Engineers India (EIL), a PSU with 80.4% government stake, is the only player in India providing complete ‘concept to commissioning’ engineering project services across hydrocarbon value-chain. India needs investments to the tune of Rs.27 lakh crore by 2030, in order to become self reliant in the hydrocarbon sector (ASSOCHAM), which is expected to provide stable order inflows for EIL;
EIL is closely working with the government’s ambitious Rs.55,000 crore project for creating additional 12.5 million tonne (MT) strategic crude oil storage facilities, which would increase India’s total strategic crude oil storage capacity to 17.8MT. EIL also has a contract from GSPL India Transco Ltd, for its 2,000-km natural gas pipeline project and a consultancy contract from Cairn Energy Pty Ltd. for its Mangala Polymer Project. In July, 2012 it secured a Rs.720 crore consultancy contract from BPCL for its $2.6 billion Integrated Refinery Expansion Project at Kochi. EIL’s total order inflow was Rs.938 crore during Q2FY2013 taking the outstanding order book to Rs.4,353 crore, which provides revenue visibility for more than one year;
We believe the Finance Ministry’s new roadmap to boost investment, along with cash-rich public sector companies (PSUs) utilizing surpluses for expansion and overseas acquisition, would be a positive development for EIL;
EIL’s revenue and PAT are expected to grow by 23% and 17% CAGR respectively for FY2012-14E. The company is in a position to earn higher margins (~22%-24%), as its turnkey orders are on Open Book Estimates Basis, wherein the entire raw material cost is borne by clients, resulting in huge cash flow generation at the operating levels;
On a standalone basis for Q2FY2013, while revenues declined by 19.3% YoY to Rs.668 crore, the net profit grew by 10% YoY to Rs.161 crore. The increase in profitability of the company was contributed by higher contribution from high margin – consultancy business (PBIT margin of 43.3%) as compared to 8.3% margin in turnkey business. Revenue from consultancy & engineering projects increased by 24% YoY to Rs.353 crore while that from turnkey projects declined by 42% YoY to Rs.315 crore for Q2FY2013;
EIL is a ‘zero debt company’ with cash and liquid investments of Rs.2,300 crore (~30% of market cap) which translates into cash per share of Rs.68 as on September 30,2012. EIL had a negative working capital (Rs.784 crore for FY2012) due to milestone based payments and back-to–back credit lines from suppliers available to the company. Adjusted for the Rs.4 final dividend in August 2012, the stock is trading at about 20% below its 52 week high price of Rs.289 and at current price trades at 10.6x FY2013E EPS of Rs.21.70. We recommend Buy with a target price of Rs.349 valuing the stock at 16.1x its FY2013E EPS;
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