patel eng ru4 qfy2010-190510

1

4QFY2010 Result Update I Infrastructure

May 19, 2010

Please refer to important disclosures at the end of this report Sebi Registration No: INB 010996539

Investment Period 12months

Stock Info

Sector Infrastructure

Market Cap (Rs cr) 2,821

Beta 1.1

52 WK High / Low 526/230

Avg. Daily Volume 62225

Face Value (Rs) 1

BSE Sensex 16,408

Nifty 4,920

Reuters Code PENG.BO

Bloomberg Code PEC@IN

Shareholding Pattern (%)

Promoters 45.5

MF/Banks/Indian FIs 12.2

FII/NRIs/OCBs 16.3

Indian Public 26.0

Abs. (%) 3m 1yr 3yr

Sensex 1.3 14.7 14.7

PEL (6.1) 30.5 (5.1)

Patel Engineering (PEL) posted numbers in line with our estimates for 4QFY2010. The Top-line grew by 24.1% to Rs1,197cr (Rs965cr) for the quarter. The EBITDA Margin was a tad lower at 12.6%, while the Bottom-line came at Rs71.9cr. PEL’s order book at FY2010-end stood at Rs8,500cr (against Rs7,200cr last year). Additionally, it is L1 in projects worth Rs1,500cr. The Order inflow for the company has been subdued as compared to its peers for the last few quarters, barring 4QFY2010, where the order inflow was Rs3,400cr. Strong order inflow, we believe, is a deciding factor for the stock’s future performance going ahead. We continue to maintain a Buy on the stock. In-line performance: PEL reported a Top-line growth of 24.1%, which was a in line with our estimates, to Rs1,197cr (Rs965cr). The EBITDA Margin for the quarter came in at 12.6% (15.4%), which was below our estimates, due to lower contribution from the US subsidiary and PEL’s micro-tunnelling subsidiary, Michigan, both of which have higher profitability. The Bottom-line was majorly in line, inspite of the lower EBITDA margin, mainly on account of higher other income due to a stake sale. Outlook and Valuation: PEL has an order book of Rs8,500cr, spread across hydel (49%), irrigation (43%), and the balance in roads and urban infra segments, which lends revenue visibility. PEL’s construction business has performed well over the last few quarters and is expected to continue the good show on account of the robust sectoral outlook. Further, with its real estate plans taking a concrete form and with steady progress in power ventures, we expect the stock performance of PEL to improve in the coming times. At Rs404, the stock is trading at attractive valuations, with a P/E of 13.0x and 12.3x on its FY2011E and FY2012E Earnings, respectively, which does not factor the value of its real estate business, PEL’s premium position in high margin businesses and its strong growth prospects. Hence, we maintain a Buy on the stock, with a Target price of Rs563, by assigning a 14x FY2012E EPS of 32.9 and valuing its investments at Rs103/share. Key Financials (Consolidated) Y/E March (Rs cr) FY2009 FY2010E FY2011E FY2012E

Net Sales (incl op. income) 2,458 3,081 3,685 4,297

% chg 32.5 25.4 19.6 16.6

Adj. Net Profit 180.5 163.3 217.9 229.7

% chg 19.2 (9.5) 33.4 5.4

FDEPS (Rs) 25.8 23.4 31.2 32.9

EBITDA Margin (%) 15.8 15.9 16.0 15.8

P/E (x) 15.6 17.3 13.0 12.3

RoAE (%) 19.4 12.8 13.3 12.4

RoACE (%) 10.9 12.2 12.7 12.1

P/BV (x) 2.8 1.8 1.6 1.4

EV/Sales (x) 1.7 1.4 1.3 1.2

EV/EBITDA (x) 11.0 8.6 7.9 7.8 Source: Company, Angel Research

Patel Engineering Performance Highlights

BUY CMP Rs404 Target Price Rs563

Shailesh Kanani Tel: 022 – 4040 3800 Ext: 321

E-mail: [email protected]

Aniruddha Mate Tel: 022 – 4040 3800 Ext: 335

E-mail: [email protected]

May 19, 2010 2

Patel Engineering I 4QFY2010 Result Update

Exhibit 1: Quarterly Performance (Consolidated and Restated)

Y/E March (Rs cr) 4QFY10 4QFY09 % chg FY10 FY09 % chg

Net Sales 1,197.1 965.0 24.1 3,081.1 2,459.8 25.3 Total Expenditure 1,046.1 816.8 28.1 2,591.7 2,070.2 25.2 Operating Profit 151.0 148.2 1.8 489.4 389.7 25.6 OPM (%) 12.6 15.4 - 15.9 15.8 - Interest 46.1 (10.3) (547.2) 127.2 47.5 167.7 Depreciation 29.6 66.2 (55.3) 125.1 119.6 4.6 Non Operating Income 37.1 (3.9) - 60.2 14.5 316.1 Nonrecurring items 0.0 0.0 - 0.0 0.0 - Profit Before tax 112.5 88.5 27.2 297.3 237.0 25.4 Tax 37.4 40.3 (7.1) 91.7 87.8 4.5 Net Profit before MI 75.1 48.2 55.8 205.6 149.3 37.8 PAT (%) 6.3 5.0 - 6.7 6.1 - Minority Interest (MI) 3.2 6.0 (47.5) 12.3 12.9 (4.6) Net Profit after MI 71.9 42.2 70.5 193.3 136.4 41.8 Adj. PAT (%) 6.0 4.4 - 6.3 5.5 -

Adj. FDEPS 10.3 6.0 70.5 27.7 19.5 41.8 Source: Company, Angel Research Key Highlights AP exposure: PEL has around 24% (Rs2,000cr) worth of projects in Andhra Pradesh, where progress has been slow. The company has adopted a ‘wait-and-watch’ policy and is keeping an eye on the payment cycle. The receivables from the AP government have come down from ~Rs200cr in 3QFY2010 to Rs60cr as on FY2010-end. BOT road projects completed ahead of schedule: PEL has two annuity road projects, both of which have been completed ahead of schedule. The company has already received annuity payment for the first project in Karnataka. Power portfolio: PEL is in the process of setting up a thermal power plant at the Nagapatnam district in Tamil Nadu. The first phase of the project will be of 1,050MW, while the second phase will be of 1,600MW. For the first phase, land acquisition has been completed and the company has also bagged environment clearances. It has also received coal linkage for 50% capacity of the first phase, and expects to achieve financial closure in FY2011E. Work on the second phase will start only after the first phase is commissioned. PEL is also planning to develop a 140MW hydel plant in Arunachal Pradesh. The capacity of the plant has been enhanced from 90MW to 140MW and this has pushed the plant’s financial closure back by a couple of quarters. Real estate projects: PEL has already launched its Bangalore Electronic City project, where it plans to develop a township. The average realisation has been ~Rs2,500/sq ft. The company is now planning to launch India’s biggest strip mall there. About 50% of the space in the mall has already been pre-leased. PEL has also launched a residential project at Noida through its subsidiary Pan Realtors, and has a 51% stake in this venture. The total developable area in this project stands at 2.2 mn sq ft, while the average realisation has been ~Rs3,500/sq ft. The company has also started work on the 1 mn sq ft corporate space in Jogeshwari. It has already signed an agreement with an anchor tenant at Rs130/sq ft. PEL has also won a US $1bn project to develop a township in Mauritius, and the master plan for the project is under preparation. The company has sold a 1% stake in the project for Rs300mn, and the investor has an option to pick up a 10% stake at the same valuation within a year.

May 19, 2010 3


Outlook and Valuation PEL has an order book of Rs8,500cr, spread across hydel (49%), irrigation (43%), and the balance in roads and urban infra segments, which lends revenue visibility. PEL’s construction business has performed well over the last few quarters and is expected to continue the good show on account of the robust sectoral outlook. Further, with its real estate plans taking a concrete form and with steady progress in power ventures, we expect the stock performance of PEL to improve in the coming times. At Rs404, the stock is trading at attractive valuations, with a P/E of 13.0x and 12.3x on its FY2011E and FY2012E Earnings, respectively, which does not factor the value of its real estate business, PEL’s premium position in high margin businesses and its strong growth prospects. Hence, we maintain a Buy on the stock, with a Target price of Rs563, by assigning a 14x FY2012E EPS of 32.9 and valuing its investments at Rs103/share.

May 19, 2010 4


Profit & Loss Statement (Consolidated) (Rs cr) Y/E March FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E

Net Sales 1,301 1,853 2,454 3,081 3,685 4,297

Other operating income 0 2 4 - - -

Total operating income 1,301 1,855 2,458 3,081 3,685 4,297

% chg 26.9 42.6 32.5 25.4 19.6 16.6

Total Expenditure 1,145 1,557 2,070 2,592 3,097 3,618

Net Raw Materials 289 455 427 - 790 900

Other Mfg costs 808 935 1,471 2,321 2,124 2,510

Personnel 44 112 128 134 175 200

Other 4 55 44 137 8 8

EBITDA 157 299 387 489 588 679

% chg 25.4 90.8 29.7 26.3 20.1 15.4

(% of Net Sales) 12.0 16.1 15.8 15.9 16.0 15.8

Depreciation& Amortisation 35 63 120 125 138 151

EBIT 122 236 268 364 450 527

% chg 30.3 94.0 13.5 36.0 23.6 17.1

(% of Net Sales) 9.4 12.7 10.9 11.8 12.2 12.3

Interest & other Charges 10 61 189 127 187 252 Other Income (incl pft from Ass/JV)

16 41 162 30 71 77

(% of PBT) 12.4 18.9 67.3 11.3 21.3 21.9

Recurring PBT 128 216 241 267 335 353

% chg 58.4 69.1 11.3 11.0 25.2 5.4

Extraordinary Expense/(Inc.) (0) - - (30) - -

PBT (reported) 128 216 241 297 335 353

Tax 14 23 44 92 100 106

(% of PBT) 11.3 10.7 18.1 30.8 30.0 30.0

PAT (reported) 114 193 197 206 234 247

Less: Minority interest (MI) 2.7 10.9 12.9 12.3 16.4 17.3

Prior period items - - - - - -

PAT after MI (reported) 111 182 184 193 218 230

ADJ. PAT 112 151 181 163 218 230

% chg 52.6 35.4 19.2 (9.5) 33.4 5.4

(% of Net Sales) 8.6 8.2 7.4 5.3 5.9 5.3

Basic EPS (Rs) (Reported) 18.6 30.5 30.9 30.2 31.2 32.9

Fully Diluted EPS (Rs) (Diluted) 16.0 21.7 25.8 23.4 31.2 32.9

% chg - 35.4 19.2 (9.5) 33.4 5.4

May 19, 2010 5


Balance Sheet (Consolidated) (Rs cr) Y/E March FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E

SOURCES OF FUNDS

Equity Share Capital 6 6 6 7 7 7

Preference Capital - - - - - -

Reserves& Surplus 701 840 1,011 1,534 1,738 1,951

Shareholders Funds 707 846 1,017 1,541 1,745 1,958

Minority Interest 7 41 22 22 22 22

Total Loans 491 1,194 1,747 1,600 2,136 2,778

Deferred Tax Liability 12 15 15 15 15 15

Total Liabilities 1,218 2,096 2,801 3,178 3,918 4,773

APPLICATION OF FUNDS

Gross Block 357 615 804 929 1,054 1,179

Less: Acc. Depreciation 114 180 303 429 566 717

Net Block 242 435 500 500 488 461

Capital Work-in-Progress 11 235 70 95 145 195

Investments 171 36 50 220 632 1,148

Current Assets 1,150 2,045 2,989 3,330 3,864 4,423

Inventories 446 824 1,234 1,357 1,520 1,748

Sundry Debtors 303 462 583 699 769 884

Cash 105 288 295 221 312 274

Loans & Advances 296 471 878 1,053 1,264 1,516

Other - - - - - -

Current liabilities 360 658 815 971 1,214 1,457

Net Current Assets 790 1,387 2,174 2,360 2,651 2,966

Mis. Exp. not written off 3 2 6 3 3 3

Total Assets 1,218 2,096 2,801 3,178 3,918 4,773

Cash Flow Statement (Consolidated) (Rs cr) Y/E March FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E

Profit before tax (excluding MI) 132 186 237 285 318 336

Depreciation 35 63 120 125 138 151

Change in Working Capital 302 396 663 260 200 353

Less: Other income 16 41 162 30 71 77

Direct taxes paid 30 45 76 92 100 106

Cash Flow from Operations (181) (234) (544) 28 84 (49)

(Inc.)/ Dec. in Fixed Assets (79) (482) (15) (150) (175) (175)

(Inc.)/ Dec. in Investments 7 (2) (51) (170) (411) (516)

Other income 16 41 162 30 71 77

Cash Flow from Investing (56) (443) 96 (290) (515) (614)

Issue of Equity 425 - - 344 - -

Inc./(Dec.) in loans 29 703 536 (147) 536 641

Dividend Paid (Incl. Tax) 9 8 6 13 15 16

Others (147) 165 (75) 4 - -

Cash Flow from Financing 298 860 455 188 522 625

Inc./(Dec.) in Cash 61 183 7 (74) 91 (38)

Opening Cash balances 44 105 288 295 221 312

Closing Cash balances 105 288 295 221 312 274

May 19, 2010 6


Key Ratios

Y/E March FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E

Valuation Ratio (x)

P/E (on FDEPS) 25.2 18.6 15.6 17.3 13.0 12.3

P/CEPS 19.2 13.2 9.4 9.8 7.9 7.4

P/BV 4.0 3.3 2.8 1.8 1.6 1.4

Dividend yield (%) 0.3 0.4 0.4 0.4 0.4 0.5

EV/Sales 2.5 2.0 1.7 1.4 1.3 1.2

EV/EBITDA 20.5 12.5 11.0 8.6 7.9 7.8

EV / Total Assets 2.6 1.8 1.5 1.3 1.2 1.1

Order Book to Sales 3.9 3.1 2.9 2.8 3.1 3.3

Per Share Data (Rs)

EPS (Basic) 18.6 30.5 30.9 30.2 31.2 32.9

EPS (fully diluted) 16.0 21.7 25.8 23.4 31.2 32.9

Cash EPS 21.0 30.6 43.0 41.3 50.9 54.5

DPS 1.3 1.5 1.7 1.6 1.8 2.0

Book Value 101.3 121.1 145.6 220.6 249.7 280.3

Dupont Analysis

EBIT margin 9.4 12.7 10.9 11.8 12.2 12.3

Tax retention ratio 0.9 0.9 0.8 0.7 0.7 0.7

Asset turnover (x) 1.2 1.3 1.1 1.1 1.1 1.1

ROIC (Post-tax) 9.7 14.4 10.2 9.2 9.6 9.1

Cost of Debt (Post Tax) 1.7 6.4 10.5 5.3 7.0 7.2

Leverage (x) 0.5 0.8 1.3 1.1 1.0 1.2

Operating ROE 14.0 21.1 9.7 13.6 12.1 11.4

Returns (%)

ROACE (Pre-tax) 10.0 14.2 10.9 12.2 12.7 12.1

Angel ROIC (Pre-tax) 10.9 16.2 12.4 13.3 13.7 13.0

ROAE 15.8 19.5 19.4 12.8 13.3 12.4

Turnover ratios (x)

Asset Turnover (Gross Block) 3.6 3.8 3.5 3.6 3.7 3.8

Inventory / Sales (days) 125 125 153 153 142 139

Receivables (days) 85 75 78 76 73 70

Payables (days) 90 100 109 105 108 113 Working capital cycle (ex-cash) (days)

192 176 221 238 222 214

Solvency ratios (x)

Net debt to equity 0.5 1.1 1.4 0.9 1.0 1.3

Net debt to EBITDA 2.5 3.0 3.7 2.8 3.1 3.7 Interest Coverage (EBIT / Interest)

12.6 3.9 1.4 2.9 2.4 2.1

May 19, 2010 7


Research Team Tel: 4040 3800 E-mail: [email protected] Website: www.angeltrade.com DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this

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Disclosure of Interest Statement Patel Eng

1. Analyst ownership of the stock No

2. Angel and its Group companies ownership of the stock No

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4. Broking relationship with company covered No

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