Kotak recommends Patel Engineering

Patel Engineering has a robust order book of Rs73.5 billion on a consolidated basis and Rs66 billion on a standalone basis, which provides a revenue visibility for next 2.5 years.

Order inflow pace had been impacted in Q1FY10 due to elections but company expects order inflow to ramp up by second or third quarter of fiscal 2010.

It is already L1 in orders worth Rs30 billion and with government’s continued focus on infrastructure, company expects to benefit in terms of larger order inflows especially in the hydro power segment.

Though overall proportion of irrigation projects in the total order has witnessed an increase, management expects hydro power segment to continue to contribute 45-50% of the total order book going forward.

Outlook

With current order book of Rs66 billion diversified across hydro projects (45%), irrigation (49%) and transportation and micro tunneling (6%), we expect revenues to grow at a CAGR of 21% between FY09-FY11.

We maintain our estimates and expect revenues to grow at a CAGR of 21% between FY09-FY11.

We continue to maintain our estimates and expect operating margins to be around 14.8% going forward. We expect net profits to be around Rs1.45 billion and Rs1.73 billion respectively for FY10 and FY11.

At current price of Rs382, stock is trading at 15.3x and 12.9x P/E multiples for FY10 and FY11 respectively.

We continue to maintain our ACCUMULATE rating on the stock with a price target of Rs414 on FY10 estimates on sum of the parts methodology.