The Hindu Business Line : Patel Engineering: Buy

Strong presence in high-end infrastructure segments, superior operating profit margins and healthy order book augur well for the earnings growth of Patel Engineering (Patel). Investment in the stock can be considered with a two- to three-year perspective. At the current price, the stock trades at 15 times its expected earnings for FY08 and is at a discount to peers.

Patel has the advantage of a favourable project mix that contribute higher margins than typical construction projects. The company's revenue stream is derived predominantly from hydro power projects followed by irrigation and micro tunnelling, all of which enjoy margins of above 10 per cent with the last-named yielding as high as 20 per cent. This has resulted in Patel's operating and net margins being superior to a number of players in the infrastructure space.

The company's present order book at Rs 4,900 crore (6 times FY06 revenues) is skewed in favour of hydropower projects (50 per cent). This, coupled with increase in micro tunnelling projects, promises sustained margins. Acquisitions in the US and Europe have helped the company equip itself with superior technology that gives an edge over local competitors. Micro tunnelling, for instance, allows boring without trenches for laying water pipes and telecommunication wires. Amidst intense competition from established players such as IVRCL Infrastructures and Nagarjuna Construction, Patel has made its presence felt in the irrigation space. About 30 per cent of the current order book comes from irrigation. The company has received a number of orders in Andhra Pradesh, which is among the few states that have been actively investing in irrigation projects. These contracts will qualify the company to bid for more projects in this space. Patel has recently forayed into annuity road projects. Being a late entrant, it may face competition from established players. The debt-equity ratio of the company is slightly higher to peers. Profits, however, adequately cover the interest costs. Any slowdown in hydro power-related policy initiatives by the Government is likely to affect earnings.

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