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Patel Eng.: Focus on high margin business - Views on News from Equitymaster
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Patel Eng.: Focus on high margin business
Nov 13, 2009

Performance summary
  • Topline grows at a robust pace of nearly 38% YoY led by a strong order book and change in product and geographic mix.
  • EBITDA margins expand by 2% in 2QFY10. The same is the result of its focus on high margin hydropower and irrigation projects.
  • Higher interest and depreciation charges along with lower other income cap growth in profit before tax at around 22% YoY.
  • Less than proportionate growth in taxes results in net profits growing by 27% YoY.
  • The company’s order book position stands at Rs 99 bn for the quarter ended 2QFY10.
  • During the quarter, the company incorporates PAN realtors, a 51% subsidiary and acquires 80% stake in Balaji Power Services Ltd (a 5MW power project in Maharashtra).


Consolidated financial performance snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 4,418 6,080 37.6% 10,002 12,510 25.1%
Expenditure 3,683 4,944 34.2% 8,481 10,318 21.6%
Operating profit (EBITDA) 735 1,136 54.5% 1,521 2,192 44.2%
EBITDA margin 16.6% 18.7%   15.2% 17.5%  
Other income 133 83 -37.6% 156 161 2.8%
Interest 192 285 48.2% 368 569 54.7%
Depreciation 170 316 86.4% 337 632 87.7%
Profit before tax/(loss) 506 617 22.0% 973 1,152 18.4%
Tax 170 176 3.5% 316 330 4.3%
Minority interest 15 34 132.7% 44 52 17.6%
Net profit 321 407 26.8% 612 770 25.8%
Net profit margin 7.3% 6.7%   6.1% 6.2%  
No of shares (m)       59.6 59.6  
Diluted EPS (Rs)*         32.9  
P/E (times)         14.6  
*trailing twelve month earnings

What has driven performance in 2QFY10?
  • Patel Engineering’s revenues grew by nearly 38% YoY during the quarter led by a strong order book and execution along with change in product and geographic mix. The high margin businesses such as hydro power and irrigation together account for nearly 90% of the revenues. The balance is contributed by the transportation segment. The company’s order book position for the quarter ended 2QFY10 stood at Rs 99 bn, which included L1 position (highest chances of order materializing) of around Rs 30 bn. The order book mix consists of hydro projects (48%), irrigation (43%) and transport (9%). Meanwhile the company has bid for projects of approximately Rs 96 bn of which hydro power constitutes 92.8%. The company has been consistently building its order book and has been strategically concentrating on its niche hydropower segment.

  • The share of hydro power in revenues increased from 45% to over 55%. The company has strategically focused on increasing the contribution from this business as it enjoys high margins. Apart from better control on costs this concentrated effort enabled the company to expand operating margins by 2% to 18.7% in 2QFY10.

  • While operating profits grew by nearly 55% YoY, growth in profit before tax stood at 22% YoY. The same was the result of lower other income, higher depreciation and interest costs. The company apart from concentrating on its core business - engineering and construction, has planned to diversify revenues vertically into power and real estate. Thus, the huge expansion plans and new initiatives are taking toll on the profitability of the company.

  • The 27% YoY growth in bottomline was almost in line with PBT. 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 482, the stock is trading at a price to earnings multiple of 14.6 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. This is 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, for the new initiatives, the company will have to infuse funds through a mix of debt and equity. While outlined capex plans were expected to restrict growth in earnings, the increased share of hydro power projects in the total order book position are expected to boost margins.

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