>PATEL ENGINEERING LIMITED (FAIRWEALTH)

We initiate a buy on dips call for Patel Engineering. One can buy at levels from around 300 to 340 for a target of 550 with a time horizon of 3 months. This call presents an upside potential of 40% and 70% for investors.

Investors having a holding period of 1-3 years can invest at current levels for a target of 720.

We have valued the company through SOTP valuations, Valuation of Rs. 720 has been arrived by valuing core operations at Rs. 325(10x EBITDA multiple) per share and Real Estate business at around Rs.325 share (30% discount to market value). Core Operations of the company have been valued at EV/EBITDA multiple of 10, while real estate has been valued at 35% discount to the market value

Key Investment reasons are strong order book (more than 5 times FY08 sales) expertise in complicated and high margin Hydro power and upstream irrigation projects. Leadership in Hydro power projects with 22% market share and prequalification for 12,000 crores of upcoming Hydro Power projects. Huge Land Bank valued at over Rs. 2000 crores. And increasing interest in Power Generation Business.

Quarterly highlights:
March 24 (Reuters) - Patel Engineering Ltd won an order worth 7.99 billion rupees for tunnelling work from the Narmada Valley Development Authority. Order book size stood at 7100 cores in Dec’08.

May: Order worth INR 554.67 Crore was bagged from the Vidarbha Irrigation Development Corporation, Maharashtra for the construction of pump house with pumping machinery, electric overhead travelling crane, switch yard and construction of rising main with manifold and water hammer control device

May: order worth INR 153.37 Crore was bagged from the Himachal Pradesh Power Corporation for the construction and completion of a powerhouse complex for the 111 MW Sawra Kuddu hydroelectric projects in Shimla district.

Order book to cross 9000 Crore by middle of this year with bulk of the orders coming from Hydro sector hydro power related projects (60%), followed by irrigation (20%) and remaining is spread across transportation and micro-tunnelling.

Result Analysis:
Top line grew by a decent 31%: Patel Engineering (PE) registered steady growth in 3QFY2009. Consolidated Sales of the company were in line with our expectations increasing 31% Y-o-Y to Rs495cr (Rs379cr) on the back of a strong Order book of Rs7,100cr. For 9MFY2009, Top-line growth was a tad better at 32% to Rs1495cr (Rs1133cr).

As of 31st March Order book stood at Rs. 9000 Crore

Operating Margins higher than peers: PE enjoys higher Margins than peers as it caters to technology-intensive businesses like Hydro Power and Upstream Irrigation Systems. For 3QFY2009, the company’s OPM at 18.1 %( 15.6%) exceeded our estimates. PE has been clocking high Margins on account of operating efficiencies and having built-in price escalation clauses in place in the contracts. The pass on of incremental costs is high in the Hydro Power and Upstream Irrigation segments (which constitutes a major part of PE’s Order book) compared to other segments like Roads.

Net Profit flat on account of higher Interest cost and Depreciation:
PE posted Net Profit growth of mere 2.2% for 3QFY2009 to Rs39.7cr (Rs38.9cr) in line with our estimates. Interest costs spiked 380% to Rs21.0cr, which was however in line with our estimates. On the Tax front, the company maintains its stance that it is entitled to avail Section 80IA benefits. As a result, it provided Tax at only 18%, which we have not considered in our estimates. We have adopted a more conservative approach and factored in Tax at a marginal rate. For 9MFY2009, PE has provided for Tax at 16% v/s our provision of 30%.

Outlook and Valuation
PE has ventured into the Real Estate sector by transferring the development rights of its Historical land bank to Patel Realty India (PRIL), its 100% subsidiary. It has a land bank of around 1,000 acres spread across Hyderabad (640 acres), Bangalore (106 acres), Chennai (230 acres) and Mumbai (26 acres).

PRIL plans to develop this land bank in phases and has accordingly announced plans for the Phase I development. Under Phase I, the company is developing around 10% of the total land bank.

■ IT SEZ Park at Gachibowli, in Hyderabad (2.7 mn. sq.ft):
■ A corporate park at Jogeshwari, in Mumbai (1.08 mn. sq.ft):
■ An Integrated Township at Electronic City near Bangalore (12.1 mn sq.ft)

T0 see full report: PATEL ENGINEERING

>Alok Industries (FAIRWEALTH)

Alok Industries is a leading vertically integrated textlie palyer of the country with Sales of more than 3000 crore and strong bottom line. We initiate a buy call on the company on basis of its attractive valuation, huge growth in topline over next three years and increased bottom line from higher foreign currency earnings, increased sale of Value added products and Vertical/ backward Integration. We estimate Alok Industries Net Profit to grow at 30% compounded over next 3 yers.Profit margins for FY09 are likey to taper to 6.1% for FY09 and move back to 9-10% by FY11E.

Company is currently trading at 4.5x is FY08 Earnings; At estiated profits of 290 crores and 412 crores for FY10E and FY11E stock is currently valued at 2.9 and 2.1 times its EPS of 4.8 and 6.8 respectively.

Alok Industries has its Cost of Capital lowest in industry at around 10% as company after tax cost of Debt is around 6%.Out of total Debt of 6500 crores 4000 crores has been raised as part of TUF scheme.

Earnings Estimate:
We expect company to post decent set of numbers for Q4 on account of higher Foreign Exchange Earnings. Alok Industries' March quarter sales are expected to go up 20% to Rs 870 crore on yoy basis. The company's net profit is seen flat at Rs. 53 crore on yoy basis.

Company Description
Alok Industries is the largest vertically integrated textile companies in India. Company has commenced massive expnasion plans since 2006 which is expected to be completed by Q1 FY10. As part of the expansion policy Company aims to achieve the following:

1. Integrated Operations and Economies of Scale
2. Become a ‘Nominated Supplier’ to Global Customers
3. Expansion of retail of products manufactured by the company

Divisions
1. Apparel Fabrics
2. Home Textiles
Store 21 in UK with more than 200 stores and H&A in India with more than 53 stores and target of over 100 by end of this year.
3. Cotton Yarn

Outlook and Valuation
Company has total debt of about 6500 crores out of which 4500 crore long term debt has been raised as part of TUF’s at subsidised rates rest 2000 crores is raised as working capital loans.

In view of company’s high net D/E ratio of 3:1 Company has decided to issue rights issue at
83:40 raising around 450 crores. Post right issue company’s total Net worth would reach
around 2300 crores with cash balance of around 1800 crores.

Company’s Long Term Debt: Equity ratio post right issue will be around 1.8 to 2 which
would be much more stable. Another thing in favour of the company is low cost of debt. Long term Debt has been raised as part of the textile promotion scheme, TUF which will provides 5% subsidy on interest cost of debt.

Increased Capacity to sales. Company has almost completed its Phase-IV expansion. Most
of the expansion is likely to be completed with in next 3 months. 90% of the overall capacities is expected to be utilized by 2011 from current levels of around 75%

We expect top line growth of compounded 30-35% over next 3 years, with bulk growth
coming from exports and retail sales. By 2010 exports would contribute about 50 percent of
company’s Net Sales up from current 40%.

Bottomline will get boosted through backward integration steps; company expects to meet
50% of its yarn demand in house and increased margin from dollar depreciation.

We value company at 4.5 x its 2009 expected EPS of 3.1. For FY10E and FY11E we expect company to post PAT of 320 crores and 410 crores respectively giving it a valuation
of 2.6x and 2x its FY10E and FY 11E EPS of 5.4 amd 6.9 respectively.

To see full report: ALOK INDUSTRIES