Patel Engineering - Ancillary business to drive growth - Buy - Elara Capital

• Rating : Buy
• Target Price : INR511
• Upside : 27%
• CMP : INR404 (as on 19 May 2010)

Ancillary business to drive growth

Earnings in line, pleasant surprise on execution front

PEL recorded yet another steady quarter with revenues rising 38.7% YoY to INR10.6bn. Operating margins expanded by 95bps YoY to 12% owing to savings across general and admin expenses. Despite a better operational performance, higher interest charges at INR390mn (+86% QoQ) led to a 7.4% decline in net profits to INR512mn. For full year FY10, PEL registered a 31.9% YoY growth in revenues to INR23.5bn. OPM and net profits though remained muted at 14.9% (+11bps YoY) and INR1.3bn (+1.5% YoY), in line with the expectation. On a consolidated basis, PEL posted revenues of INR30.8bn (+25.3% YoY) with operating margins at 15.9% and net profits of INR1.9bn (+41.8% YoY).

Order book expands, mainly due to escalations

The order backlog as of March'10 stands at INR100bn, including L1 jobs and escalations on existing jobs worth INR15bn and INR22bn respectively received during Q4FY10. In terms of the segmental break-up while multipurpose power projects (49%) continue to dominate a major chunk of the backlog, contributions from irrigation and transportation segments stand at 43% and 8% respectively.

The company is pre-qualified to bid for orders worth INR200bn in addition to in-house jobs amounting to INR30bn across the power and real estate segments. The management aims at closing FY11 with a backlog of INR160-170bn. While the exposure of the existing order backlog to the Andhra–Telangana region is at INR20bn, pending payments from the State government stand at INR600mn as of May'10.

Maintain BUY with a revised price target of INR511

A rich track record of successfully executing projects in the hydro power and irrigation segments coupled with a potential unlocking of value from the group's power and real estate initiatives makes us positive on PEL's prospects. Our SOTP valuation indicates a ~27% potential upside for the stock from present levels. We retain our BUY recommendation with a revised 12 month price target of INR511.

Source : Equity Bulls

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