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Patel Eng.: Strong order book position - Views on News from Equitymaster

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Patel Eng.: Strong order book position
Jul 9, 2009

Performance summary
  • During FY09, topline grows at a robust pace of 32% YoY led by hydro projects that contribute over 50% to the total revenues.
  • EBITDA margins expand by 1.1% in FY09. The same is also the result of execution of hydro projects that earn higher margins.
  • However, at the net level, the margins have contracted owing to higher depreciation, finance costs and tax charges.
  • The company has recommended final dividend of Rs 0.95 per share. This is in addition to the interim dividend of Rs 0.8 per share. The total dividend for the year works out to Rs 1.75 per share, which at the current level translates into a dividend yield of 0.4%.
  • The company’s order book position stands at Rs 72 bn for the year ended FY09.


Consolidated financial performance snapshot
(Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
Net sales 7,268 9,650 32.8% 18,596 24,598 32.3%
Expenditure 6,137 8,168 33.1% 15,856 20,702 30.6%
Operating profit (EBITDA) 1,131 1,482 31.1% 2,740 3,897 42.2%
EBITDA margin 15.6% 15.4% 14.7% 15.8%
Other income (79) (39) -51.0% 37 145 291.9%
Interest 159 (103) -164.9% 295 475 61.1%
Depreciation 323 662 104.9% 627 1,196 90.7%
Profit before tax/(loss) 570 885 55.3% 1,855 2,370 27.8%
Tax 37 194 428.1% 227 436 92.2%
Minority interest 28 59 109 129 18.4%
Net profit 505 632 25.2% 1,519 1,805 18.8%
Net profit margin 6.9% 6.6% 8.2% 7.3%
No of shares (m) 59.6 59.6
Diluted EPS (Rs)* 30.3
P/E (times) 14.1
*trailing twelve month earnings

What has driven performance in FY09?
  • During FY09, Patel Engineering reported a robust topline growth of 32% YoY. The growth in topline has been led by strong order book position and execution of hydro projects that contribute over 40% to the order book position. The irrigation and transportation businesses are also supporting growth with increasing share in order book position. The company’s order book position for the year ended FY09 stands at Rs 72 bn, which is comprised of hydro projects (45%), irrigation (40%) and remaining 15% comprised of transport business.

  • Operating costs grew at a slower pace as compared to topline - resulting into 42% YoY growth in operating profits. As a strategy the company has always focused on high margin projects achieving optimum utilization. Hydro projects enjoy better margins compared to irrigation and transportation segment. This strategy of concentrating on high margin business has enabled the company to witness 1.1% expansion in EBITDA margins during FY09.

  • The contribution of hydro projects to the total order book position has come down to 45% in FY09 from over 50% in earlier years. Though the contribution of hydro projects to total order book position is declining it still constitutes the major share.

  • Profit before tax (PBT) grew at a slower pace of 28% YoY as compared to operating profits. Excluding the other income that reported more than threefold growth, PBT reports 22% YoY growth. The same is on account of higher depreciation and finance cost.

  • The company has some contract revenues receivable in foreign currency. To cover this financial risk the company entered into a hedging transaction. However, delays in payments, changes in drawings, changes in designs, all on account of the client, has led to hedging loss of Rs 521 m. The same is charged to profit and loss account under the interest expense and is claimable from the client. As per AS-11 the company has also made provisions relating to changes in the exchange rates. This forex translation loss has resulted in charge of Rs 50 m to the profit and loss account. All of this arrested growth in net profits at 19% YoY.

What to expect?
At the current price of Rs 428, the stock is trading at a price to earnings multiple of 14.1 times its trailing twelve month earnings. The company is diversifying their revenue stream vertically into power and real estate business. 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 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. However, further margins improvement is less likely to happen owing to declining share of high margin hydro projects to total order book position. Further for the new initiatives, the company will have to infuse funds through a mix of debt and equity. Thus, the outlined capital expenditure plans are also likely to arrest growth.

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