Engineers India Ltd. (EIL) | Q3FY15 Result Update | Maintain BUY rating on the stock with PT of Rs 280 ::IndiaNivesh

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Highlights: Engineers India reported below consensus numbers for Q3FY15. Net revenue of the company declined y-o-y by 5.2% to Rs 3,983 mn; led by 17.5% decline in consultancy segment. EBITDA margin declined sharply from 23.5% in Q3FY14 to 9% in Q3FY15, on account of margin contraction in both the segments of the company. Other income (due to cash balance) of the company which contributes significantly to the bottom line has also declined by 43.1% y-o-y to Rs 617 mn. In addition to lower net revenue and EBITDA margin contraction; higher depreciation charges (due to changes in depreciation policy) at Rs 54 mn (up 96.3% y-o-y) has resulted in reported net margin declined from 25.5% in Q3FY14 to 13% in Q3FY15. Core net profit of the company (excluding other income and exceptional item) has declined y-o-y by 68.8% to Rs 198 mn.

Decline in Revenue due to lower order book in consultancy segment: Net revenue of Engineers India declined y-o-y by 5.2% to Rs 3,983 mn; led by 17.5% decline in consultancy segment to Rs 2,345 mn. Decline in overall revenue was restricted due to 9.9% growth in turnkey segment to Rs 1,638 mn. Lower revenue in consultancy segment is attributable to the lower order book of Rs 15.7 bn at the beginning of FY15 compared to order book of Rs 21 bn at the beginning of FY14.However in the course of FY15, order book of the consultancy segment has increased substantially to Rs 26.9 bn (H1FY15) which is likely to help in boosting the revenue contribution from this segment

Outlook and Valuation: Although Engineers India has reported poor set of numbers in Q3FY15 and 9MFY15, we remain optimistic on the outlook of the company mainly on account of ■ Increase in the order book of the company in the course of FY15, at the end of H1FY15 order book of the company stood at Rs 37.3 bn compared to Rs 29.1 bn at the beginning of FY15. ■ Higher contribution from consultancy segment (high margin segment) in the overall order book is likely to improve the overall margins of the company from current levels. At the end of H1FY15, consultancy segment contributed 72% to the total order book of the company compared to 54% contributed by it at the beginning of FY15. ■ Diversifying in Non-hydrocarbon sectors: While Hydrocarbon remains major contributor to the consultancy and LSTK businesses of the company, company is also diversifying in other sectors like chemicals & fertilizers, metal, power and infra etc. to support its long term growth plans. Other sectors (other than hydrocarbon) contribute 28% and 12% to the consultancy and LSTK order book respectively. (H1FY15) ■ Strong balance sheet: Zero debt and high cash balance of Rs ~20 bn. (which is Cash of Rs ~60 per share) (H1FY15). At CMP of Rs 217, EIL is trading at attractive PE multiple of 15x and 13.9x, FY16E and FY17E consolidated earnings (Bloomberg). We value EIL at 18x FY17E (Bloomberg) earnings estimate and arrive at price target of Rs 280. Seeing ~29% upside potential from current levels, we maintain BUY rating on the stock.

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