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Buy Patel Engineering; target Rs 485: Kotak Securities

Published on Sat, Aug 25, 2007 at 10:20 | Source : Moneycontrol.com

Updated at Sat, Aug 25, 2007 at 11:25

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Patel Eng

BSE | NSE 10/02/12

Are Mutual Funds betting on Patel Eng?

Kotak Securities is bullish on Patel Engineering and has upgraded its rating from Hold to Buy and expects target price of Rs 485.

Kotak Securities research report on Patel Engineering

We spoke to the management of Patel Engineering about the progress of order inflows as well as execution status. We maintain our positive bias on the company. We expect order inflows to register an increase of 20% as compared to last year, leading to 30% CAGR in revenues between FY07-FY09. Due to the recent correction in the stock price, we upgrade the stock to BUY from HOLD with a price target of Rs.485

Key highlights of the company

Robust order book.

Patel Engineering has a current order book of approximately Rs.50 billion spread across hydropower (55%), irrigation (28%), road and microtunneling projects (17%). The company's major thrust area is hydropower EPC projects. Patel would continue to remain focused on this. It has also diversified its order book towards road BOT projects as well as irrigation projects in India and other countries. The company expects to benefit from the Government's focus on increasing the contribution of hydropower to the total power generated in the country. It is already L1 in Rs.4 billion worth of orders.

Stable margin scenario.

Patel Engineering enjoys very good margins as compared with other construction players due to its focus on the higher margin hydropower construction projects. Hydropower projects have operating margins in the range of 17-22% while irrigation projects have margins in the range of 7-15%. Road projects have relatively lower operating margins of 5-7%. Portfolio diversifications, larger scale of operations and variable pricing clauses have enabled the company to hedge against any kind of margin decline. For a particular quarter, margins depend on the specific projects executed in the corresponding period. However, we expect the company will be able to maintain operating margins in the range 13.5% for the full year, going forward.

Venture into thermal IPP project.

The company has signed an MoU with the Government of Gujarat to set up a thermal power plant of 1200 MW, entailing an investment of Rs.50 billion. The electricity generated will be sold to power traders, captive consumers and state governments. The company is currently in the process of land acquisition, tying up coal linkages outside India and getting clearances from the Government. We do not expect returns from the thermal IPP project to come in the near term. However, this foray is likely to result in enabling the company to emerge as an independent power producer in the long run.

Valuation and recommendation

With a current order book of approximately Rs.50 billion, we expect the company to

grow its revenues at a CAGR of 30%. At the current market price of Rs.398, the

stock is trading at 21.7x and 17.3x on P/E multiples on FY08 and FY09 estimates,

respectively. Adjusted with the subsidiary and land bank valuations, it is trading at

14.3x and 11.4x on P/E multiples on FY08 and FY09 estimates, respectively. This

is very attractive.

We maintain our estimates and upgrade the stock to BUY from HOLD with a price

target of Rs.485. Our price target is based on the sum of DCF value of the core

business, subsidiary valuation and land development valuations arrived through NPV methodology on FY09 estimates. Our target price provides an upside of 22% from the current levels.