Patel Engineering Looks To Capitalise On India's 70GW Hydropower Push

India aims to install 70 gigawatts of hydropower capacity by 2030, leveraging its 91 GW of untapped hydroelectricity potential.

The total civil construction value of the 91 GW of untapped hydropower potential stands at around Rs 4-5 lakh crore.

Given the market share Patel Engineering Ltd. traditionally and currently enjoys, the company has an opportunity size of Rs 1 lakh crore in the next four to five years. Here's how.

Hydroelectricity power has advantages over wind and solar power, especially for peaking power needs. Unlike wind and solar, hydro plants are easily dispatchable and are not dependent on weather conditions.

India's hydropower potential, as per a reassessment by the Central Electricity Authority (2017–2023), is 133.41 gigawatts. Currently, only 42.10 GW is utilised, leaving 91.30 GW untapped.

"The government aims to install 40 GW of hydroelectrical power and 30 GW of pump storage orders in the next five to seven years," Rupen Patel, chairman and managing director at Patel Engineering, told NDTV Profit in an interview. "Orders worth around Rs 5 lakh crore are to be awarded in the next five years," he said.

Patel Engineering is a construction company specialising in dams, bridges, tunnels, roads, and other heavy civil engineering projects in areas like hydro, irrigation, water supply, urban infrastructure, and transport.

The company generates roughly 50% of its revenue from the hydroelectric segment and has completed over 40 hydroelectric projects, with several more in progress.

As of Q3 FY24, Patel Engineering's total order book reached Rs 19,134.7 crores, with 61% from the hydroelectric sector. The company targets to increase the hydro segment's contribution to 75%, citing higher profitability with an Ebitda margin of up to 14%.

The book-to-bill ratio for its total operations stands at 4.3, whereas the book-to-bill ratio for the hydroelectric segment stands at 5.3.

A higher book-to-bill ratio typically indicates that the company receives more orders than it fills, indicating strong demand.

Out of the current 42 GW installed capacity of hydroelectric power in India, Patel Engineering has completed around 40 hydroelectric projects of approximately 11GW in India, a study by NDTV Profit Research showed.

This brings the company's historical market share in installed capacity to 26%, the study showed.

At present, India has hydroelectric projects of 18GW currently under construction. Projects worth an aggregate of 8GW are currently being carried out by Patel Engineering Ltd.

This brings the company's current market share to 46%, the study showed.

In addition to 18GW of hydroelectric projects currently under construction, around 19GW of projects have been approved by the Central Electricity Authority.

This indicates that although the CEA has given these projects technical approval, the construction phase has not yet begun.

Assuming a market share of 25% all the way up to 45%, Patel Engineering stands to gain hydroelectric power projects of capacities ranging from 4GW to over 8GW, from the 19GW projects concurred by the CEA.

The Central Electricity Authority underlines that the civil construction value of the 91GW of untapped hydroelectric potential in India is more than Rs 4 lakh crore.

Whether one assumes Patel Engineering's market share of 26% in the current installed capacity of its 40% share in hydroelectric projects currently under construction, the company still stands to seize an opportunity worth over Rs 1 lakh crore over the next four to five years

Key Risks: Where Does Patel Engineering's Capability Stand?

The domestic infrastructure and construction sector is fragmented, with price cuts during bidding raising concerns, HDFC Securities said in a December 2023 note. However, segments like hydropower and tunnelling have lower competition—mainly five players in the hydro segment, according to Patel Engineering's management.

Yet, HDFC Securities highlighted that companies face high execution risk due to the 4-5 year construction timelines for hydroelectric projects. These lengthy timelines also raise the risk of delays due to geological, logistical, and climate challenges.

When asked about the challenges, Patel stated that the previous issues in the hydro segment, such as environmental clearance and land acquisitions, had been cleared out. "Work is only bided out once the land is acquired and environmental clearances are made," he said.

The construction business is inherently working capital-intensive in nature. As of Q3 FY25, Patel Engineering's working capital cycle stood at four months, a significant reduction from levels a year ago, as noted by HDFC Securities. Furthermore, Patel also told NDTV Profit that the working capital cycle will improve as the order book expands.

Patel Engineering did go through financial stress five to six years ago. However, with consistent debt reduction, the company's total debt has fallen 12.5% from Rs 2291.8 crore in Q4 FY22 to Rs 2,004.9 crore in Q2 FY24.

"The company reduced Rs 300 crore of debt last year,"  highlighted Patel, who stated that the company will further reduce Rs 300 crore of debt over the next 2-3 years.

The debt reduction plan involves primarily selling non-core assets, like the company's 2,150 acres of land assets, and utilising the Vivaad Se Vishwas scheme. The company anticipates converting Rs 1,000 crore of arbitration awards into cash through this scheme.

The company can sustain annual revenues of Rs 5,000 crore for the next three to four years even without new orders, given its typical order book conversion ratio of 4 to 4.5, Patel said.

The company anticipates orders worth Rs 30,000–35,000 crore within the next 12 months, he said. The company is prepared with adequate manpower and technical systems to handle these orders and has started accepting larger contracts ranging from Rs 1,000 crore to Rs 4,000 crore each, Patel said.

In the near term, the company expects revenues between Rs 4,500 and Rs 6,000 crore in FY25.