Patel Engineering - May Unlock Value

Patel Engineering May Hive Off Realty Arm

Patel Engineering, the Mumbai-based infrastructure construction firm, is on course to unlock the value of its urban land bank. The company is transferring most of its rights in lands in cities like Hyderabad, Chennai, Bangalore, Mumbai and Pune to a company which will be a 100% subsidiary of Patel Engineering.

The new company, named Patel Realities India Ltd will have a land bank of more than 500 acre of urban real estate in these cities. The new company will also develop these properties.

Sources at Patel Engineering confirmed the development. The idea to hive off its real estate division into a separate company was to enhance shareholders wealth by monetising its urban land bank, sources said. The entire land bank of Patel Engineering is owned by the company it had bought several years ago and is valued at historical prices in its books.

A fund manager, who tracks the company and attended a recent management meet, said Patel Realties plans to develop its urban land areas into commercial and residential real estate. When completed, the total space could aggregate to about 60 million square feet. At a conservative price of about Rs 2,000 per square feet, the total value unlocking could be a staggering Rs 12,000 crore.

Compared to this, Patel Engineering’s current market capitalisation is a little over Rs 2,200 crore. Going forward, on a standalone basis, the real estate subsidiary itself could be as big or even larger than its parent, Patel Engineering.

"The company has already made the initial moves and put in place its key management team," the fund manager said. Recently there was market speculation that the company might hive off its real estates into a separate listed company. However, the company sources said at present there were no plans to list the realty company.

Patel Engineering has already put in place a key management team headed by Pravin Malkani as PRIL’s president. “We are in the process of appointing other key personnel for the company to create adequate infrastructure for the real estate business,” said Mr Patel. Mr Rupen, however, denied any plans to demerge the subsidiary. “Since our entire real estate development is in major metros, we do not see any need to access the capital market. Going forward, we believe that reality business will enhance cash flows, which will then be used for further strengthening our core business and taking more BOT and independent power projects.”

Pravin Malkani, president, PRIL, said, “We will focus on residential and commercial development in these metros. Going forward, we see profits from PRIL competing with the parent company.” The company reported a 51% rise in consolidated net profit at Rs 111 crore for the financial year ended March 31, 2007.

The positive development is already beginning to show on the company’s stock price. In the last one month, the stock has increased 20% and the activity in the stock has increased since the company announced its annual results a week ago. Volume have jumped dramatically in both the NSE and BSE in the last two days.

Patel Engineering is a major player in underground construction of tunnels and caverns and has also acquired expertise in micro-tunnelling. Recently the company, in partnership with another firm, bagged a Rs 157 crore order from the municipal authority in Mumbai for construction of a tunnel in the city.

Recently, the company also announced its foray into thermal power generation. It is planing to set up a 1200 MW power plant in Gujarat with a proposed investment of Rs 5,000 crore.

The company is also foraying into power production as an independent power producer through its subsidiary Patel Energy Ltd.

Hydro-power generation could be the next area where it could step into, the company said in a recent announcement to the Bombay Stock Exchange.