Patel Engineering is an attractive infrastructure and land bank story. Its infrastructure business consists of high-margin hydro power, irrigation and micro-tunneling projects. PEL expects better inflow in H2FY11 and is very optimist on real estate foray. In the real estate segment, the Bangalore project has been completely sold and the Noida project has been pre-sold more than 75%.

What will move the stock?
1) We believe the core business is undervalued, and are optimistic of enhanced valuations as we believe the order book would grow at~20.9% CAGR over FY10-12E.
2) Order flow from the hydro power segment has been below potential. During H1FY11 owing to dormant phase of hydro project awarding by govt, hence the order book growth is muted. Nevertheless, the current order backlog stands at Rs105bn; including L1 status of ~Rs21bn. PEL is hopeful of adding Rs30-40bn of captive orders from its power foray in H2FY11 & also from its real estate projects.
3) Faster execution of the real estate projects would stimulate stock performance. In Q2FY11, PEL has already booked Rs500mn of revenues from real estate project in Bangalore & expect good traction in coming quarters.

Where are we stacked versus consensus? Our FY11E and FY12E earnings estimates at Rs25.8 (12.2 %) and Rs33 (8.2%), lower than mean consensus estimates. We expect top-line growth of ~11.1% at Rs35.4bn for FY11 and 19.9% at Rs42.4bn vs. consensus estimate of ~10.8% at Rs35.4bn and ~22.6% at Rs43.5bn. Our SOTP-based target price is Rs567 vs. consensus target of Rs505.

What will challenge our target price?
1) Lower-than-expected order inflow of Rs45bn in FY11; 2) Slowdown in the real estate market