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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The real Indian engineers
Amongst its Engineering & Construction (E&C) peers, EIL has an
unmatched cash flow profile and RoEs (37%-40%). Specific, yet
scalable, hydrocarbon engineering and project management skills, a
large talent pool and Government ownership drive its competitiveness.
Rising investments in the hydrocarbons sector by Government related
companies (XIIth 5-year plan suggests 2x XIth plan investments) will
fuel EIL’s growth. Whilst there can be near-term growth deceleration,
the present valuations (12x FY13 core eps) do not reflect the firm’s
competitiveness and its cash flow generating capability.
Competitive positioning: STRONG Change to this position: POSITIVE
The E&C sector’s overhang has led to EIL’s stock price declining 37% over the
past year despite revenue growth remaining strong (up 40% YoY in 1HFY12)
and the firm’s business capabilities being robust. In an industry where
companies are shedding strength with rising debt, we recommend EIL due to:
Government sponsored enterprises to invest twice in the XIIth plan v/s
the XIth plan: The cyclical nature of refinery and petchem investments can
lead to a lack of orders for a brief period. But Government sponsored plans to
increase their refinery capacity [by 60% (74mmtpa) by investing US$18bn in
greenfield capacities and US$13bn in upgradations] will provide EIL with
growth visibility over FY12-FY17. Further, greenfield petchem capex is
expected to be closer to US$8bn. Slippage risks are low owing to Government
support for energy PSUs and fewer procedural problems in expansions.
Superlative capabilities with flexibility: EIL’s scalable hydrocarbon
engineering/project management skills, extensive experience and Government
ownership make its offerings flexible — not only E&C services across the
contracts spectrum (design to EPC) but also critical path projects, tweaking the
usual EPC models (offering open book estimates, OBE) and entering into longterm
relationships (MoUs, nominations) with energy PSUs. The cost-sensitive
nature of large projects keeps the threat from the high-cost global majors low.
Unrivalled CFOs and RoEs: Over FY08-FY11 EIL leveraged its rising
investments by capturing a bigger share of hydrocarbon spend by taking up
low EBITDA margin (10%-12%) high volume lumpsum turnkey (LSTK) jobs
(144% CAGR) instead of high EBITDA margin (40%) low volume consulting
jobs (22% revenue CAGR). Hence, op cashflows (CFO) rose and RoEs moved
to 37%-40% from mid-teens earlier, overriding the declining EBITDA concerns.
Valuations projecting near-term concerns into long-term? Despite a
radically better CFO/RoE profile, EIL’s stock trades in line with peers. Paltry
orders in FY12 and a growth deceleration beyond FY13 have led to a gradual
derating. We do expect lower revenue growth over FY13-FY15, but believe
EIL’s multiple should retrace lost ground as the refinery opportunity gets
supplemented with fertilizer capex, thus addressing growth concerns. A higher
investible float than many peers addresses low free float concerns.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The real Indian engineers
Amongst its Engineering & Construction (E&C) peers, EIL has an
unmatched cash flow profile and RoEs (37%-40%). Specific, yet
scalable, hydrocarbon engineering and project management skills, a
large talent pool and Government ownership drive its competitiveness.
Rising investments in the hydrocarbons sector by Government related
companies (XIIth 5-year plan suggests 2x XIth plan investments) will
fuel EIL’s growth. Whilst there can be near-term growth deceleration,
the present valuations (12x FY13 core eps) do not reflect the firm’s
competitiveness and its cash flow generating capability.
Competitive positioning: STRONG Change to this position: POSITIVE
The E&C sector’s overhang has led to EIL’s stock price declining 37% over the
past year despite revenue growth remaining strong (up 40% YoY in 1HFY12)
and the firm’s business capabilities being robust. In an industry where
companies are shedding strength with rising debt, we recommend EIL due to:
Government sponsored enterprises to invest twice in the XIIth plan v/s
the XIth plan: The cyclical nature of refinery and petchem investments can
lead to a lack of orders for a brief period. But Government sponsored plans to
increase their refinery capacity [by 60% (74mmtpa) by investing US$18bn in
greenfield capacities and US$13bn in upgradations] will provide EIL with
growth visibility over FY12-FY17. Further, greenfield petchem capex is
expected to be closer to US$8bn. Slippage risks are low owing to Government
support for energy PSUs and fewer procedural problems in expansions.
Superlative capabilities with flexibility: EIL’s scalable hydrocarbon
engineering/project management skills, extensive experience and Government
ownership make its offerings flexible — not only E&C services across the
contracts spectrum (design to EPC) but also critical path projects, tweaking the
usual EPC models (offering open book estimates, OBE) and entering into longterm
relationships (MoUs, nominations) with energy PSUs. The cost-sensitive
nature of large projects keeps the threat from the high-cost global majors low.
Unrivalled CFOs and RoEs: Over FY08-FY11 EIL leveraged its rising
investments by capturing a bigger share of hydrocarbon spend by taking up
low EBITDA margin (10%-12%) high volume lumpsum turnkey (LSTK) jobs
(144% CAGR) instead of high EBITDA margin (40%) low volume consulting
jobs (22% revenue CAGR). Hence, op cashflows (CFO) rose and RoEs moved
to 37%-40% from mid-teens earlier, overriding the declining EBITDA concerns.
Valuations projecting near-term concerns into long-term? Despite a
radically better CFO/RoE profile, EIL’s stock trades in line with peers. Paltry
orders in FY12 and a growth deceleration beyond FY13 have led to a gradual
derating. We do expect lower revenue growth over FY13-FY15, but believe
EIL’s multiple should retrace lost ground as the refinery opportunity gets
supplemented with fertilizer capex, thus addressing growth concerns. A higher
investible float than many peers addresses low free float concerns.
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