Hold Patel Engineering; target of Rs 113: KRChoksey

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Hold Patel Engineering; target of Rs 113: KRChoksey

KRChoksey has recommended hold rating on Patel Engineering (PEL) with a target of Rs 113, in its August 17, 2011 research report.

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KRChoksey has recommended hold rating on Patel Engineering (PEL) with a target of Rs 113, in its August 17, 2011 research report.

"Patel Engineering Ltd (PEL) reported Q1FY12 standalone revenue of Rs 541 crore (up, 11.2% YoY) that is in-line with our expectation. Standalone EBITDA decreased by 6% to Rs 73.8 crore on YoY basis, primarily down due to increase in construction & other costs by 16%. EBITDA margins fell by 253 bps to 13.6% on YoY basis for Q1FY12. PAT stood at Rs 10.2 crore, a fall of 60% on a y-o-y basis and 72% sequentially. PEL reported lower PAT mainly on back of higher interest cost of Rs 48 cr, an increase of 64% on a y-o-y basis. Debt on the company's standalone balance sheet stood at Rs 2100 crore."

"In Q1FY12, PEL won two order's worth Rs 500 crore, both were EPC road contracts that were awarded to PEL, one of them was a road contract in Pune worth Rs 350 crore and another a contract in Bihar worth Rs 150 crore. None of the new orders were from PEL core competency area of hydro. Current executable order book for PEL is Rs 6500 crore, as company's Kotli Bhel project (Rs 1500 cr) & Andhra Pradesh irrigation project (Rs 1500 cr) are not moving since many quarters. We expect the order book to gain momentum in FY12 as 2 internal power projects (Rs 2500 cr) of the company are expected to be awarded in the H2FY112. PEL has a debt of ~Rs 2100 crore on its standalone balance sheet, debt increased by ~Rs 150 crore on a sequentially basis mainly to fund the gap in the working capital. The average interest cost for the company stood at 11.5% and is a risk to the company's profitability as RBI has signaled that the rate hike cycle is not yet over."

"We have used SOTP method for PEL and revised target price is Rs 113 as against earlier target price of Rs 186. The interest cost for PEL increased dramatically in Q1FY12 that has eaten substantial profitability. After adjusting the increased interest cost on standalone financials we are getting EPS of Rs 10.8 & Rs 11.6 for FY12E & FY13E respectively. We have valued the standalone construction business at Rs 54 (5x to Rs 10.8 FY12E EPS), International subsidiaries value has been downgraded on account of muted growth to Rs 3 (2x to FY10 EPS), two BOT Road Projects are valued at Rs 10.4 (DCF), Real Estate is valued at Rs 45 for Bangalore, Noida and Jogeshwari projects on NAV basis. We recommend a "Hold" on PEL," says KRChoksey research report.

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