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Patel Eng.: Concentrated efforts - Views on News from Equitymaster
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Patel Eng.: Concentrated efforts
Aug 12, 2009

Performance summary
  • Topline grows at a robust pace of 15.2% YoY led by a strong order book position and execution of hydropower projects.
  • EBITDA margins expand by 2.4% in 1QFY10. The same is the result of its focus on high margin hydropower and irrigation projects.
  • Profit before tax grows by 14.6% YoY. Higher interest and depreciation charges restrict growth in profitability at the PBT level.
  • Net profit growth of 24.8% YoY exceeds growth in PBT on account of less than proportionate growth in taxes.
  • The company’s order book position stands at Rs 73.5 bn for the quarter ended 1QFY10.


Financial performance snapshot
(Rs m) 1QFY09 1QFY10 Change
Net sales 5,584 6,430 15.2%
Expenditure 4,798 5,373 12.0%
Operating profit (EBITDA) 786 1,057 34.5%
EBITDA margin 14.1% 16.4%
Other income 24 78 230.6%
Interest 176 284 61.8%
Depreciation 167 315 89.0%
Profit before tax/(loss) 467 535 14.6%
Tax 146 153 5.2%
Minority interest 30 18 -39.4%
Net profit 291 363 24.8%
Net profit margin 5.2% 5.7%  
No of shares (m) 59.6 59.6  
Diluted EPS (Rs)*   31.5  
P/E (times)   12.0  
*trailing twelve month earnings

What has driven performance in 1QFY10?
  • Patel Engineering reported a robust 15.2% YoY growth during the quarter led by a strong order book position and execution of hydropower projects that contributed nearly 45% to revenues. The revenues from irrigation projects accounted for 25% of revenues while the balance 30% was contributed by other (roads and transport) business. The irrigation and transportation businesses also supported growth with an increasing share in the overall order book position. The company’s order book position for the quarter ended 1QFY10 stood at Rs 73.5 bn, which comprised of hydro projects (44%), irrigation (44%) and others that includes transport business (12%).

  • Operating profits grew by a healthy 34.5% YoY as costs grew at a slower pace as compared to the topline. Moreover, as a strategy the company has always focused on high margin projects achieving optimum utilization. The high margin hydropower and irrigation projects accounted for over 80% of the revenues during the quarter. This strategy of concentrating on high margin business enabled the company to improve profitability.

  • The contribution of hydro projects to the total order book position came down to 45% in FY09 and 1QFY10 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 by 14.6% YoY. Excluding the other income that grew threefold, PBT rose by merely 3.1% YoY. The higher depreciation charges and interest costs restricted the growth in PBT. The finance costs increased on account of increase in debt obligations. The borrowed funds were deployed to fund working capital requirements or partly invested in new projects on the power and energy front. The company’s debt to equity is around 1.25 times.

  • Net profits grew by 24.8% YoY during the period under consideration. The bottomline grew at a faster rate as compared to the growth in PBT on account of less than proportionate growth in taxes.

What to expect?
At the current price of Rs 377, the stock is trading at a price to earnings multiple of 12 times its trailing twelve month earnings. The company is diversifying its revenue stream vertically into power and real estate. The vertical revenue diversification seems to be a positive move over the long run, given the scope for growth in these segments as a 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 margin improvement is less likely to happen owing to declining share of the 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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