Weather plays spoilsport; order inflow remains subdued Patel Engg. reported dismal results, multiple factors effected revenues a) flash floods effected two of its hydro projects which lead to revenue loss of Rs600mn & heavy snowfall in US also effected its US operation. b) Cancellation of Loharinagpala hydro electric project (4x150 MW) from NTPC c) Delay in execution of Pranahita Chevella irrigation project.

Hence, revenue was down by 31% YoY at Rs4.3bn. Ebidta margin stood at 24.9% (adj to Forex claim it is 15.1%), interest during the quarter was at Rs862mn, which includes forex loss of Rs500mn on account of closure of a hedge position for Loharinagpala project, PAT was lower by 80.2% YoY at Rs88mn. We reduce TP from Rs567 to Rs231, maintain ‘BUY’ rating Flash flood effects execution During the end of Q2FY11, two of its projects Teesta low dam and Parbati witnessed flash floods, impacting revenue by Rs600mn.

Claim of Rs2bn with NTPC PEL has lodged a claim of Rs2bn with NTPC due to cancellation of Loharinagpal hydro project.

VALUATIONS AND RECOMMENDATION The fear has come alive, the core business visibility has deteriorated; 3 large projects are stuck providing low revenue visibility, order book inflow are capped and now facing high debt burden. We have drastically reduced our FY11 and FY12 estimates, and watch its execution run rate over the next 2-3 quarters and order wins. Though the management is positive on new orders wins from internal real estate and power ventures, but it’s a relatively new area for PEL and could bring uncertainty on margin which are currently high levels of 15%-16%.

Given the large correction in the stock price of 53% in the last 6months we maintain our ‘BUY’ recommendation with a revised lowered target price of Rs231, which is including the land bank value of Rs40 per share; we value the core business at a P/E of 10x (ex-real estate) at Rs116 per share. Valuation for combined real estate projects is at Rs26 per share, Power at Rs36 per share
(1x to equity investment of Rs2.5bn) and BOT at Rs12 per share.

Patel Engg. reported dismal results, multiple factors effected revenues a) flash floods effected two of its hydro projects which lead to revenue loss of Rs600mn & heavy snowfall in US also effected its US operation. b) Cancellation of Loharinagpala hydro electric project (4x150 MW) from NTPC c) Delay in execution of Pranahita Chevella irrigation project.

Hence, revenue was down by 31% YoY at Rs4.3bn. Ebidta margin stood at 24.9% (adj to Forex claim it is 15.1%), interest during the quarter was at Rs862mn, which includes forex loss of Rs500mn on account of closure of a hedge position for Loharinagpala project, PAT was lower by 80.2% YoY at Rs88mn.

Flash flood effects execution During the end of Q2FY11, two of its projects Teesta low dam and Parbati witnessed flash floods, impacting revenue by Rs600mn. However, the work has started off late and mgmt expect revenue booking during current quarter. The total project cost is Rs10.5bn for both the projects. US subsidiary also witnessed lower execution due to heavy snowfall.

Claim of Rs2bn with NTPC PEL has lodged a claim of Rs2bn with NTPC due to cancellation of Loharinagpal hydro project. PEL has already got in principle approval of Rs500mn loss due to forex hedge, which is booked as revenue during the quarter.

Order book remains muted PEL’s order book stands at Rs100bn (4.2x FY11 revenue), this includes L1 of Rs10bn. Inflow during nine months was at Rs12bn. Of the total order book, hydro projects constitute
45%, irrigation 40% and remaining 15% are other projects.

Power project update PEL is awaiting final clearance from Tamil Nadu government to commence construction activity. The company has till date invested Rs2.5bn in the project. PEL is also looking for PE investor once the clearances are in place.

Real Estate project update During the quarter, PEL booked revenues worth Rs135mn and profit of Rs38 lakh from its real estate project. In Bangalore Smondoville project, Phase I is completely sold out and Phase II & III are 80% sold and have recently launched Phase IV. Whereas, Noida project is completed sold out. In Mumbai, PEL has roped in an anchor tenant for Corporate Tower at Rs120-130/ sqft and completion is likely to be in 18months.

The fear has come alive, the core business visibility has deteriorated; 3 large projects are stuck providing low revenue visibility, order book inflow are capped and now facing high debt burden. We have drastically reduced our FY11 and FY12 estimates, and watch its execution run rate over the next 2-3 quarters and order wins.

Though the management is positive on new orders wins from internal real estate and power ventures, but it’s a relatively new area for PEL and could bring uncertainty on margin which are currently high levels of
15%-16%. Though sales mix is not expected to change drastically by FY11 and FY12, impact of margins is yet to be understood. Hence in the near-term much would dependent on PEL’s success in real estate.

Given the large correction in the stock price of 53% in the last 6months we maintain our ‘BUY’ recommendation with a revised lowered target price of Rs231, which is including the land bank value of Rs40 per share; we value the core business at a P/E of 10x (ex-real estate) at Rs116 per share. Valuation for combined real estate projects is at Rs26 per share, Power at Rs36 per share (1x to equity investment of Rs2.5bn) and BOT at Rs12 per share.