Buy Patel Engineering - Execution woes arrest progress - Elara Capital

• Patel Engineering
• Rating : Buy
• Target Price : INR500
• Upside : 21%
• CMP : INR412 (as on 13 August 2010)

Execution woes arrest progress

Earnings in line, falters for first time since Q1FY10 on execution

PEL faltered on execution front for the first time since Q1FY10 as its topline rose by a meager 2.2% YoY to INR4.9bn during the quarter. The primary reason for the same was stoppage of works on the HEPP across the Ganga basin in Uttarakhand (owing to agitation by locals) as well as the Pranahita – Chevella lift irrigation project in AP. Operating margins though expanded by 101bps YoY to 16.2% owing majorly to savings on cost of raw materials; the same led a 9% YoY rise in operating profits to INR787mn. Higher interest charges at INR293mn (+21.1% QoQ) though, took its toll on the operational efficiency curtailing the net profits growth to ~3% YoY to INR257mn.

Order book concerns loom large, L1 for INR15bn since Q2FY10

The order backlog as of June'10 stands at INR110bn, including L1 jobs worth INR30bn, half of which were received during Q2FY10. Among the new L1 contracts bagged are micro-tunneling works (INR2.9bn), Kashang HEPP by HPPCL (INR3bn), high altitude roads along Indo - China border in J&K (INR3.4bn) and Parnai HEPP by JKPDC (INR6.5bn). 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 Jun'10.

Toning down estimates, maintain Buy with revised TP of INR500

Considering the dearth in fresh order flows coupled with surmounting borrowing costs (owing to equity infusion in power assets), we tone down our core business earnings estimates for FY11 and FY12 by ~14%. Our revised estimates take into consideration the maximum impact which can arise out of the prevailing situation.

A rich track record of successfully executing projects in the hydro power combined with a potential unlocking of value from the group's power and real estate initiatives makes us positive on PEL's prospects. Retain Buy with a revised 9-month price target of INR500.

Source : Equity Bulls

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