Patel Engineering Ltd.
CMP: Rs445
Market Performer
Patel Engineering Ltd (PEL), with a dominance in the hydropower segment (40.3% of its order book and 61.7% of revenues), commands a 22% share in this vertical. We estimate spend of Rs500bn on hydropower during the 10th and 11th plan. Maintaining its share would mean Rs10bn order flow (simple average) to PEL from this vertical each year, ensuring a comfortable position for the next 6-7 years.
PEL’s OPM at 12.9%, is one of the highest among peers on account of complexity of work in this vertical and capabilities that only a handful of players possess. We expect an increased share of hydropower in PEL’s order book (43.2%) in FY07, helping sustain margins.
PEL’s initiative, to move up the value chain by bidding for independent power projects in hydropower and lumpsum turnkey projects in the irrigation segment, is a value accretive one. PEL is awarded its maiden annuity project valued at
Rs4.1bn, wherein its share is 60%. We assign a value of Rs8.2 per equity share of PEL to this annuity project, expecting an IRR of 12-14%.
PEL’s order book at Rs4.3bn translates into 4.2x FY06 turnover, offering visibility for a 3-year period. Order intake at 2.5x its FY06 consolidated revenues and the expected increase of 35% in order book in FY07 to drive growth.
PEL is fairly diversified and expected to witness a CAGR of 36.3% in turnover between FY06 and FY08. Its overseas subsidiaries and the recent acquisition in the urban infrastructure segment to add value going forward.
With an order book of 2.4x its current market capitalization, valuations appear attractive. We assign a MARKET PERFORMER rating.