Monday, May 25, 2009


Patel Engineering (Rs309)
BUY - Target price: Rs395

Torrent Pharmaceuticals (Rs155)
BUY - Target Price: Rs210

During the quarter ending Mar 09, we expect the company would report the net sales growth of 11.5% to Rs. 8.1bn in Q4FY09 from Rs. 7.26bn in Q4FY08. We expect EBIDTA would go up by 19.5% to Rs. 1.25bn and EBIDTA margin would improve by 100bps to 15.5% on account of higher contribution from high margin order book. We expect RPAT would go up by 36.3% to Rs. 726mn.

During the quarter, the company has bagged an order worth of Rs 7.99bn from the Narmada Valley Development Authority for Bargi Diversion Project in joint venture with SEW Construction Ltd. The company's stake in the project would be around 60% which will translate the order inflow of Rs. 5bn. The project would be executed in three years and provide the EBIDTA margin of around 15%. PEL has an order book position of Rs.71bn as on 31st Dec., 2008 which works out to 3.1x of book to bill ratio at FY09 earnings which is providing strong revenue
visibility for next 3years.

Valuation: At the current market price of Rs 309, the company is trading at PER multiple of 10.2x and EV/EBIDTA multiple of 5.8x on FY10E earnings. We have valued the core business of the company using EV/EBITDA methodology at 6x. Real estate division at 75% discount to value of raw land. Looking at the easing liquidity situation and expected robust order inflow post stable government; we maintain our BUY rating with revised price target of Rs395.

The net revenues for the quarter delivered decent growth of 24.3% y-o-y to Rs.4050mn compared to our estimates at Rs.3768mn mainly on back of strong growth witnessed from key markets like Europe, Heumann and rest of the world as well as better than expected results from contract manufacturing business.

Despite reporting strong growth rate in revenues, the company's EBITDA margins dropped to 13% compared to 15.82% in Q4FY08 due to net forex loss to the tune of 15.8mn, higher staff expenses on account of a new extra urban division, higher R & D expenses and bad debts of Rs75mn in Q4FY09. The tax expense (-Rs.22.3mn) includes MAT credit entitlement to the extent of Rs.159.6mn pertaining to first three quarters of the previous year. The exceptional item of Rs.0.1mn is one time expense towards settlement of a research contract claim for out-ofcourt settlement. The profit after tax for the quarter de-grew by 18.8% to Rs.360.9mn over Q4FY08 mainly due to lower operating profit margins and lower other income reported during the quarter.

View & Valuation: We are revising our FY10 net revenue estimates upwards by 3.3% to Rs.18943.6mn on account of better than estimated revenue growth reported for FY09 and improved revenues from Europe, Brazil, US, Russia and RoW markets. We are downgrading our EBITDA margin estimates for FY10 by 80 basis points to 16.9% mainly due to lower margins reported in FY09 (15.9% on account of forex loss of Rs412mn). We are marginally increasing
our FY10 earnings estimates by 1.94% mainly on account of improved revenue traction and better margins compared to FY09. Currently, the stock is quoting at PE of 5.9x on FY10 EPS at Rs.26.3. We continue to rate the stock as 'BUY' and upgrade our price target by 5 % to Rs.210 based on 8x on FY10 basis.

To see full report: STOCKS UPDATE