Patel Engineering (PEL) Q2FY11 results surprised us with a higher than topline number at Rs7.7bn against Rs6.4bn expected, Rs0.5bn explained by the real estate sales booking and rest from better performance in irrigation segment and US subsidiary. Due to lower hydro sales mix margins where lower by 352bps on a YoY basis at 15.2%. Still PAT was higher by 7% on a YoY basis at Rs436mn. We are disappointed with the core business development, due to no traction in order booking & await H2 development. The management has provided a very optimistic scenario for its real estate assets over the next 3years, we maintain our numbers and target price of Rs567 with a BUY rating.

Core order book disappoints; but management is optimistic about internal orders

The gross order book stands at Rs105bn which is including L1 position of Rs21bn. Net order book is up by only 7% on a QoQ basis to Rs84bn...

Core margins disappoints.

EBITDA margin for Q2FY11 was lower at 15.2% vs 18.7% for Q2FY10, which is due to lower hydro segment booking and higher mix from US subsidiary...

Heavily Debted.

Total debt has increased to Rs23.6bn from Rs18.3bn in FY10 taking D/E ratio to 1.4x...

VALUATIONS AND RECOMMENDATION

We maintain 'BUY' recommendation with a target price to Rs567, we value the core business at a P/E of 12x (ex-real estate) at Rs396 per share. As far as the core business is concerned, the outlook has certainly taken a beating with low visibility on order book inflow and higher debt. In the near-term much seems dependent on PEL success in real estate, which we acknowledge as impressive. Valuation for combined real estate projects is at Rs55 per share, Land Bank at Rs
67per share, Power at Rs36 per share (1x to equity investment of Rs2.5bn) and BOT at Rs12 per share.