Betting big on core sector development

Updated: Apr 30 2006, 05:30am hrs
The economy is growing at a GDP rate of 8%. However, the biggest challenge lies in sustaining this growth that calls for a substantial infrastructure development in the country. Realising these potential benefits for the construction companies, Patel Engineering Ltd (PEL) has come up with a follow-on offer of Rs 403.75 crore. The company is planning to invest the amount raised in capital equipment, investment in infrastructure projects, subsidiaries and joint ventures for meeting working capital requirements and repayment of debts.

PEL is a civil engineering and construction company that is primarily engaged in hydro power, irrigation and water supply and transportation projects. Hydropower and irrigation are high-margin segments for the company. Together they contribute 80% of revenue to the company while the rest is contributed by road projects.

The company, with 56 years of experience, has executed civil works for more than 7,000 MW of hydro power projects out of the total 32,000 projects executed in India since Independence. This serves as an edge for PIL against its competitors in the future bids.

It has also been involved in 75 dams and over 160 km of tunneling in India and abroad. The company is technology-driven and is one of the firsts in the field of mass block blasting, roller compacted concrete (RCC) and microtunnelling and horizontal directional drilling. Some of its modes of executing contracts are build, operate and transfer (BOT) and build, own, operate and transfer (BOOT).

Valuation

The stock is currently trading at Rs 503. A valuation of PEL is at 35 times based on the FY06 EPS of Rs 14.34.

Its close competitor Jaiprakash Associates Ltd (JAL) is trading at a P/E of 40 times considering the EPS of Rs 13.16 for the trailing four months. Comparing it with JAL and the industry P/E of 41 times the stock is fairly valued. Return on net worth works out to 27% for the nine months ended December 31, 2005.

Financials

For the FY06, PEL sales moved up by 49% to touch Rs 801.61 crore on the back of strong order book position. PAT ramped up by 97% at Rs 70.21 crore on account of strong sales and better margins from hydro power and irrigation segments. The order book of the company is growing at a CAGR of 67% over a period of two years. On December 31, 2005, its order book position stood at Rs 4,339 crore. Annual operating margins for the company also improved by 55.84%

The company has 1,087 employees of which 77% comprises technical staff. The income comes from both the annuity and BOT contracts for the company. For 4QFY06 net sales went up by 32% to touch Rs 301.36 crore while PAT improved by 103% to touch Rs 21.23 crore. Considering the strong order book position and plans for the submission of bids for a number of infrastructure projects, aggregating to Rs 5,500 crore in the next one year, the company looks well placed for the future.

Recent developments

The company has commenced work on Teesta Hydroelectric Project (THP) in the Darjeeling district of West Bengal. The project was among nine hydroelectric projects aggregating 3,000 MW and worth Rs 1,668 crore that the company was at present executing.

Beginning FY2007, it plans to bid for medium-size projects in the range of 100 MW to 500 MW on a BOOT basis in the north and north-eastern regions of India.

PEL has also announced plans to foray into hydropower generation as an independent power producer. Recently, the company, in consortium with Larsen & Toubro, bagged Rs 439.07 crore 520 MW Parbati Hydro Electric Project Stage (III) from the National Hydroelectric Power Corporation Ltd.

Overview

The government has ambitious plans for installing 50,000 MW of hydro power in the next 20 years that translates into Rs 2,00,000 crore. In pursual of this so far, 162 projects have been identified in 16 states, out of which 132 are received and 103 finalised.

In the 10th Five-year Plan, out of the targeted 14,393 MW hydro power capacity, 4,315 MW has been executed so far. With large construction activities expected in future, PAL, with its competencies in engineering and construction, has the potential to benefit in long-term from the present economic boom.