Patel Engineering - A bet on India's Infra growth

Stock Opportunities
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Patel Engineering Limited, founded in 1949 and headquartered in Mumbai, is a prominent player in the civil engineering construction segment. With over seven decades of experience, the company has successfully constructed various heavy civil engineering works such as dams, bridges, tunnels, roads, piling, and industrial structures.

The company is strong in high-margin, technology-intensive areas like hydro, tunneling, irrigation, water supply, urban infrastructure, and transport. Its outstanding execution of projects has resulted in the successful completion of over 250 projects.

Patel Engineering Limited commands a robust position in the hydropower and tunneling segments and has played a vital role in some of India’s most prestigious and strategically significant projects. Its shares are listed on the Indian Stock Exchanges (BSE/NSE), and the
company has valuable non-core assets.

Currently, the company’s order book stands at about ₹ 2,00,142 Mn (Including L1 Orders)

Narration Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 Mar-22 Mar-23 Trailing Best Case Worst Case
Sales 3,701.13 3,415.39 4,040.87 3,883.84 2,274.55 2,362.21 2,617.21 1,994.79 3,380.31 4,201.97 4,253.70 5,223.35 4,225.79
Expenses 3,234.27 2,919.00 3,641.66 3,462.83 1,743.34 1,985.26 2,431.73 1,750.41 2,850.13 3,577.04 3,619.69 4,444.82 3,658.78
Operating Profit 466.86 496.39 399.21 421.01 531.21 376.95 185.48 244.38 530.18 624.93 634.01 778.54 567.01
Other Income 98.97 131.25 40.97 165.14 106.00 247.43 201.69 -114.78 83.27 119.48 95.99 - -
Depreciation 81.98 79.78 54.98 78.04 54.27 50.20 66.18 72.03 81.90 93.30 89.96 89.96 89.96
Interest 437.86 516.17 601.61 579.21 489.42 370.27 266.27 401.39 419.53 418.42 404.50 404.50 404.50
Profit before tax 45.99 31.69 -216.41 -71.10 93.52 203.91 54.72 -343.82 112.02 232.69 235.54 284.08 72.55
Tax 21.28 22.02 -20.22 31.79 -11.27 44.49 23.42 -70.88 43.14 53.89 59.61 25% 25%
Net profit 16.37 8.47 -196.19 -102.89 104.79 154.15 11.13 -290.75 72.10 183.48 182.62 212.18 54.19
EPS 0.60 0.31 -7.10 -1.82 1.85 2.61 0.18 -4.16 1.00 2.37 2.36 2.74 0.70
Price to earning 69.03 172.69 -5.43 -29.94 22.53 6.76 45.06 -2.56 22.46 6.30 19.85 19.85 16.20
Price 41.15 52.90 38.52 54.50 41.78 17.61 8.19 10.65 22.53 14.95 46.85 54.43 11.35
RATIOS:
Dividend Payout 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
OPM 12.61% 14.53% 9.88% 10.84% 23.35% 15.96% 7.09% 12.25% 15.68% 14.87% 14.90%
TRENDS: 10 YEARS 7 YEARS 5 YEARS 3 YEARS RECENT BEST WORST
Sales Growth 1.42% 0.56% 13.06% 17.09% 24.31% 24.31% 0.56%
OPM 13.42% 14.07% 13.48% 14.61% 14.90% 14.90% 13.42%
Price to Earning 45.58 20.49 20.08 16.20 19.85 19.85 16.20

Risks and concerns.

Internal Risk Factors:
Our business heavily relies on government contracts, making us
vulnerable to potential policy changes. This introduces uncertainty
and challenges that need careful management. Additionally, delays,
modifications, or cancellations of projects can have a significant
impact on our business, affecting our order book and future projects.
These factors have the potential to materially and adversely affect
our results of operations and financial condition.

External Risk Factors:
Prevailing economic, political, and market conditions can lead
to a slowdown in the Indian economy, negatively impacting our
business, financial performance, and operations. Communicable
diseases like COVID-19 and natural calamities pose a significant risk
to the Indian economy, which in turn can have adverse effects on
our business. Moreover, a potential downgrade in India’s debt rating
by rating agencies can have adverse implications for our business
operations and financial performance.

Rating
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Disclosure - Invested

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Key highlights
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Q2FY24 Con-call highlights -

(+)

  • Current order book - 20,000 crores.
  • Received an order to work on India’s largest Hydro project.
  • H2 is expected to bring better order inflow.
  • The company currently handles 45% of the total hydro projects in India (Signifying dominance).
  • There is tremendous potential in the sector going ahead.
  • Share of tunneling projects to increase further (Better margins).
  • Debt repayment is to happen throughout the next 3-4 years.
  • Revenue growth guidance 15-20%.
  • Expect an inflow of 150-200 crores through the Vivadh se Vishwas scheme.
  • 90-95% price escalation is passed on to the clients.
  • Debt reduction will consistently increase the net profit margin as interest costs reduce.
  • H2 will be much stronger.

(-)

  • Election year might temporarily hamper big order inflows.
  • High debt remains a pinching point.

(i)

  • 60% Hydro | 21% irrigation | 12% tunneling | road and others.
  • 62% order inflow from PSUs | 35% state govt. | others.
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88.6% of the promoter shareholding is pledged.

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True and that is one of the negatives in the company but that was done to aid growth and the management has all plans to reduce the pledge as early as possible.

As you can see they have already freed up some good chunk.

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Concall Notes - Feb 2024

Industry Outlook:

  • India’s construction market is growing, especially in infrastructure projects and renewable energy.
  • Focus on hydro power sector.

Budget Impact:

  • Government proposed increase in infrastructure outlay.
  • Positive outlook for the sector.

Order Book:

  • Currently at Rs.19,000 Crores.
  • Orders from various sectors including hydro, irrigation, tunneling, and road projects.

Recent Projects:

  • Sela pass tunnel project nearing completion.
  • Expected to provide connectivity in Arunachal Pradesh.

Financial Performance:

  • Revenue and net profit showing significant growth.
  • Operating EBITDA improving.

Debt Position:

  • Consolidated gross debt reduced.
  • Plans to repay term debt over next three to four years.

Arbitration Awards:

  • Expecting Rs.150-200 Crores in next quarter.
  • Will help in working capital requirements.

Future Outlook:

  • Expect revenue to continue growing at 15% annually.
  • Focus on maintaining operating margins.

QIP Plans:

  • Enabling provision taken for QIP of up to Rs.500 Crores.
  • Post-elections to raise funds for working capital and growth.

Employee and Equipment Base:

  • Increased in anticipation of upcoming orders in renewable energy sector.

International Projects:

  • Limited projects in Nepal.
  • Focus on strategically important projects for India.

Land Monetization:

  • Plans to sell land parcels gradually to reduce debt and improve financial position.

Bid Capacity:

  • Sufficient capacity to increase order book by 15-20% in the next year.

Courtesy - screener…

Expert may throw light

Note: invested little, for traking…

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Why sudden 9 percentage fall in the counter??

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QIP liquidation adjustment.

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Definitely a good development for a company like patel engineering.

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Invested in this stock, my tracking.

Patel Engineering - https://pateleng.com/

Q3/23 Earning call highlights. (Feb 23)

  • Mr Rupen Patel has not participated.
  • Orderbook @ 16K
  • Land parcels are being sold to reduce debt.
  • Right issue, 1:2 at Rs 11 premium on 6/2/23, another at 7:5 at 8 Rs premium in 2019.
  • JVs and others loss making assets are being trimmed to improve financial health.
  • Too many questions on finance cost, Debt, right issue, Management commitments etc

Q4/24 Earning call highlights (May 24)

  • QIP of 400 Cr raised at Rs 56.53.
  • Order book 18,600 Cr as on march end 24.
  • 130 Cr recd as arbitration with Govt. @ 300 Cr still pending, will be recd in next 3-4 years.
  • FY 25 R guidance -10-15%/FY 26 R guidance 20-25%
  • Next 3-4 years, debt to be reduced to @700-800 Cr, current debt 2600-2700 Cr. 5-6 year back it was 5500 Cr.
  • 10% Equity participation in new Indian start up working in TBM servicing.
  • Debt to EBITA ratio current 3-3.5, to be reduced to 2.25 by FY 26.

08/07/24 - Patel Engineering crashes 12% after CMD Rupen Patel death, pares YTD gains. Patel Engineering stock price hit a record high of Rs 740 on January 4, 2008, and an all-time low of Rs 0.69 on October 13, 1995. Patel Engineering stock hit a 52-week high of Rs 79 on February 6, 2024, and a 52-week low of Rs 34.95 on July 10, 2023.

Q1/25 Earning call audio recording

  • Order book 17700 CR, @ 4 time annual revenue
  • FY 24 revenue 4544 Cr, FY 25 10%, FY 26 20% increase, margin 14-15%
  • Death of main promoter Mr Rupen Patel on 7/7/24.
  • Concall assurance of the continuation of legacy in bid, competency and business.
  • 50000 Cr tenders being quoted, success ratio @20-22%, Available opportunity 1.5L Cr.
  • Hydro, irrigation and tunneling main focus area.
  • Lesser orders received in Q1 due to election.
  • Reduced interest burden due reduced debt on account of money received from arbitration and QIP. QIP issued at 56.53, 10.03% discount of last closing price (400 Cr.)
  • Future growth expected from pumped hydro storage
  • Expected order inflow of 10-12K Cr in FY 25.
  • Average broker price target 75 by FY 25 end.

30 Aug 2024, 11:12AM
Patel Engineering Shares Gain @ 6.5% to 57.30 After Tie-Up With RVNL For Hydro, Infra Projects.

Sep 20 2024 | 1:33 PM IST
Patel Engineering stock gains: Shares of Patel Engineering rose sharply on September 20, 2024. The share surged up to 4.89 per cent to hit an intraday high of 60.39 per share.
The rise in Patel Engineering share price came after the company said that it has bagged an order worth Rs 240.02 crore from NHPC.

17/10/24 - Ircon International signs a memorandum of understanding (MoU) with Patel Engineering (+@4%. To 56.50) to collaborate on identifying, pursuing, and executing infrastructure projects in India and overseas.

30/10/24
Patel Engineering Limited has announced its decision to divest its remaining 9.99 per cent stake in Welspun Michigan Engineers Limited. This strategic move aligns with the company’s objective to optimize its investment portfolio and focus on core business activities. The sale is expected to be completed on November 7, 2024, and is anticipated to fetch a consideration of Rs 100 crore. Price reacted to +4% to 51.50

Q2/25 Result 13/11/24 and earning call highlights
Wednesday, 13th November 2024, at 05:00 PM IST

Share holding pattern and changes in last 4 quarters.
Summary Jun 2024 Apr 25, 2024 Mar 2024 Dec 2023
Promoter 36.1% 36.1% 39.4% 39.4%
Pledged 88.67% 88.67% 88.67% 88.67%
Locked 0.0% 0.0% 0.0% 0.0%
FII 3.7% 8.5% 3.4% 2.8%
DII 6.2% 7.1% 4.5% 5.6%
Public 49.6% 43.9% 47.9% 47.4%
Others 4.4% 4.4% 4.8% 4.8%
Big investor - Vijay Kedia - 1.42%, Anil vishanji dedhia 1.48%

Major event specific to Patel Engineering to be tracked.

  • L1 to order conversion
  • Tracking by - ICICI direct, Hem Securities, Anand Rathi.
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Further update on Patel Engineering

Q2/25 Results and earning call highlights

  • Revenue guidance?
  • Margin 13-14%, Hydro 15%, others 11-12%
  • Revenue hydro 55%, irrigation 20%, tunneling 15%, rest others.
  • 10k bidding done, Past success in @20%
  • Next one year from now order inflow expected 10-12K, bid pipe line 40-50k
  • PSP is Major opportunity in renewable
  • Actively looking at the river interlinking and lift irrigation opportunity, few bids submitted, more in pipe line.
  • Expected few arbitration awards, figures not given.
  • Q2 L1 in 240 Cr, no other orders. Due to the election fall out.
  • Order book 17260 Cr
  • D/E 0.39 to check
  • Credit rating FY 21 B+ to FY 24 BBB+, FY25 plan A-
  • Disposal of non core assets to reduce debt. 100 Cr recd for welspun Michigan stake sell.
  • OVERALL, LOOKS MANAGEMENT IS CONFIDENT OF FUTURE GROWTH, WILL TAKE FORWARD LEGACY OF LATE SHREE RUPESH PATEL.

Major event specific to Patel Engineering to be tracked.

  • L1 to order conversion
  • Future development of tie up with RVNL and IRCON
  • Tracking by - ICICI direct, Hem Securities, Anand Rathi.
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Hi All.

The valuation is absolutely tempting here right now. EVEBITDA is close to March 2023 lows right now.
A few questions.

  1. Pledge is very high. Management said previsouly that they were going to ask banks to reconsider the balance sheet strength. But I guess after the unfortunate demise of Rupen Patel sir, the new management might be waiting a bit before they go back to banks. What’s everyone’s view here?
  2. Very high contingent liabilities. What are the chances of these things materializing & is the management doing anything to reduce these?
  3. Do we think Patel will be able to grow their revenue at the guided 20%+ rate? Also, can they sustain these 13-14% margins?
  4. Valuation wise can hydro EPC companies gain close to ~10 EVEBITDA or is ~5-7 a new normal? Competitive intensity needs to be taken into account here. As of now 46% of total hydro EPC is carried out by Patel Engg I guess. But can they sustain that market share & grow at these margins?
  5. As of now government focus seems intact in this field & seems like it will continue. What do we all think?

Disc: Invested & Biased but trying to see what’s coming in the Infra EPC plays.

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Had a chat with the management recently over email.
The questions & the answers here:

  1. When do we think we will revoke the pledge and how are we going to do that?
    Ans: The Promoters had pledged the shares for infusing funds in the company as required by lenders. The company has been performing well in last few quarters and the credit rating of the company has been improving and we had expected the pledge to start going down. However, with the change in promoter structure due to untimely demise of our late CMD Mr. Rupen Patel, the same has been held back for a while.
    After a few quarters when the lenders start getting more confidence on the current professional management, we shall request them to start releasing the pledges slowly, as there is enough margin available.

  2. Contingent Liabilities & margin for pledge:
    Ans: With respect to contingent liabilities – A major portion of this is towards performance bank guarantees which are issued by us to the clients. Due to the nature of the business this is required. These guarantees are linked to the projects and when projects get completed these guarantees get released and when new projects are received guarantees would be required to be provided. Other major portion of contingent liabilities pertain to income tax refunds where the lower authority has issued order in our favour and hence we do not see any unforeseen liability for the same.
    AWith respect to pledge of shares – The same were pledged when the rate of the stock price was around Rs.9/share and hence there is more than adequate cover. We had earlier expected the pledge to start going down. However, with the change in promoter structure due to untimely demise of our late CMD Mr. Rupen Patel, the same had been held back for a while. We shall await a few quarters when the lenders start getting more confidence on the current professional management and with our growing revenues and financial performance, and then start discussion with them again.

  3. Do we know if the slowdown in the incoming orders has been sorted now or we still have to wait for the strong order flow like we saw before the election last year?
    Also, what do we think about the competitive intensity in our field?
    Are we confident that the market share in Hydro tunneling will remain stable & increase from here?
    Ans: Post the elections, we have seen ordering has picked up and our Company has submitted bids for around 30,000 crores of work as of end of December quarter.

We expect these bids to be opened in the coming future. We are also seeing more tenders to come up for bidding in the coming year.
In terms of competition, Hydro power sector where we have a dominating presence the competitive landscape is limited to only a few players currently.
We expect to continue to maintain a healthy market share in the hydro segment.

Finding the management very responsive & transparent with their execution & the situation.

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It seems Maharashtra government is not releasing payment for the infrastructure projects. Water infra has been badly impacted.
I have gone back to the Patel management today to ask what’s the impact on the company.

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News link: https://indianexpress.com/article/cities/mumbai/maharashtra-govt-contractors-court-crore-dues-9954400/

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What is your take with the recent order and order book standing around 16k cr and market cap at 3k

Is it in valuezone ? project driven by Govt its seems undervalued

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Future sequence of development for Patel Engineering could be,

  1. Geopolitical development, read IWT can be beneficial as PE is already dominant player in entire Himalayas terrains.
  2. Recent order receipt sucess indicates that Late Shri Rupesh Patel’s legacy will be continuing.

Very good for long term investors.

NB: Invested @ current price @ 6-8 month back, continuing holding.

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