Engineers India - Low margins in consultancy impact earnings - ICICI Securities

Engineers India (EIL) has reported largely in-line execution led by LSTK segment, while consultancy execution was weak. Order intake outlook continues to be healthy on the back of budgeted contracts from BPCL and IOCL in the near term, while medium to long term opportunities are also intact. With the orderbook strong at Rs91bn (3x TTM sales) and an encouraging order intake pipeline, growth outlook is healthy. Factoring in Covid-19 crisis related margin stress in consultancy division, we cut FY21E earnings by 5% and maintain FY22E earnings. Given medium to long term growth visibility and benign valuation at 10.1x FY22E earnings, we maintain BUY on the stock with an unchanged target price of Rs95.

- Weak execution under consultancy, while LSTK segment witnessing better traction: Execution on HPCL Barmer has gained traction with the completion of ~15% of the project currently; HPCL Vizag project is also progressing well. However, some consultancy-related projects are getting delayed, impacting the overall execution of the segment and margins.

- 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. Management has made it clear that decision will be taken only if the investment makes commercial sense. However, we believe, this will be an overhang with a valuation standpoint. Factoring the risk, we have reduced our weightage of cash to 50%.

- Strong order pipeline, delay in finalisation to impact timelines: Some large orders in the pipeline for medium to long term: 1) IOCL Panipat capacity expansion by 10mmtpa; 2) HMEL petrochemical expansion (Rs6bn-7bn); and 3) GAIL Kakinada petrochemical expansion - over the next two years. 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 into three packages each worth Rs3bn-4bn. Management has guided for orders worth Rs15bn in FY21.

- Maintain BUY: Though in near term there are challenges in terms of growth due to lockdown-related uncertainty, we believe, EIL has strong balance sheet with net cash of Rs25bn to tackle the same. Strong orderbook and healthy order intake pipeline provide medium- to- long-term growth visibility. We have factored in the risk in terms of any likely investment towards Numaligarh refinery by reducing our weightage to cash to 50%. Hence, given benign valuation, we maintain Buy rating with an unchanged target price of Rs95.

Shares of ENGINEERS INDIA LTD. was last trading in BSE at Rs.68.4 as compared to the previous close of Rs. 67.85. The total number of shares traded during the day was 430080 in over 3318 trades.

The stock hit an intraday high of Rs. 69.5 and intraday low of 67.4. The net turnover during the day was Rs. 29509206.

Source : Equity Bulls

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