Patel Engineering (PE) registered steady growth in 4QFY2009. Consolidated Sales of the company were above our expectations, increasing 33% y-o-y to Rs965 crore (Rs727cr), on the back of a strong order book of Rs7,200 crore.
For FY2009, the topline grew by 32% to Rs2,460 crore (Rs1,860cr). Going ahead, PE is expected to continue its good performance and post a CAGR of 21.3% in its topline.
The company enjoys higher Margins than its peers, as it caters to technology-intensive businesses like Hydro Power and Upstream Irrigation Systems.
For 4QFY2009, the company’s OPM at 15.4% (14.5%) exceeded our estimates. The company has been clocking high Margins on account of operating efficiencies and by building in price escalation clauses in the contracts. For FY2009, PE clocked margins of 15.8% (14.7%).
Order book
Patel Engineering has a robust order book of Rs7,200 crore (2.9x its FY2009 Revenues) as on 31 March 2009. There has been a change in its order book mix towards Hydro Power Projects (with higher Margins).
It has been a company policy to concentrate on high-margin projects and to enjoy an optimum utilisation of resources.
Currently, Hydro Projects contribute 45%, Transportation, 15%, and Irrigation, 40%, of the company’s total Order book. As of today, PE’s order book is at Rs10,000cr, which shows that the traction in the order book in 2QCY2009 was good for the company. Additionally, PE is L1 for orders worth Rs2,500cr.
Outlook
The Infrastructure Sector has embarked on a strong Public Private Partnership (PPP) mode, changing from the earlier, public investment driven mode.
A growing complexity in jobs has resulted in domestic construction companies joining hands with global leaders to improve their pre-qualifications for bagging orders.
Investment in infrastructure is expected to be around US $500bn over the next four to five years, which would provide a substantial opportunity to players in the segment.
Valuation
We have valued PE on SOTP methodology. We have assigned its Core Construction business a PE of 12x FY2011E EPS of Rs36.8. Its Real Estate arm has been valued at huge discount, using the NAV method, at Rs103/share.
In the recent past, the stock had witnessed a sharp appreciation, in line with its construction peers. We believe that, at the current levels, PE is available at reasonable valuations.
At Rs429, the stock is trading at 11.6x its FY2011E EPS of Rs36.8, on a consolidated basis without considering its real estate venture. We recommend a BUY on the stock, with a target price of Rs545.