Govt’s infrastructure focus augurs well for Patel Engineering

The government’s strong thrust on infrastructure projects and improving economic conditions would benefit Patel Engineering Ltd (PEL), one of the major players with superior technical advantage in hydropower and irrigation projects.

Business:
PEL operates as a civil engineering and construction company in India and abroad. The company, along with its various subsidiaries, offers its services to power, irrigation and water supply, infrastructure development, and transportation sectors.

So far, the company has completed 40 hydropower projects, 175 km of tunneling projects and 78 dams in India. PEL’s subsidiaries in the US — ASI RCC and Michigan Engineers — provide the company an edge to undertake and execute complex projects involving RCC and microtunneling.

PEL has completed 33 microtunneling projects in India and the US.

The company derives majority of its revenues from hydropower segment (58%). Water and irrigation segment contributes 28%, while the rest 14% comes from transportation and specialised projects.

PEL has a strong order book of around Rs 10,000 crore, which includes projects worth Rs 1,500 crore in which it is L1 bidder.

The hydropower-based projects constitute 48% of order book, water and irrigation account for 44% and rest 8% is from infrastructure and transportation.

The company expects 60-70% growth in order book for FY11 on back of Rs 2,000 crore orders, where it is pre-qualified, in addition to Rs 3,000 crore worth of internal orders (from power and real estate).

The company has recently forayed into real estate business, where it has land bank of over 1,100 acres in Mumbai, Panvel, Bangalore, Mysore, Hyderabad and Chennai.

The company is developing 1 million sq ft commercial project in Jogeshwari, Mumbai, from which it anticipates annual lease revenues of about Rs 100 crore.

PEL’s subsidiary has launched a residential project in Noida, Phase I of which comprises 1,600 units with a saleable area of 2.2 million sq ft. PEL has also its Bangalore Electronic City township project. It has already sold close to 1,000 apartments out of total 1,123 planned in Phase I with 1.2 million sq ft. The company plans to launch another residential project and a mall there soon.

Further, the company is also scaling up its asset ownership business in road and power sectors.

Its build-operate-transfer (BOT) road projects would provide steady annuity revenues. The company has two BOT road projects of which one, in Karnataka, is already operational with semi-annuity received. The other project, in Andhra Pradesh, is expected to follow soon.

In its power vertical, PEL is in process of setting up thermal power plants with a total capacity of 2,650 mw in Tamil Nadu in two phases.

The land acquisition and environmental clearance for the first phase (1,050 mw) is complete and financial closure is expected this fiscal.

Work on the second phase of 1,600 mw will start once the first phase is commissioned. PEL is also planning to develop a 140 mw hydropower project in Arunachal Pradesh, financial closure of which is expected in the next 6 months.

Investment rationale:
The government of India has increased the expenditure for infrastructure development and power sector.

For FY11, allocation has increased 46% while that for power sector has been doubled. This would be positive for PEL, which has a rich track record of executing these projects.

The diversified strong order book and order inflows in the coming year provide revenue visibility for next 2-3 years. Further, its real estate business has also started picking up momentum.

During the last quarter, PEL’s subsidiary bagged a large waterfront project worth Rs 4,500 crore in Mauritius for developing an integrated township
within the capital city of Port Louis in 7 years. This project has not been considered in the order book, but would provide extended revenue visibility.

The company’s effort to become an integrated infrastructure player, with its asset ownership in the road, realty and power segments, would add to revenue stream stability.

Concerns:
PEL has exposure to irrigation projects in trouble torn Andhra-Telangana region with Rs 2,000 crore in the order book from this region, which are progressing slowly. Outstanding payments from the Andhra government, though reduced, still stand at Rs 60 crore. Any delays in economic recovery in the US or delays in the implementation of overall projects due to land acquisition, clearances or any other issues will increase the project cost, thereby affecting financial performance. Any increase in raw material cost will also impact the margins.

Valuations:
PEL’s diversified order book provides revenue visibility and its foray into power and realty segments would add to revenues. The revenues are likely to grow at CAGR of 19% over FY10-FY12E.

Net profit is likely to grow at CAGR of 18% over the same period on back of its presence in high-margin complex infrastructure projects and contribution from realty projects. At a current price of Rs 387.70, the stock trades at 12.16x its FY11 earnings and 10.10x its FY12 earnings per share. One can look at the stock on dips from medium- to long-term perspective.

Disclaimer: The writer does not hold  any share in the company