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Red Flags
– Decrease in promoter holding
– 98% of the shares have been pledged
– Debt to equity close to 1
PEL is a dynamic and forward-thinking Indian engineering company specialising in the design and construction of Power Houses, Hydroelectric Projects, Commercial Buildings, Industrial Complexes, Dams, Tunnels, Underground Structures, Steel and Concrete Structures, Bridges, Marine Works, Flyovers, and National Highways in India and abroad.
Patel engineering
Current market price on the date of publishing this report-: 18 Rs
Introduction
Founded in 1949, PEL is one of India’s biggest comprehensive infrastructure and building services enterprises. PEL has a wide range of experience in the infrastructure business, including dams, tunnels, micro-runnels, hydroelectric projects, irrigation projects, motorways, roads, bridges, trains, refineries, and real estate and townships.
Patel Engineering Ltd. has been awarded IMS Certificates (ISO 9001:2008 Quality Management System, ISO 14001:2004 Environmental Management System, and OHSAS 18001:2007 Occupational, Health, and Safety Management System) by UK-based BSI, demonstrating its commitment to the highest quality, safety, health, and environmental standards.
Infrastructure
Hydropower
A hydro power project is a matter of great experience and expertise. Difficult geographical areas, inclement weather and inhospitable conditions are some of the obstacles that come in the way of constructing a hydropower project. PEL has involved in constructing Thermal and Hydroelectric schemes, varying in capacities from 3MW to 1,000MW.
PEL has generated more than 12000 MW of power.
Patel Engineering had bagged an order to build Rs 1,564.42 crore Subansiri Lower Hydroelectric Project in Arunachal Pradesh. It had an installed capacity of 2000 MW. It is one of the largest Hydroelectric power project in India.
Other notable Hydroelectric power projects
PEL Large Hydro Power Projects
- Koyna HEP 1580 MW
- Arun 3 HEP 900 MW
- Teesta 6 HEP 500 MW
- Kiru HEP 624 MW
- Kwar HEP 540 MW
- Tapovan HEP 520 MW
Transport
PEL has been the name behind some of the best highways, rail bridges, and tunnels in the country. Among the significant projects performed are the 25 km-long East-West Corridor in Assam, which cost Rs. 2387.25 million, and the Surat-Manor Tollway Project, which stretches up to 38 km and costs Rs. 2550 million.
PEL has constructed more than 1200 Kms of roads.
Dams
In India, water resources are becoming increasingly limited. Because rainfall happens just once every three months, dam storage is essential for water use.
PEL has commissioned more than 85 Dams in India
Dams and maritime works on a large scale need years of solid knowledge and skill. PEL revolutionised these critical sectors of construction by combining in-depth knowledge, experience, and technical competence with rigorous planning, an efficient management strategy, and resolve. For harnessing the tremendous river flows, the company has erected earthen dams and concrete gravity dams. Jetty, caissons, slipway, wet docks, and other linked structures are among the company’s outstanding maritime projects.
Irrigation projects
PEL has irrigated over 1.55 lakh acres of land
Major irrigation under execution includes Bhima Lift Irrigation Project, Kalwakurthy Lift Irrigation, Jawahar Lift Irrigation Project, Jigaon Lift Irrigation Scheme, Bargi Diversion Project and Krishna Delta System
Real Estate
The company has successfully completed numerous large-scale projects by combining exceptional quality and speed. Oil refineries, foundries and machine shops, chemical plants, and a variety of industrial units needing many tonnes of concrete, structural steel construction, and installation are examples.
Furthermore, the company has created a name for itself by erecting a number of iconic structures capable of defining any city’s skyline. Hotels, theatres, post offices, car parks, sports stadiums, college campuses, office buildings, power stations, and public utility facilities are examples of these.
Micro tunneling
Tunnel construction from Veravali to Adarsh Nagar to Yari Road, comprising shafts and ancillary activities. In this example, the tunnel bore extended up to 6.1 kilometres to provide water supply. The project does not interfere with people’s routine daily lives and activities in and around the neighbourhood, while maintaining uninterrupted water delivery to the whole stretch covered by the tunnel.
PEL has constructed more than 280 kms of tunnels
PEL has employed micro tunnelling to develop subsurface networks for sewage, water, and storm water applications in order to alleviate the acute difficulties of underground infrastructure linked with increasing urban expansion. Over 25 km of new networks have been developed in Mumbai and Delhi, with pipe widths ranging from 600mm to 2000mm and employing RCC and HDPE pipes, allowing urban planners to overcome obstacles such as the presence of slums and a lack of secondary networks for vehicle, pedestrian, and water traffic. Over 315 metres have been driven in a single drive.
Other Notable projects undertaken
Parliament Building in Bhutan
Unique in its own way page
Major projects under execution
Order Book
Current order book as of Sept 23 stands at 17,598 crores .
Financials
For Q2FY23
- Net Sales stood at Rs 814.46 crore in September 2022 up 25% from Rs. 651.56 crore in September 2021.
- Quarterly Net Profit stood at Rs. 15.57 crore in September 2022 up 154.83% from Rs. 6.11 crore in September 2021.
- EBITDA stood at Rs. 148.39 crore in September 2022 up 21.48% from Rs. 122.15 crore in September 2021.
- EPS increased to Rs. 0.32 in September 2022 from Rs. 0.13 in September 2021.
- Company repaid debt of 50 crs in the current quarter.
- The company raised fresh equity from FPI a tune of INR 31.84 crores and also got inclusion from promoter of INR 70 crores
For the year ended March 22
- On a consolidated basis, revenue from operations for FY22 stood at ₹ 33,802.9 million up by 69.46% from ₹ 19,947.9 million in the previous year.
- The consolidated EBITDA for FY22 at ₹ 5,277.2 million was higher by 124.91%%.
- The net profit in FY22 was in the positive territory at ₹ 547.6 million as against a loss of ₹ 2,982.0 million in the previous year.
- Eps for the year ended march 23 stood at 1.50 Rs as against loss of 6.25 Rs last year.
- Revenue from operations for H1 FY ’23 is at INR 1866.96 crores, which is up by 34.25% from INR 1390.7 crores in H1 FY ’22.
Debt Reduction
The company pays around 11.5% to 12% interest.
The total debt on a consolidated basis was ₹ 22,616.1 million as of March 31, 2022, compared to ₹ 22,663.9 million as of March 31, 2021.
In this quarter, company repaid LIC NCD instalments of INR 50 crores and reduced its debt burden further.
In the coming six months also, management has plans to reduce INR 50 crores to INR 100 crores that is by March 23.
The current debt is around INR 2,000 crores. And the repayment schedule for the following six months calls for repayments ranging from INR 70 crores to INR 80 crores.
Additionally going forward management pans to reduce another INR 100 crores to INR 200 crores next year. So over two to three years INR 500 crores to INR 600 crores of debt reduction is expected to be reduced.
Land Bank
Company has land parcels in and around Chennai, Telangana, Tamil Nadu and somewhat in Maharashtra.
Total land bank in Tamil Nadu is around 1,400 – 1,500 acres, in Telangana it is around 300 – 400 acres. Additionally company has some portion of land in Maharashtra as well as in Bangalore.
Company has not conducted valuation of the land bank however as per the management it is estimated to be around 1000 crores.
Fresh Infusion of capital
Promoters have diluted their stake in the current quarter by selling the shares in the market and funds received have been infused back into the company. This funds infused by the promoters have been infused by the way of unsecured debentures which they plan to convert into the equity in the coming period as said by the management.
The pricing for conversion of the same into equity is not discussed as well as the date and time are also not clear. As per the managements comments this funds will lie in the book as unsecured loans from promoter.
Promoter holding has come down from from 54.62% to 43.48% and the pledge % has also gone up.
Despite explanation from management, we are still unable to comprehend the nature and intent of the transaction. However, we would like to recommend that people refrain from posting queries about it.
Management’s comments
- Management has provided revenue guidance of around 15% year-on-year revenue growth.
- As per the management company is operating in very narrow segment and going forward t plans to focus more on hydro and tunnelling projects, where management doesnt see much competition coming in near future.
- Management intends to monetize its assets by selling non-core assets and using the proceeds to pay down debt. Management is already in discussions and expects a sale around 50-100 crores to close by March 23.
- In terms of 5 years, management expects the company to be debt free.
- As per the management hydro and tunnelling segments give better margins and as a result those projects forms maximum portion of company’s order book. That is to say around 60% to 70% of revenue comes from hydro projects.
Users must comprehend. Despite demonetisation and the government’s best efforts, there remains a parallel black money economy in India. As a result, quantifying the amount of profit that occurs to the company and the promoters separately is challenging since it is nearly impossible for the asset sale transaction to be completed using white money.
Therefore how transparent the management is will be know only post sale of the assests.
Sectorial outlook
In India, hydropower has good prospects. The reason for this is that India wishes to achieve net zero carbon emissions. India intends to transition to renewable energy, and hydropower is the greatest sector to do so. India has a rich supply of flowing rivers. As a result, hydroelectric dams can be erected quickly.
Out of total Installed Capacity of the country ~ 393 GW, share of hydro power is at ~ 11.8%. As on 31st December 2021 India’s current Hydro power Installed Capacity is 46,512.20 MW. Hydro Capacity added in the recent years – 795 MW during 2017-18, 140 MW in 2018-19, 300 MW in 2019-20, 510 MW in 2020-21 and 213 MW in 2021-22 and the future is even more promising with many upcoming projects under construction and more in pipeline. Hydro power plants have generated ~ 150 billion units of electricity during year FY 20-21.
The potential in hydro is enormous. The management anticipates 50,000 megawatts of hydropower to be installed during the following few years.
Conclusion
PEL is a dynamic and forward-thinking Indian engineering company specializing in heavy infrastructure engineering, with a key focus on hydropower and tunnel projects. Over the years, the company had suffered massive losses and accumulated massive debt. With a positive net profit last year and a positive net profit in two consecutive quarters this year, the company appears to be on the road to profitability. Furthermore, management has guided for a 15% increase in sales for the current fiscal year, with EBITA margins in the 14-15% range. Looking at the present HY outcomes, it appears to be achievable; in fact, management may outperform.
In addition, management has drawn out an amibitions strategy for debt reduction, with the aim of becoming entirely debt free in the near future. One of the finest features of the company is that almost all of its projects include an escalation clause. That is, if the price increases by more than a particular percentage, the additional cost must be paid to the contractor, in this case PEL.
Thus, based on all that has been discussed, it appears that PEL is poised to gain significantly in the coming period. However, in the end, it all comes down to what the management actually delivers in relation to what it has stated. Nevertheless, this makes PEL worth exploring in the long run.
