Patel Engineering has huge Opportunity ahead. Buy for target price of ₹80 (36% upside): ICICI Direct

Huge Opportunity ahead …

About stock: Patel engineering is an EPC player which specialises in technologyintensive areas like hydro, tunnelling, irrigation, water supply, urban infrastructure, and transport.

• The company enjoys an order book of ₹ 19,134 crores (Including L1 Orders) as of Q3FY24, implying 4.3x book to bill.

Investment Rationale

• Strong Presence in segment like Hydro Power, Irrigation which has big opportunity: Hydro power, tunnelling and irrigation segment constitute ~93% of the Company’s Orderbook. The company foresees a strong ordering opportunity ahead in the above-mentioned segments such as a) 19 GW of HEP projects concurred by CEA b) State-run hydropower major pursuing pumped storage projects (PSPs) of more than 20,000 megawatts (MW) capacity across states c) huge pipeline of 875 tunnels, spanning a length of around 2,600 km. and d) Pradhan Mantri Krishi Sinchayee Yojana (PMKSY) for 2021-26 outlay allocation of ₹ 93,068 crore.

• Huge opportunity to translate into healthy inflows and revenue growth ahead: We highlight that order inflow momentum had slowed down in H2FY24, amid elections. We expect the order momentum to pick up post Q1FY25 (post-election results). We expect the company to receive order inflows of ₹ 6000 crore and ₹ 10,000 crore in FY25 and FY26, respectively. Given the robust inflow potential, we expect strong revenue CAGR of ~16.3% over FY23-26E to ₹ 6612 crore

• Stable margins; interest costs to drive strong earnings growth ahead: The company expects similar levels of margins at 13-14%. With strong execution, stabilised raw material prices, we expect margins to remain stable at 14.2%. Strong topline growth coupled with stable margins and lower interest expense is likely to drive 32.4% earnings CAGR over FY23-26E

• Non-core asset monetisation and arbitration claims could help the company to lighten the balance sheet: In the near term, it has guided for receipt of ₹ 150-200 crore from the arbitration claim awards. Furthermore, it has major land parcels across Maharashtra, Tamil Nadu, Bangalore and Telangana encompassing ~2150 acres and worth ₹ 1000 crore which it is looking to monetise in the long-term horizon.

Rating and Target Price

• Given the strong opportunity from the key segment driving the topline and earnings growth visibility coupled with stable balance sheet, we initiate coverage with a BUY rating on the stock.

• We assign a target price of ₹ 80, thereby valuing it at 16x FY26 P/E.

Click here to download IDirect Patel Engg Conviction Idea Apr24