At its current market price of Rs 379 the stock trades at 13 times its trailing four-quarter earnings on a standalone basis.

The stock is at a discount to larger peers such as Nagarjuna Constructions, HCC and IVRCL which trade at price earnings multiples of over 16 times.

Investors with a long-term perspective may buy into this stock, given its leadership in the high-margin hydropower segment, niche technical expertise, order book growth and potential for new contracts given the Government’s thrust on infrastructure and other development schemes.

Patel has made its mark in the construction of hydropower projects, a relatively high-margin business. These contracts make up about 44 per cent of the order book. The company’s other area of expertise is irrigation construction contracts, where contribution to order book is up from 25 per cent in 2007 to 44 per cent now.

Patel’s advantage lies in its technical expertise; it is among the companies in India that possess RCC technology that replaces cement with fly ash in the construction of dams, enabling faster execution of projects. It also has micro tunnelling expertise which replaces the conventional method of digging up roads to lay pipes.

The company has acquired these technologies by taking over companies that had them. It is open to further such inorganic growth to gain technological advantage.

At 3.4 times FY 09 consolidated sales, Patel’s current order backlog stands at Rs 7,350 crore, up 19 per cent from the position a year ago. The company has also emerged as the lowest bidder for projects worth Rs 2,500 crore (as of March 2009). Besides irrigation and hydro power, Patel has interests in road constructions, marine, water and sanitary works.

Patel has a conscious strategy been taking on larger orders, making it easier to qualify for bigger contracts. It also participates in consortiums to bid for those contracts for which it is unable to qualify on its own.

For example, Patel, together with BHEL and Navyuga Constructions, has been awarded a Rs 3,859-crore irrigation project from the Government of Andhra Pradesh, one of the largest irrigation projects in the country.

Another strategy followed is to remain focussed on high-margin bids. With the current focus on strengthening infrastructure, and with schemes such as JNNURM, opportunities are plenty.

Patel already has a leadership position in hydropower construction, and its focus on its niche capabilities will serve it well in expanding its order flows. Contribution of hydropower to the order book will be maintained at about 45 per cent while irrigation will be maintained at 30 to 40 per cent.

Besides its core segments, Patel has added new ones to diversify revenues. Towards this end, a good part of its land bank of about 1,000 acres acquired over the years, will see development through Patel’s wholly-owned real estate subsidiary.

To start with, the company already has readied for lease an office complex in Mumbai, with works in place to develop another.

Two Special Economic Zones, in Bangalore, have been approved. Even so, the real estate sector is yet to show concrete signs of recovery and it may take a while to contribute to revenues.

In another initiative, Patel has begun setting up a 1200-MW thermal power plant in Gujarat; works are on to set up another hydro power plant. It also acquired ownership of a company holding a licence for two hydropower projects in Nepal.

With Patel pursuing overseas opportunities, it has already completed a few projects in the US and Greece with more in the piepline. Office networks are in place in the United States, Africa and Indonesia, where it may acquire a coal mine to supplement its thermal power plant.

The company’s three-year sales growth has averaged 33 per cent at the consolidated level. Operating profits showed a growth of 56 per cent in the same period. Operating margins therefore showed steady improvement, from 15.6 per cent in 2006 to 25.4 per cent in 2009.

An increase in interest costs over the past two years, and rise in depreciation pulled net profit margins down to 9 per cent in 2009, compared with 10 per cent in the year before.

Again, net profit registered a 36 per cent CAGR where operating profits clocked a much higher growth. The June quarter of 2009-10 saw a consolidated sales growth of 15 per cent with net profits up by 25 per cent.

Given its dependence on Government contracts, delays in meeting infrastructure targets could impact order inflows.

Projects such as those in the hydropower segment may face opposition especially if displacement of people is required.

Patel also has a debt equity ratio on the higher side at 1.1 times; interest payouts have more than doubled in 2008-09 over the year before. Interest cover as well has halved from 4.1 times in 2007-08 to 2.2 times in 2008-09.

Please find the story on IT raids on Patel Engg as appeared in Hindustan Times on Friday.

http://www.hindustantimes.com/Engg-firm-admits-to-concealing-Rs-200-cr/Article1-642134.aspx

Friday, 24^th December 2010

The owners of Patel Engineering Limited, a listed company, admitted to the concealment of income of Rs 200 crore during searches conducted by the income tax (I-T) authorities. The company is mainly into construction of bridges, dams and highways. I-T authorities had searched 25 premises of the company and its owners in Mumbai, Hyderabad, Kolkata, Bangalore and Buldhana last Thursday and Friday.

A senior I-T officer, requesting anonymity, as he is not authorised to speak to the media, said the company owners admitted concealment of income. “Though they have admitted to concealment of Rs 200 crore, we are continuing our investigation to find out if there is more,” the officer said.

He added that the department suspects that the concealed income amount could climb, as out of 12 bank lockers sealed last week, 11 are yet to be opened. “On opening these lockers, things will be clear as they could contain some valuables or important documents,” the officer said.
Ashwin Parmar, an authorised representative for the company refused to comment.

During searches, the I-T authorities had found that the company had shown artificial expenditures in making payments for sub-contracts awarded by it to other firms and in purchases of various machinery and equipment.

The authorities found that the company used to pay excess amount to firms taking sub-contracts, by cheque, but a part of it (which was in excess) came back to the company in cash.

The I-T team had also found a benami bank account during searches. The account was in the name of an employee of the company but was controlled and operated by the company owners.

Meanwhile, as per regular rate, the company would be required to pay around Rs 67 crore in tax on the concealed income. The officer said that the department could also charge interest on the tax amount that was not paid on time by the company.

Further, the department could also levy penalty on the company for concealing income. The penalty, if levied, could be 100 to 300 per cent of the tax amount.

Also find a link to story dated 17^th December 2010 when the raids started. http://www.hindustantimes.com/tabloid-news/mumbai/Income-tax-officials-raid-engineering-company/Article1-639416.aspx