Recent project wins and increased government support should help Patel Engineering Limited

Growth drivers of Patel Engineering Limited include increased government focus, increased funds earmarked for developmental activities, strong order book, favourable industry dynamics and recent project wins. Under National Infrastructure Plan, government has proposed expansion of National Highway network by 60,000 km by 2025 in strategic locations, major economic corridors, and major cities such as Delhi, Chennai, Kolkata, Mumbai, and Bengaluru. Patel Engineering Limited is in a strong strategic position to take benefits of these opportunities.

Patel Engineering Limited

Business overview:

Patel Engineering Ltd. is one of most integrated infrastructure and construction services conglomerates in India, encompassing all sectors of Infrastructure industry. These sectors range from dams, tunnels, micro-runnels, hydroelectric projects, irrigation projects, highways, roads, bridges, railways, refineries to real estates and townships.

Business model:

The company supports its clients from project inception, to commissioning of fully operational facility and its network of local offices enable to offer clients dual advantage of strong local presence and geographic reach. It provides entire range of civil engineering services such as designing, constructing Power Houses, Hydroeletric Projects, Commercial Building, Industrial Complexes, Dams, Tunnels, Underground Structures, etc. in India and abroad. Therefore, the company has been categorised as a most integrated infrastructure and construction services conglomerates in India.

Fundamentals of Patel Engineering Limited:

·        Performance of the company saw significant improvement in 3Q23 because of growth in its operations. Profitability for 9M23 more than doubled against corresponding previous year and has surpassed all targets. Infrastructure continues to be a prime focus of government with increased allocations in budget and this should support the company’s order book.

·        Hydro power is one of oldest sources of renewable energy and to achieve net zero goals it is should be a focus area for energy consumption. The company’s expertise in segment should act as a key growth enabler going forward apart from other infrastructure segments.

·        The company’s revenue for 3Q23 came in at INR10,369.77 million, exhibiting 18.11% year-over-year growth. Its operating EBITDA for 3Q23 was INR1,637.48 million, a growth of 11.86% year-over-year. As on 31^st December 2022, its total order book was INR1,68,094 million. During quarter, hydro sector contributed 52%, tunnel contributed 21%, irrigation made up 13%, road made contribution of 6%, and others made up 8%.

·        Revenues from operations for FY22 grew by ~76.12% to INR30,277.9 million as compared to INR17,191.2 million in FY21 on a standalone basis and on a consolidated basis. Order book of the company as on March 31, 2022 was INR1,50,115 million and post year-end, the company further converted L1 into orders of ~INR28,800 million.

Sector-wise performance of Patel Engineering Limited (Revenues)

·        Out of total revenues in FY22, Hydro Power business contributed 42.7% which amounts to INR12,922.0 million against INR6,167.6 million in FY21, exhibiting 109.5% growth and Irrigation business made a contribution of 6.9% amounting to INR2,093.6 million against INR1,434.2 million in FY21, reflecting 46.0% growth.

·        Road business contributed 16.5% making INR5006.5 million against INR3,463.1 million in FY21, reflecting 44.6% growth and Tunnel business contributed 27.5% amounting to INR8,319.0 million against INR4,883.1 million in FY21, exhibiting 70.4% growth.

       Industry overview

·        Even though there were difficulties which were caused by pandemic, Indian economy proved to be reasonably resilient. However, a few headwinds could impact India’s economic recovery in FY23. In 3Q and 4Q of FY22, India’s GDP expanded by 5.4% and 4.1%, respectively against 8.4% in preceding quarter.

·        India’s GDP growth should be highest among other major economies in 2022, growing by 7.4%, as per IMF’s July World Economic Outlook. Given foreign supply shocks and geopolitical unrest, short-term outlook seems to be uncertain, but government is acting responsibly to put nation back on sustainable economic trajectory. This year’s union budget’s emphasis on urban infrastructure, power generation from renewable energy and digital economy proved beneficial to long-term growth of Indian infrastructure industry.

·        Regarding infrastructure, government has announced several initiatives. Seven engines of Gati Shakti will be in full force – Roads, Railways, Airport, Ports, Mass Transport, Waterways, Logistics infrastructure to speed up economic growth. Asset creation is focused on roads and railways. Over half (51%) of capital outlay in FY23 is allocated to such segments. Spending on road transport is 58% more than in FY22. About INR7.50 trillion is being reserved for capital expenditure and for building infrastructure, making up ~2.3% of GDP in real terms along with grants to states. Therefore, actual amount spend will be ~INR10.25 trillion or 4.1% of GDP. About 25,000 Kms of new highways and roads are expected to be developed in FY23 and INR200 billion is expected to be mobilized through innovative ways of financing to complement public resources.

Projects update

·        Hydro power projects – Gongri H.E. Project is terminated and the company has settled debt of lenders for this project. It has filed an arbitration claim against Govt. of Arunachal Pradesh in respect of this project. As a result of this, the company now focuses only on E&C business.

·        Thermal power projects – Thermal power projects are currently kept on hold.

·        Road BOT – Two annuity road BOT projects, i.e. KNT – 1 & AP – 7 are in operation and maintenance stage. For other BOT Project i.e. four-lane highway project on Varanasi-Shaktinagar Road, toll collection period is currently on.

·        Transmission asset –Project – Raichur Sholapur Transmission Co. Pvt. Ltd. is an SPV in JV with Simplex and BS Ltd. where Patel Engineering Limited has 33.34% stake. During FY22, the company has refinanced ECB loan to a rupee term loan to de-risk from foreign exchange fluctuation.

The company aims to hive-off these assets as part of its strategy to sell non-core assets.

·        Regarding real estate, the company said that large amounts of land that belong to the company are mostly located in or close to major cities of Mumbai, Hyderabad, Bangalore, and Chennai. Such sites are most likely intended for residential construction. It intends to sell these land parcels outright or use Joint Development Agreements (JDA) to monetize them. The company is nearing completion of its residential project – Smondo Gachibowli located in Hyderabad.

Future prospects and outlook

·        The company continues to focus on improving its leverage situation and improving its operational efficiency. Apart from this, focus is on monetizing non-core assets. This should help the company in reaching target of debt reduction and also help finance working capital requirements of the company.

·        The company expects to improve its order book further in upcoming quarters. Focus is on bidding for projects of reputed clients which can be funded from client advances. Hence, this should result in efficient working capital management.

·        The company continued to focus on monetization of non-core assets to reduce debt and to increase liquidity. It continues to receive further funds against arbitration awards by submission of bank guarantees under NITI Aayog initiatives. Moving forward, it expects to receive even more funds, which should reduce debt burden. Continuous monetization of real estate remains a priority of management.

Recent project wins

·        Patel Engineering Limited announced that, along with JV Partners, it has received Letter of Acceptance for Tumkur Branch Canal (Package III) Micro Irrigation Project from Visvesvaraya Jala Nigama Limited (VJNL) and Sher Micro Irrigation Project from Water Resources Department, Government of Madhya Pradesh. These projects were announced as L1 earlier. The company is a 51% partner in JV for Tumkur Branch Canal (Package-III) project and its share in project is INR158.68 crore. In JV for Sher Micro Irrigation Project, the company has a 35% share and its share in project is INR349.56 crore. Total value of these 2 contracts is INR1,309.88 crore.

·        The company, along with its Joint Venture Partners, has received Letter of Awards (LOAs) for Krishna Marathwada Irrigation Project – Lift Irrigation Scheme 01 and Krishna Marathwada Irrigation Project – Lift Irrigation Scheme 02 respectively from Water Resources Department, Government of Maharashtra, where JVs were declared L1 (lowest bidders) earlier. Patel Engineering Limited is a 51% partner in a JV in Scheme 01 Project and 60% partner in a JV in Scheme 02 Project. Therefore, its share in aggregate for these 2 projects is INR451.28 crore. Total value of contracts comes out to be INR841 crore.

Investment rationale

·        Patel Engineering Limited intends to continue bidding for projects which are funded by either multilateral agencies such as Japanese Bank for International Co-operation, World Bank and Asian Development Bank or by central or state governments. As a result, the company stands in an advantageous position to get timely payment of works executed and regular monitoring of progress by these agencies.

·        The company expects to continue to focus on enhancing execution capabilities and optimizing resources and to leverage its expertise in hydro-power projects, irrigation, tunnelling and urban infrastructure segments to bid for projects in which Government is investing funds.

·        At CMP of INR26.75, stock of the company currently trades at ~17.7x of FY22 EPS, which is at a deep discount to its industry figure of ~25.65x. Therefore, the company should be considered by potential investors.  

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