market share of about 22 per cent in India and is among the leading players in the segment.

In a hydro power project (which costs about Rs 6-7 crore per mw), the construction cost accounts for almost 65-70 per cent of the total cost. Given that about 40 per cent of the planned expenditure for the XI Five Year Plan is earmarked for the power and irrigation projects, there are huge opportunities in the segment. According to a CRISIL Research report, over Rs 100,000 crore will be invested in these two segments during FY10-14. This is huge as compared to just Rs 40,000 crore invested in last four years.

The company is also present in the urban infrastructure and roads projects segments, which are also fast growing segments. The company already has two annuity-based road projects through a joint venture (owns 42 per cent stake) with KNR Construction. But, as of now urban infrastructure accounts for just about 8-10 per cent of its current order book. The company is looking for further opportunities in the transport sector and is planning to bid for more projects, which should see the business grow further.

SUM-OF-THE-PARTS
Method Value per share (Rs)
Power business 1 time investments 47
Core business 10 times FY12 profits 248
Real estate 20% discount to NAV 190
International 5 times FY12 profits 54
Road projects DCF 13
Total 552
Source: Analyst reports

Strong visibility
The company’s order book reached a significant milestone after its subsidiary was awarded a new order on 26 March 2010. This order is estimated to have the potential to generate gross revenues of about Rs 4,500 crore. It is the largest waterfront development project in Mauritius and is slated to be completed within seven years. With this new order, the company's order book stands at Rs 10,800 crore or over four times its 2008-09 revenue, which means strong revenue visibility and higher revenue growth in the years to come.

Real estate
Besides construction, the company is also active in the real estate segment. The company has two real estate projects in Jogeshwari, Mumbai. The first one of 80,000 square feet has been completed and will start generating lease rentals of about Rs 10 crore annually from the first quarter of 2010-11. In the second project, which comprises of one million square feet, the work is going on and the company expects to complete it over the next 2-3 years. This project has the potential to provide lease of about Rs 100 crore annually. Its Bangalore project has a total 1,123 apartments of which, the company has already sold about 900. It expects the Bangalore project to generate about Rs 200 crore revenues over the next two years.

STRONG FOUNDATION
in Rs crore FY09 FY10E FY11E
Sales 2,460.0 3,060.0 3,650.0
Net profit 181.0 190.0 225.0
OPM (%) 16.0 17.0 17.0
EPS (Rs) 30.0 27.5 32.0
PE (x) 15.5 16.9 14.5
E: Analyst estimates

Further, the company is also developing 2.2 million square feet of residential space (1,600 apartments) in Noida, wherein it has a 51 per cent stake. The company has already sold 1,200 apartments, which expected to provide revenues of about Rs 500 crore over the next 2-3 years (as execution progresses). That apart, the company is also has developable land across Bangalore, Chennai and Mysore measuring 970 acre, which will be developed in the coming years. Overall, its real estate business could create significant value in the years to come as the company has already started to monetise its land bank. Meanwhile, analysts value its land bank and ongoing projects at about Rs 180-190 per share.

Powering ahead
The company’s 1,200 mw power plant has recently bagged coal linkages equivalent to 50 per cent of its coal requirements. For the remaining 50 per cent of the coal requirements, the company is in talk for acquiring mines in Indonesia, which is expected to be finalised soon. For the same project, the company has already acquired the land and is planning to achieve financial closure in near-term. In addition to this, the company plans to commission a 90 mw hydro project in Arunachal Pradesh in the coming years.

Since these projects are yet to get commissioned and may take another 4-6 years before they start contributing to the revenues, the valuations are being done on the basis of the equity of Rs 250 crore, which the company has invested so far in these projects. Taking the equity into account, these two projects are now worth about Rs 45-47 per share.

Outlook
Considering the strong capex planned in the power and irrigation, expect the company’s core construction business to do well going ahead. The company is also looking for new projects in the urban infrastructure and road segments, which are equally promising segments.

For the year ending March 2010, the company's net profits are expected to grow at 30 per cent. The following years namely, 2010-11 and 2011-12 are expected to see profits rising by about 20 per cent annually. Based on consolidated earnings, at Rs 460, the stock is trading at reasonable valuations of 14 times 2010-11 and 12 times 2011-12 estimated earnings. The valuations look reasonable considering the company’s exposure to annuity-based road projects, international subsidiaries, real estate business and power ventures. Taking the value of these assets into consideration, analysts value the stock at about Rs 530-550 per share. Notably, as the visibility is improving and new projects are being bagged (it is the lowest bidder in about Rs 2,000 crore worth of projects), investors can expect the company’s prospects to improve further.

Link for article http://www.business-standard.com/india/news/on-firm-ground/390735/


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