Thursday, March 11, 2010


Our recent meeting with the management of Petron Engineering Construction (PTEC), a mid-sized EPC services player, revealed that the company’s growth trajectory appears intact. PTEC has logged a topline CAGR of 18% over FY05- FY09, and expects to clock a stronger growth rate of 25% over FY09-FY11. Growth will be underpinned by a healthy order book of Rs 6.5bn (excluding Rs 2.1bn in L1 orders), strong moorings in the form of a globally recognised parent company, and favourable sector dynamics.

Growing order book: PTEC is mainly present in the refinery and power EPC space and has a strong client base, many of whom are repeat customers. Some of its prominent clients include BHEL, NTPC, Reliance Energy, Bharat Petroleum, Indian Oil Corp and Adani Power. Over the past year, PTEC has been gaining traction in order wins and currently has an order book of ~Rs 6.5bn or 1.4x FY09 sales. This is dominated by the refinery segment (60%), while power projects (20%), cement projects (10%), and others (10%) make up the balance. The company is also the lowest bidder (L1) for two contracts worth Rs 2.1bn, comprising the Rs 1.5bn Paradip refinery project and a Rs 0.6bn electrical supply order from NTPC.

Strong parentage: PTEC was acquired by UK-based Kazstroyservice (KSS) in 2008. The KSS group clocked a turnover of Rs 23.1bn in FY09, has a strong equipment base valued at more than Rs 5bn, and has successfully executed over 100 projects since inception, including several turnkey EPC works.

The growth plans of PTEC and KSS are complimentary and a powerful synergy exists to expand activities of the group in India and beyond. Together, the partnership plans to explore the Middle East, Far East and Turkmenistan markets. KSS has a 53% stake in the company while the erstwhile owners (including the Nair family) still hold 10%. Unlisted group company Petron Civil Engineering (topline of Rs 6bn, 100% owned by KSS) may be merged with PTEC.

Healthy growth guidance: PTEC has guided for a topline of Rs 5.5bn and a bottomline of ~Rs 250mn for FY10. It aims to log a sales CAGR of 35% over the next two years to Rs 10bn, and higher growth in profits as EBITDA margins hold firm at 11–12%. On the capex front, PTEC plans to invest Rs 500mn in equipment purchase in 2010. The company’s debt position stands at ~Rs 650mn. It had legacy bad debts of Rs 0.5bn (partly pertaining to NTPC’s Khalgaon unit) which have now been written off.

Valuations appear attractive: Currently, the stock trades at ~10x FY10E EPS and ~6.2x FY11E EPS (based on the management guidance). While we do not have a rating on PTEC, we believe the stock is attractively priced at this level.