SELL Engineers India; TP: INR 190.00 :: religare research,

Weak orders to hobble growth; downgrade to SELL
ENGR’s revenue growth profile is likely to remain weak over FY13-FY14 due to anaemic order inflows, with the order book unlikely to scale prior peaks in the medium term (Rs 75bn in FY11). We expect revenues to decline at an annual run-rate of 14% over FY12-FY14E (down 16% in Q1FY13), though profitability should be supported by margin improvement and higher other income. We cut our September’13 TP to Rs 190 and downgrade the stock to SELL.

�� -->


 Muted order booking to affect execution: ENGR’s order booking has been muted (Rs 7.6bn in FY12, 74% lower than the average annual run-rate over FY07-FY11), while the order book has declined 40% YoY as at end-Q1FY13. Though ENGR has booked orders worth Rs 11bn in the current fiscal, the company is unlikely to scale past peaks. Further, addressable business opportunities (capacity expansion in midstream and downstream hydrocarbon in the country) are expected to remain under pressure.
 Capex planned for office building in FY13: The management has guided for capex of Rs 2.5bn-3.0bn in FY13 (vs. Rs 0.40bn/Rs 0.25bn in FY12/FY11; Rs 0.4bn already incurred). Most of this will be for new office space in Chennai Mumbai and Gurgaon.
 Margins to improve on better mix; working capital under control: ENGR’s YTD order booking (~Rs 11bn) is skewed in favour of the higher margin consultancy business (~88% of order inflows vs. 44% at end-FY12). This should support higher operating margins in FY13 and rein in working capital needs (consultancy is low-WC intensive).
 Downgrade to SELL, TP cut to Rs 190: With the decline in order book, we expect revenues to shrink by 14% p.a. over FY12-FY14E. But strong operating margins and high other income (cash on B/S of Rs 16.9bn at end-FY12) should limit the impact on earnings. We cut our September’ 13 TP to Rs 190 based on a target multiple of 10x operating income (ex-other income & resultant taxes) plus FY13E cash of Rs 65/sh.