IDBI Capital initiates coverage on Patel Engineering with a buy rating; ups target price by 54%

Patel Engineering

IDBI Capital has initiated coverage on Patel Engineering Ltd with a "Buy" rating and a target price of Rs 76 per share, representing a 54% upside from the current market price.

The target price reflects expectations of continued strong order inflows, particularly from the hydro power segment, along with the company’s strategic diversification across both geographic and sectoral lines. These factors are anticipated to drive the company’s revenue growth, as per the brokerage.

Founded in 1949, Patel Engineering (PEC) specialises in complex civil infrastructure projects, including hydro power plants, tunneling, urban infrastructure, and irrigation. The company has navigated multiple capital expenditure cycles in India and currently holds an order book worth Rs 191 billion, which is four times its trailing twelve-month revenue.

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Since COVID-19, PEC has experienced a significant upturn in order inflows. In FY23, it recorded its highest-ever annual order inflow of Rs 78 billion. As a major beneficiary of India’s infrastructure capital expenditure in the hydro power sector, PEC anticipates bidding opportunities for over 30GW in the coming years. The company has posted a consistent double-digit revenue CAGR of 18% from FY20 to FY23, with its YTD FY24 revenue increasing by 20% year-on-year.

PEC’s leverage has declined to 0.6x in 9MFY24 from around 1x pre-COVID, supported by internal accruals, non-core asset sales, and equity raises over the past four years, it added.

IDBI Capital said the company’s robust construction capabilities, developed through years of executing highly technical projects, are expected to play a key role in its growth. Operating margins are forecasted to remain stable, driven by a strong order book in the hydro segment. Additionally, PEC’s low debt-to-equity ratio and improving return ratios highlight its strong financial position.

At the current market price, the stock is trading at a valuation of 16x FY25E P/E, 13.5x FY26E P/E, and 11.5x FY27E P/E. Using a sum-of-the-parts (SOTP) valuation methodology, IDBI Capital has assigned a P/E of 12x FY27E for the core construction business, resulting in a valuation of Rs 63 per share. Additionally, the value of land assets, other investments, and recoveries from arbitration claims is estimated at Rs 20 per share. After applying a 65% valuation factor to these investments, this translates to Rs 14 per share, IDBI added.

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