Motilal Oswal - Patel Engineering

Patel Engineering (PEC IN; Mkt Cap USD0.6b, CMP Rs445, Buy);

High end construction capabilities: Patel Engineering has expertise in hydro power, tunneling, irrigation, railways and roads. The company has: (1) 22% share in hydro power construction in India; (2) executed cumulative underground tunneling up to 162km (highest in Indian construction industry); and (3) access to niche technologies such as RCC dams, micro tunneling, underwater lake tapping etc.

Real estate - value unlocking possibilities: Patel Engineering has a land bank of ~400 acres spread across Hyderabad, Mumbai, Bangalore and Maharashtra (Karjat, Panvel etc). Whilst not much detail relating to acreage and location are available, management has stated that development plans should be finalized by end-FY07. Based on the valuation exercise undertaken ~4-5 years ago, value of the land bank stood at ~Rs2b- 2.5b.

Strong earnings growth ahead: During FY06-FY09, we expect Patel Engineering (standalone) to report revenue CAGR of 38%, EBITDA CAGR of 38% and net profit CAGR of 36%. As of September 2006, the order book was Rs50b, with 78% comprising high margin segments such as hydro power and irrigation.

Recommend Buy: Based on our SOTP valuations, we arrive at a target price of Rs529. We value the core business at Rs365 per share (12x FY09 PER), subsidiaries at Rs7/sh (10x FY09 PER), investments in BOT projects etc. at Rs17/sh (at book value, March 2007) and real estate at Rs140/sh.

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Thanks Vishesh