Nirmal Bang has come out with a report on Patel Engineering' Q2FY10 earnings. The research firm recommended a buy rating on the stock with a target price of Rs 616.

"Patel Engineering Ltd is one of the major players in the construction business in India with rich experience in sectors like irrigation and hydro construction. The revenues of the company have grown at a CAGR of 34.0% from FY 2006 to FY 2009 and Net Profit has grown at a CAGR of 35.0% for the same period. We believe going forward the revenues of the company will grow at a CAGR of 25.3% over a period of next 3 years and Net profit will grow at a CAGR of 18.8% during the same period.

We have valued the Construction Business on a PE basis assigning it a multiple of 15x FY11E earnings of Rs. 35.6 per share thereby valuing the core construction business at Rs. 533.9 per share. Whereas the BOT projects are valued using the NPV methodology and yields a value of Rs. 7.7 per share. We are valuing the real estate business based on 2x Book Value of Rs. 74.8 per share.

At the current market price of Rs 446.1 per share, PEL is currently trading at a PE of 16.5 FY10E and 12.5x FY11E EPS estimates. At Rs. 446.1 per share the stock is trading at a discount of 38.2% from our intrinsic price of Rs. 616 per share which is 22.8x FY10E and 17.3x FY11E earnings. We recommend a BUY rating on the stock with a long term view.", says Nirmal Bang.

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