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Engineers India - Consultancy segment outperformance - ICICI Securities

Posted On: 2020-11-23 21:40:01 (Time Zone: Arizona, USA)

Engineers India (EIL) has reported better-than-expected execution and strong margins in consultancy segment. IOCL Panipat order may get delayed and hence, the management has reduced the order intake guidance for FY21E to Rs11bn vs Rs16bn earlier. However, given the strong orderbook of Rs91bn (3x TTM sales) and an encouraging order intake pipeline, growth outlook is healthy. Factoring in better-than-expected performance, we raise FY21E earnings by 10% and FY22E earnings by 9%. The fertiliser plant, in which EIL had invested, is complete and will shortly commence operations, hence, we have factored the same in our SoTP valuation. Given the delay in order intake and the uncertainty regarding investment towards Numaligarh refinery, we cut our core valuation multiple to 15x vs 18x and maintain our BUY rating with a revised target price of Rs97 (earlier: Rs95).

- Healthy execution implies gradual easing out of operations from the pandemic: Execution on HPCL Barmer has gained traction and HPCL Vizag project is also progressing well. This, along with, gradual improvement in onsite project activities have supported better-than-expected growth.

- Healthy consultancy margins, LSTK fails to cheer: Consultancy segment margins witnessed healthy rebound to 27% versus 14% in Q1FY21. However, LSTK margins continue to be under stress at 2% and this may be low given the type of projects under execution in the same.

- Overhang in investment towards Numaligarh refinery will impact valuation: EIL, along with Oil India, have submitted the expression of interest for due diligence of investment towards Numaligarh refinery. However, we believe, this will be an overhang with a valuation standpoint.

- Strong order pipeline, delay in finalisation to impact timelines: Some large orders in pipeline for near term include: 1) IOCL Panipat capacity expansion by 10mmtpa; 2) HMEL petrochemical expansion (Rs6bn-7bn); however, IOCL order can slip to H1FY22E. Additionally, Bina refinery capacity expansion by 7.5mmtpa and Mangalore refinery capacity expansion by 10mmtpa are also in pipeline. CPCL Nagapatinam expansion by 9mmtpa will be split in three packages each worth Rs3bn-4bn. Management has reduced guidance from Rs15bn to Rs11bn.

- Maintain BUY: EIL has strong balance sheet with net cash of Rs29.8bn to tackle the same. The company announced buyback of 69.9mn shares at Rs84, which will aid in improvement in return ratio. We have factored in the company's 26% stake in Ramagundam due to the completion of the plant.

Shares of ENGINEERS INDIA LTD. was last trading in BSE at Rs.73.35 as compared to the previous close of Rs. 70.65. The total number of shares traded during the day was 416788 in over 2932 trades.

The stock hit an intraday high of Rs. 73.85 and intraday low of 70.5. The net turnover during the day was Rs. 30262716.

Source: Equity Bulls

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