We recently spoke to the management of Patel Engineering about the credit crunch situation witnessed by the entire industry and impact on company’s future as well as ongoing business plans.
Order inflow in the hydropower segment has witnessed a slowdown in past 3-4 quarters and overall order inflow in this segment for the company is also lower than our expectations.
The current order book of company is expected to drive the revenue growth between FY09-FY10, however an increased pace of order inflows is required to maintain the growth momentum going forward.
Due to mix of the order book towards higher margin hydropower projects, operating margins of the company are better than the industry. Along with this, the decline in the commodity prices is expected to augur well for the company as well as for the sector.
Though the impact of lower commodity prices is expected to be reflected by Q4FY09, company should be able to maintain margins at the current levels going forward due to their diversification.
We continue to maintain our estimates of operating margins of around 14.3% and 14.2% for FY09 and FY10 respectively.
We incorporate higher borrowings for the company in the current fiscal as well as next year coupled with high interest rates.
Net profits is expected to be around Rs919 million and Rs1,037 million for FY09 and FY10 respectively assuming a tax rate of 30% as against Rs1,024 million and Rs1,294 million for FY09 and FY10 respectively.
At current market price of Rs120, stock is trading at 7.8x and 6.9x its FY09 and FY10 P/E multiples.
We arrive at a price target of Rs227 based on sum-of-the-parts methodology as against Rs306 earlier.
Though in a longer run, we remain positive on the company but we believe that near terms concerns of liquidity crunch, higher interest rates as well as slowdown in realty sector will continue to impact sentiment and valuations.
We thus continue to maintain our ACCUMULATE recommendation on the stock.