Multibagger stock Patel Engineering corrects 38% from recent peak. Right time to buy? | Stock Market News

Shares of Patel Engineering, one of the major infrastructure and construction companies, have been on a downward trajectory over the last 7 months (including January), losing 26% of their value to trade at the current level of ₹48.30 apiece.

Notably, the stock has corrected 38.36% from its February 2024 peak of ₹79. Despite this recent sharp fall, the stock still delivered 209% gains in the last two years and 280% over the last three years.

Domestic brokerage firm IDBI Capital is bullish on the stock and expects the stock to reverse its bearish streak. In its report, the brokerage initiated coverage on the stock with a ‘buy’ rating and set a target price of ₹76 apiece, indicating a strong 54% upside from the stock’s latest closing price. 

The brokerage’s positive outlook is driven by the company’s strong order book, anticipated inflows from the hydro segment, and strategic diversification across geographical and sectorial lines, which the brokerage believes will drive the company’s topline growth.

The brokerage has also highlighted the company’s robust construction capabilities, backed by extensive experience in executing highly technical and advanced projects, which are expected to play a pivotal role in its growth trajectory.

Operating margins are expected to remain stable, supported by a significant portion of the order book in the hydro segment. Additionally, it notes that the company’s low debt-to-equity (D/E) ratio and improving return ratios reflect its strong financial position.

Growth drivers

Healthy Order book: As of H1FY25, Patel Engineering has a robust order book worth ₹173 billion, offering nearly 4 years of revenue visibility. While order inflow was subdued during H1FY25 due to the election period at ₹3.5 billion, IDBI Capital expects a stronger inflow in H2FY25.

Stable EBITDA margins: As per the brokerage, the company’s absolute EBITDA has grown at a CAGR of 39% from 2020 to 2024, and it has consistently maintained stable EBITDA margins in the range of 14%-15%. IDBI Capital expects Patel Engineering to sustain margins within this range, as a significant portion of its order book is driven by hydro projects, which typically offer better margins compared to other segments.

Reduction in Debt: The brokerage further said that the company in recent years has prioritised monetising non-core assets to reduce debt and plans to continue this strategy. As of H1FY25, Patel Engineering has received arbitration claims amounting to ₹2,200 million, which will be used for debt repayment.

The company has pending arbitration claims of approximately ₹33 billion and expects to secure 65% of these as awards over the next 4-5 years. The proceeds from these awards will be allocated toward both debt reduction and working capital needs.

Positive OCF: Patel Engineering has reported positive operating cash flow (OCF) over the past four years, with working capital days standing at 100, primarily driven by unresolved arbitration claims and land holdings.

Improving ROE: The company achieved an ROE of 9.07%, up from 5.44% in the previous fiscal year. The revenue trajectory is improving on a sequential basis, followed by improved operational efficiency, which is improving operating margin levels at 14%, the brokerage noted.

Technical outlook

Jigar S. Patel, Senior Manager of Equity Research at Anand Rathi Share and Stockbrokers said, “Currently, the stock has formed a head-and-shoulders pattern on the weekly chart, raising concerns about potential bearish momentum. The pattern is approaching its neckline, suggesting growing selling pressure. A decisive break down below the neckline, especially with strong volume, could confirm the pattern and trigger a significant downward move.”

He advised traders to closely monitor a confirmed close below the neckline to validate the bearish outlook. If the neckline breaks, Jigar expects the stock to decline toward the 43-44 zone, aligning with the S3 Camarilla monthly support pivot. This level also coincides with its October 2023 lows, as highlighted in the chart.

“These overlapping technical factors indicate strong support at 43-44, but the overall structure warrants a cautious approach. At this stage, adopting a wait-and-watch strategy is prudent, as further confirmation through price action is essential before taking any decisive trade positions,” Jigar noted.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.