Patels Airtemps (MCAP Rs 170cr) - Ancillary play on Oil & Gas Capex
Design & Fabrication of industrial products like Heat Exchangers, Pressure Vehicles, etc.
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Patel Airtemp (PAIL) is in the business of design and fabrication of process equipment and engineering goods. Industrial products include Shell/Tube heat exchangers, air cooled heat exchangers, pressure vessels surface conductors, Oil coolers, etc. PAIL also provides air conditioning solutions to industrial and domestic customers. PAIL’s business has scaled up to ~Rs 290 crore in FY23 (5/10 year revenue CAGR ~12%), heat exchangers form majority of the company’s revenue (~90% share).
What are Heat Exchangers & Pressure Vehicles? Briefly understanding the products (diagrammatically shown below), (1) Heat Exchangers primarily serve the role of transfer of heat between the 2 fluids/material. Shell & Tube is the most used heat exchanger, unit consist of round tubes mounted in cylindrical shells. Primary fluid flows through tubes, while the cooling liquid through. It a heat transfer process that does not require fossil fuels, hence a preferred way. (2) Pressure vessels are used to store liquid/gas at pressure which is very different from ambient pressure.
Long & reputed history of Patel Airtemp. Heat exchangers are critical products, key factors that are considered in choosing the supplier are – (1) Technical expertise and quality, (2) Adherence to the delivery schedule. Over the past 46 years, PAIL has supplied 10k+ equipment to 550+ customers. The products of PAIL are approved by some of the major third-party inspection agencies and consultants like Bureau Veritas, TUV, Engineers India Ltd., SGS India Pvt. Ltd, etc. Some of the notable customers are IOCL, BPCL, HPCL, Reliance, ONGC, GAIL, GSFC, Nirma, Seimens, Linde, Inox Air Products, L&T, Petrofac, EIL, etc. Typically top 5 customers in any particular year constitute 60-80% of sales, however the composition of these top 5 customers/industries keep changing.
About the promoters - Patels Airtemp was founded by Mr. Naryanbhai G. Patel, as a partnership in 1973, which later got converted into public company in 1993. While Mr. NG Patel (Aged 83 years) is still involved in business, he is supported by 2nd & 3rd generation, Mr SN Patel (50 years) and Mr. Shivang Patel (31 yrs).
Growth tailwinds supportive in FY24 (expect 25-30% YoY). Growth prospects are linked to the capex cycle of engineering, petroleum, and oil & gas industry. With favorable sector tailwinds, we can see strong order book growth across all players (listed comparable are Anup Engineering, Kilburn Engineering, Loyal Equipment, etc.). Unexecuted order books Anup is Rs 530 crore as on Mar-23 (130% of FY23 revenue), was Rs 534 crore for Patel Airtemp (PAIL) as on Oct-22 (190% of FY23 revenue). For PAIL, FY24’s strong revenue outlook (expect 25-30% YoY) is driven by – (1) Strong order book, (2) Inventory build up as on Mar-23 (Rs 150 crore, +50% YoY), please note its largely WIP for them.
Margins should improve YoY as steel prices have moderated. Key RM used are steel sheets (mild-steel & stainless steel), tubes, pipes, etc. Average gross margins for PAIL has ranged 40-45% over past decade, however FY22/23 Gross margins were at 38% due to high commodity price environment. Consequently, EBIDTA margins dipped to 11% (vs 12-13% in past). PAIL’s margins are ~8-10% lower than Anup, reasons being higher mix of pressure vessels for Anup and also higher mix of newer technology heat exchanger products like ‘Helixchanger’ and ‘Embaffle Heat Exchangers’.
FY24 forecasts. Strong order book (+90% YoY) gives a good FY24 growth visibility of 25-30%, FY24 revenue forecast of Rs 350-360 crore. We also bake in margin improvement as RM prices ease & some operating leverage, building in 12% EBIDTA margins, yielding Rs 40-42 crore EBIDTA, Rs 19-20 crore PAT. No major debt reduction is being built, as WC requirement will remain. Hence, stock is trading at ~8x FY24 PE, ~6x FY24 EV/EBIDTA, leaving sufficient margin of safety at current levels. Key risks – margins miss, order book slowdown.
There is a large overlap in Anup Engineering’s business and PAIL’s. In terms of scale and order book also, they are not very different, though Anup operates at ~20-22% EBIDTA margins vs ~10-11% for PAIL. But with Anup at 35x+ trailing PE, Loyal Equipment at 20x+ PE, Kilburn Eng at 25x core PE – PAIL trading at 15x PE looks attractive valuation wise, specifically with good FY24 growth visibility.
Comparison of 3 listed players in the space -