Engineers India (Q2 FY21) - BUY (Target Rs102, Upside 39%)
ENGR's business prospects are improving as management expects execution run-rate to improve significantly in H2FY21. Sales dropped 5.6% yoy (-6% vs our est.) as Consultancy (PMC)/Turnkey (LSTK) sales were down by 2%/9% in Q2FY21. Order book is at Rs89.8bn (3x TTM sales) while domestic refining PMC business has strong order pipeline of ~Rs25bn in next 18months. EBITDA was down 28% yoy as LSTK segment margin slumped from 7.7% to 1.9% while consultancy segment margin largely remained flat. Adj. PBT was down 25% yoy (-9% vs our est.). CFO was at Rs452mn vs negative Rs309mn in H1FY20. Proposed share buyback (Rs5.87bn) via a tender offer at Rs84/share. Govt of India (GoI) will participate in buyback; however, GoI intends to keep its stake at least 51%.
When compared to GDP growth, the average energy multiplier for India has been at ~0.8x of GDP growth. Hence, at ~5% CAGR demand for petroleum products, India is likely to face supply deficit situation by FY25. In addition, current refining capacity utilization stands at 100%+, which warrants significant capex, implying improving business prospects for ENGR over medium to long term. PMO has set plans to nearly double its oil refining capacity in the next 5 years (refining capacity expansion of ~250MMTPA), so the cumulative capex is expected to be Rs7-8trn, implying a PMC opportunity size of ~Rs450-500bn for ENGR. ENGR's core business is services based on strong technical knowhow which enables it to operate on negative working capital & negligible capex (Infinite core RoIC) leading to strong free cash flows. We expect FCF of Rs34bn over FY20-FY25E, implying superlative avg. FCF yield of 15%. Cut FY21E EPS by 14% to factor lower other income & earnings miss in Q2FY21. Trading at an inexpensive valuation (-1.5SD of long term average) and we see it as being on the cusp of the next capex cycle upturn & expect 38% EBITDA CAGR over FY21E-FY23E. Given its debt-free balance sheet, market leadership, and strong execution capability, retain BUY with TP of Rs102.
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.