Stock Market Result Update on Patel Engineering for 1QFY2012

Stock Market Result Update on Patel Engineering for 1QFY2012 with a Neutral recommendation.

For 1QFY2012, Patel Engineering (PEL) posted disappointing numbers on a consolidated and standalone basis. Going ahead as well, we believe recovery to the growth path will take time as order inflow concerns loom large and the current order book is plagued with delays. Hence, we are revising our estimates further for FY2013. Also, the company is yet to provide for the IT raid (which would accrue in the next few months, thereby increasing the tax rate going ahead); and the hedging loss incurred due to project cancellations, which we believe would materialise and impact the company’s financials. Hence, we maintain our negative stance on the company and a Neutral rating on the stock.

One more disappointing quarter on the operating front; no respite in sight: For 1QFY2012, on a consolidated basis, PEL posted growth of 7.7% yoy in net sales primarily due to real estate revenue booking and good performance of its subsidiaries. EBITDA margin came in healthy at 15.5% due to strong come back from subsidiaries, which posted a healthy jump on the margin front. Reported PAT for the quarter declined by 60.4% yoy and 55.9% qoq.

Outlook and valuation: PEL’s core C&EPC business is currently facing headwinds with its large projects facing delays and disappointing order inflow. Further, the longer gestation nature of its order book, macro headwinds and increasing debt levels put the company’s growth visibility for the next few quarters under doubt. Hence, we maintain our Neutral rating with a revised fair value of `122/share. Key risks to our recommendation are 1) pick-up in order inflow from the power segment in the near term; 2) earlier-than-expected execution from its slow-moving orders; and 3) raising of capital and the resultant decline in debt levels.