Engineers India- Buoyant results, margins surpass expectations: Religare

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Engineers India Ltd
Buoyant results, margins surpass expectations
Engineers India (ENGR) has reported net revenue growth of 27% YoY to
Rs 5.9bn in Q2FY11, marginally short of our expectations. EBITDA stood at
Rs 1.5bn, 13.1% ahead of estimates mainly on account of stronger margins in
the consultancy & engineering projects segment. Employee cost for the quarter
was 10% lower YoY due to additional provisioning in FY10 (related to the sixth
pay commission). Other income declined 41% YoY to Rs 349mn, mainly
because of lower interest income earned on a lower cash balance Y-o-Y
(following a 1000% cash dividend declared by the company). PAT for the
quarter rose 14% YoY to Rs 1.2bn. The order book at the end of the quarter
was Rs 80bn compared to Rs 62bn at the end of FY10. We reiterate a BUY on
the stock with a target price of Rs 400.


Positive surprise in consultancy margins: Margins for the consultancy &
engineering projects segment jumped to 46.4% versus 40.2% for FY10 led by a
man-hour restructuring exercise undertaken by the company. Margins for the
turnkey project segment also rose 40bps YoY to 10.2%.
Robust growth in order book: The order book at the quarter ending was Rs 80bn,
compared to Rs 62bn at the end of FY10. Hence, the implied order inflows in
H1FY11 were Rs 37bn. Further, according to the management, the company is
the lowest bidder (L1) in a couple of projects worth Rs 15bn which are yet to be
reflected in the order book.
Employee costs stabilise after last year’s spike: Employee cost as a percentage of
sales was 19.9% for the quarter, flat QoQ but 8 percentage points lower YoY.
The employee cost for the previous year spiked because of additional
provisioning (related to the sixth pay commission) done in FY10.
Decline in cash balance reduced interest income: ENGR’s other income in the
quarter was lower than the previous year by Rs 245mn (implying a 41.3% YoY
decline) mainly because of lower interest income earned on its cash balance.
The quarter-ending cash on balance sheet was lower by Rs 2.8bn YoY as ENGR
distributed a 1000% cash dividend for the previous fiscal year.
Valuation: At our current estimates ENGR is currently trading at a P/E of
22.2x/15.6x for FY11E/FY12E. We maintain BUY on the stock with a March ’12
target price of Rs 400 which implies an upside of 16% from current levels.