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Uptick in the capital goods cycle to help the business

The engineering sector is the largest of the industrial sectors in India. It accounts for 27% of the total factories in the industrial sectors and represents 63% of the overall foreign collaborations. India’s engineering sector is divided into two major segments- heavy engineering and light engineering. Turnover of the capital goods industry was estimated at US$ 92 billion in 2019 and is forecasted to reach US$ 115.17 billion by 2025. Engineering R&D revenues are projected to reach US$ 42 billion by end of this fiscal year from US$ 36 billion in FY19. according to the National Association of Software and Services Companies (NASSCOM), India’s share in the global engineering R&D markets is likely to expand at a CAGR of 12-13% to reach US$ 63 billion by 2025. the government has expanded the ‘National Infrastructure Pipeline’ NIP to 7,400 projects. ~217 projects worth Rs. 1.10 lakh crore (US$ 15.09 billion) were completed as of 2020.

Good fundamentals and operational profile at attractive valuations

Patels Airtemp has an excellent operating profile with a diverse set of industries and clients that it serves. The company’s promoters have a track record of over 4 decades and 3 generations of the family have been running the business. Patel’s Airtemp is one of only 3 organizations in India to acquire ASME N- NPT Stamp for manufacturing a stringent nuclear application. The company has added a new greenfield project at Dudhai, Gujarat. Fundamentally, the company has a strong balance sheet, robust return ratios, good margins and profitability and a consistent dividend policy. The company’s stock is attractively valued.

OUTLOOK & VALUATION

We have forecasted a revenue growth of 12.5% CAGR over FY21-24E where we expect revenue for FY24E at Rs. 364.1 cr, EBITDA at Rs. 35.5 cr at an EBITDA margin of 9.8% and Net Income of Rs. 18.4 cr. We estimate FY24E EPS at Rs. 36.35 and assign a PE multiple of 10x to arrive at a target price of Rs. 363, which is an upside of ~51% from today’s price of Rs. 240. We initiate coverage on Patels Airtemp (India) Ltd. with a BUY rating, over an investment horizon of 18-24 months.

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