Engineers India - Disappointment Continues; Result Update Q2FY15 :: Edelweiss, PDF link

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Engineers India Ltd. (EIL) has once again reported disappointing results, with Q2FY15 sales declining by 16% YoY as against our estimate for a 1% YoY decline. The biggest disappointment in the quarter came on EBITDA margins, which at 2% was below our expectation of 17% due to 1) INR 28 cr anticipated loss booked on cost overrun in one of the LSTK contracts and 2) lower margins in the Consultancy segment (19% vs 35%) led by execution of small size brownfield orders with low margins. The company has an order book of INR 3725 cr, which is executable over the next 2-3 years. In the quarter, the company added INR 385 cr of new orders. In the next 3-6 months, the management expects mid-size orders from international markets while large-sized order inflows from the domestic market are expected to be delayed due to pending government approvals. We believe that EIL is facing short-medium term pain due to unfavourable order mix and delay in addition of some key orders, which would negatively impact its financials for the next 2-3 quarters. However, we believe in the long-term growth story of the company and believe that it is in a prime position to gain from the impending revival in the domestic capex cycle in oil refinery, petrochemicals and fertilizer sectors.

Sales down 16% on decline across segments 

The company’s net sales for Q2FY15 at INR 391 cr fell by 16% YoY and were below our estimate of a 1% YoY growth. The decline in quarterly sales was driven by a 16% YoY drop in both consultancy segment and LSTK segments. Approximately 56% of revenues for the quarter were contributed by the Consultancy business while LSTK segment accounted for the balance 44%. International markets contributed 13.4% to Q2FY15 sales, which is expected to rise further on account of strong build-up of international orders (35% of the current order book).

Sharp fall in margins due to project specific cost overruns and adverse mix

Q2FY15 EBITDA margins fell sharply to 2% (Vs 19% in Q2FY14) due to 1) INR 28 cr anticipated loss booked on cost overrun in one of the LSTK contracts and 2) lower margins in the consultancy segment (19% vs 35%) led by execution of small brownfield orders with low margins. After adjusting for one-offs, the EBITDA declined by 59% with 9.2% EBITDA margins. The company has booked cost overrun in one of the fixed price LSTK contracts from CPCL of INR 500 cr order size and there could be further losses of ~INR 20 cr. Apart from this, the consultancy margins are expected to persist at current levels for the next 2-3 quarters till the company starts executing large- sized greenfield refinery consultancy orders. Thus, the margins are expected to be under pressure for the next two quarters and improvement is likely in FY16E on increased share of consultancy business which comprises 72% of the total order book.

Large size consultancy orders delayed on pending approvals

EIL witnessed 5% QoQ decline in order backlog to INR 3725 cr, as large sized consultancy orders from the domestic market are getting delayed due to pending regulatory/statutory approvals. The order inflows for the quarter were at INR 385 cr, which includes INR 200 cr LSTK order from ONGC. The company expects medium sized consultancy orders from the international market in H2FY15. The management expects INR 2000 cr of order inflows in FY15. 

Expects revenue decline in FY15

The EIL management expects FY15 sales to decline due to delay in finalization of new orders where it was well placed while large sized international contracts will start contributing significantly in FY16 only. We expect improvement in order bookings in FY16, which would drive revenue growth going ahead.  In addition, the company continued to be positive on the overseas business.

LINK
https://www.edelweiss.in/research/Engineers-India--Disappointment-Continues;-Result-Update-Q2FY15/10005163.html