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Patel Engineering: Diversifying revenues - Views on News from Equitymaster
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Patel Engineering: Diversifying revenues
Jul 8, 2009

Patel Engineering had held an analyst meet recently to discuss the company’s performance during FY09. The management also discussed the future plans of the company. Here are the key takeaways from the same. A brief about the company: Patel Engineering established in 1949 is engaged in providing the entire range of civil engineering services. The company is primarily engaged in the civil construction of hydro-power projects (includes dams, tunnels, power-houses, barrages, etc), irrigation and water supply projects (dams, weirs and pump house), and transportation projects (includes roads, railways, bridges and tunnels). The company is involved in the design and construction of these various projects. Some of the projects undertaken include the Durgapur Steel Plant, the Barauni Oil Refinery, Yamuna Hydro Electric Project, Konkan Railway Tunnel and projects in countries like Sri Lanka, Qatar and Bhutan.

The company has also advanced its presence into international territory through technology centric subsidiaries in the US.

Order book position: The company has been consistently building its order book over the past 5 years. The order book position has grown at a CGAR of 31% to Rs 72 bn during FY09. The company has prequalified as the lowest bidder for projects worth Rs 25 bn. Of the total orders 45% is constituted by hydropower projects, 40% by irrigation projects and the remaining 15% by the transportation segment. Recently, the company bagged two more orders - one each in the hydro (Rs 1.5 bn) and the irrigation (Rs 5.5 bn) segment taking the total order book position to Rs 79 bn. Such huge order backlog provides revenue visibility over two to three years. The company witnessed an expansion of operating margins in FY09 from 14.7% in FY08 to 15.8% in FY09. The same is on account of execution of high margin hydro power projects. However, the share of this high margin business has declined over the years, and the recent orders bagged by the company are within the sphere of irrigation and urban infrastructure. Hence, margins are expected to settle down at the current level.

Way forward: The integrated engineering, construction and technical services firm is diversifying revenues vertically into power and real estate business. Going forward, the company’s business can be divided into three verticals viz. Engineering and construction, real estate and townships, and asset ownership.

  • Engineering and construction segment: Till FY09, the company’s growth was driven by the engineering and construction segment. In the case of the hydro power segment, the company has gained expertise in this line of segment over 60 years, and enjoys 22% market share, whereas in the case of micro tunneling, the company enjoys a 95% market share. Patel Engineering is the only Indian company with experience in construction of RCC dams.

  • Real estate: The company has historically built a land bank of 1,100 acres at prime locations (Mumbai, Chennai, Bangalore and Hyderabad) and is an FDI compliant project. These assets are currently valued at Rs 21 bn. The company has developed a corporate park at Jogeshwari with a built up area of 80,000 sq ft. This property would be leased and is expected to generate revenues of Rs 80 m p.a. starting second half of FY10. For the second project of corporate tower of 1 m sq ft, the company has received all necessary approvals.

  • Asset ownership: In the transportation sector, the company is in the process of constructing infrastructure of 61 kms in Karnataka, and 53 kms in Andhra Pradesh (AP) on built operate transfer (BOT)/ annuity basis. The project in Karnataka is expected to start generating revenues in FY10, while the AP project will start contributing to revenues starting FY11. The company enjoys a 60% stake in these projects, which are expected to generate revenues of Rs 1 bn for the group over the next 18 years.

    The company has also outlined IPP investments in thermal and hydro power projects of 1,200 MW and 120 MW respectively. The thermal power project is worth Rs 60 bn in which the company’s proposed equity contribution is 51%. The project would be funded by a mix of debt and equity in the ratio of 4:1. These BOT projects are expected to start contributing to revenues in FY11.

On a concluding note…
The vertical revenue diversification seems a positive move over the long run given the scope for growth in these segments as lot needs to be done on the infrastructure front, which is a prerequisite for sustainable growth of any economy. However, it remains to be seen how efficiently and in a timely manner the company executes these projects. The huge order backlog provides revenue visibility over the next two to three years. The new initiatives are also likely to give a further fillip to the company’s topline going forward.

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