Engineers India
Fully energised
In view of the expected sharp growth in investments in the energy sector in India as well as the middle-east, the company has a bright future
| Buy | Engineers India |
| BSE Code | 532178 |
| NSE Code | ENGINERSIN |
| Bloomberg | ENGR@IN |
| Reuter | ENGI.BO |
| 52-week High/Low | Rs 1084/430 |
| Current Price | Rs 897 (as on 19th December 2007) |
Energy sector in India is at a take-off stage. Huge investments are planned in almost all areas of energy sector. With a history of building 'Hydrocarbon India.' and being involved in consultancy and engineering services for almost all key projects in this sector, Engineers India (EIL) is now well-poised to take advantage of the considerable investments in the hydrocarbon and energy sectors particularly in the field of refining, transportation, storage and marketing.
Ample opportunities
The market imperatives arising from the record crude oil prices are resulting in oil refiners focusing on newer methods to increase refining margins. Central to the current endeavours in this direction is the requirement of building flexibility in refinery designs so as to use heavier and sour crudes and simultaneously maximize the production of middle distillates. This is resulting in large investments by all the PSU oil majors and EIL is a key beneficiary. The requirement for greener fuel is resulting in a large number of upgradation projects both for Motor Spirit as well as diesel, in line with the moves to introduce Euro-III/IV fuel standards in various cities by April 2010. The Company is well placed to secure consultancy' assignments for these projects. In India, apart from the grassroot refinery project at Phatinda, there are various other projects aimed at capacity expansion and/or upgradation envisaged at the existing refineries in Visalch, Kochi, Songaigaon and Koyali. For several of these projects, EIL had already been involved in conducting configuration studies and preparing feasibility reports and hopes to secure assignments for executing these projects in the near future.
The Company is already providing project management consultancy (PMC) services for the first underground crude storage at Visakh. The Company expects to secure more such assignments for the planned storages on the west coast for which the Company was earlier involved in conducting studies. Amongst the other core areas of Company's operations, Pipelines sector has considerable potential. The coming few years are expected to see major investments and emergence of 'National Gas Grid' with GAIL. and Reliance Industries likely to be major investors. With the experience of having installed over 12000 km. of trunk pipelines and close to 5000 km. of ongoing projects, the Company is well placed to capture several of the upcoming projects for providing engineering and PMC services.
Revamp of offshore facilities, viz., drilling and production platforms including associated underwater pipelines will continue to provide steady business for the Company. In the Petrochemicals sector, the Assam Gas Cracker project, work on which is expected to takeoff shortly, is likely to provide a major business opportunity for the Company. The Company's previous involvement in preparing the Feasibility Report for this project along with past track record in execution of various Petrochemical Complexes is expected to facilitate securing the consultancy assignment for execution of the project.
Apart from the hydrocarbon area, the Infrastructure Sector and the Mining & Metallurgy sectors are expected to continue to provide new business opportunities. The Company has recently secured a significant assignment for providing Owners' Independent Engineer's services for the Delhi International Airport. The Company looks forward to secure more such assignments in the near future, apart from the various building and urban development related projects, in which the Company continues to secure small but steady business. In the field of Mining & Metallurgy, the bauxite mining to alumina to aluminium metal production route will continue to be important for EIL. The Company is also exploring business opportunities in the Iron Ore and Steel sector and a few small assignments have already been secured from NMDC and SAIL.
The quantum jump in availability of gas will significantly impact India’s energy scenario in the near future. Many of the existing fertilizer plants are expected to switch over from naphtha/fuel oil to natural gas. This would call for major plant modifications and is likley to provide an opportunity to the Company to undertake these jobs. The Company is well known for specialized services in the field of refinery optimization, heat & mass transfer, environmental services, maintenance services and troubleshooting and these areas will continue to provide good business opportunities independent of the larger project oriented business.
In the area of turnkey contracting, EIL is now well placed to qualify for large value bids in the country. As a choice of business, EPC business has to be pursued as an alternative to traditional consulting business as logically the Company cannot expect to be both a consultant (PMC) and EPC contractor for the same project. Forthcoming projects are being carefully scanned to facilitate a judicious decision as to whether the Company will forego the business of Consultancy (PMC) in favour of larger Lumpsum Turnkey (LSTK) business for the same project. The Company hopes to secure such turnkey business which are expected to be put for bidding in the near future. Hitherto the Company was not pursuing LSTK business in the overseas market, both on account of greater difficulty of prequalification and larger risks involved. In the year gone by, the Company did for the first time for two large value overseas turnkey bids through JV route. Though neither of the bids developed into an order, joint venture approach for bidding in certain Gulf countries is in position and the Company hopes to secure overseas turnkey bids in the near future. This is apart from the traditional consultancy services business where the Company will continue to secure steady business from the countries it has focused upon.
Engineers India (EIL), a government undertaking (90.40% stake owned by the government), renders project consultancy and engineering services and also undertakes lumpsum turnkey (LSTK) projects. The company derives nearly 90% of its revenues from oil & gas sector. In addition to petroleum refineries, with which it started initially, EIL has diversified into and excelled in other fields such as pipelines, petrochemicals, oil and gas processing, offshore structures and platforms, fertilizers, metallurgy and power. EIL now provides a complete range of project services in these areas and has emerged as Asia’s leading design and engineering company. EIL has to its credit more than 4,300 assignments including 320 major projects. The company has earned the reputation of being a veritable treasure of technical knowledge, skill and professional competence.
The company operates in two segments- Consultancy & Engineering segment and Turnkey projects. The consultancy segment is a high margin low value segment while the turnkey project division is low margin high value segment.
Strong order book
In FY’07, the company has secured new business amounting to Rs 1916 crore of which Rs 998 crore is from consultancy business and Rs 918 crore is from LSTK business segment. The total order book stood at more than Rs 2500 crore (4.4 times FY 2007 revenues) as of March 2007
The current year has also started well with the Company having already secured large fresh orders, both domestic and overseas. Combined with the business proposals that have been made and orders that are in the pipeline, the outlook is robust. The order book can exceed Rs 4000 crore by end of the current year.
The orders secured and the orders in the pipeline so far this year are both in the Consultancy as well as LSTK sectors in roughly equal proportions. In the last few years the Company has had mixed success in securing LSTK business. The road ahead may be slightly different from what has been followed so far. The Company is poised to establish joint ventures with suitable partner organizations in India and abroad for undertaking LSTK business using the respective strengths of the partners. This would also enable the Company to bid and execute LSTK assignments overseas thus paving the way for new exciting and challenging prospects.
Consultancy division is driving growth till now, LSTK will add to the growth in future
During Sep’07 quarter, the company reported a 28% increase in revenues to Rs 166.99 crore, largely due to 37% increase in high margin consultancy and engineering business. However, the fall in LSTK division by 18% to Rs 17.91 crore restricted the growth in topline. Since most of the sales from LSTK division will be booked in second half, the fall is seasonal in nature.
The PBIT margin from consultancy business stood at 33%, and PBIT stood at Rs 49.65 crore, up by 41% on y.o.y basis. Not much profit was booked for LSTK division whose PBIT stood at Rs 1.07 crore. Still, the OPM improved by 190 basis points to 28.1%, which lead the OP to improve by 38% to 46.97 crore. The other income was up by 65% to Rs 29.93 crore. The PAT stood at Rs 48.39 crore, up by 48% as compared to corresponding previous quarter.
For the six months ended Sep’07, the net sales was up by 15% to Rs 317.48 crore. The sales from Consultancy division stood at Rs 286.72 crore, up by 32% while from LSTK division stood at Rs 30.76 crore, down by 49%. The OP was up by 26% to Rs 81.94 crore, largely lead by 240 basis points improvement in OPM to 25.8%. PAT was up by 43% to Rs 86.46 crore.
As the revenues from Rs 900 crore LSTK project from IOC for a new refinery in Panipat will start reflecting from the fourth quarter of the current year and will be substantially booked next year, sales and profits from LSTK division will surge going forward.
Valuation
For FY 2008, we expect the company to register net sales and net profit of Rs 865.88 crore and Rs 221.32 crore. This gives an EPS of 39.4. For FY’09, we expect the company to report net sales and PAT of Rs 1438.66 crore and Rs 288.02 crore. The EPS works out to Rs 51.3.
At current market price of Rs 897, the scrip is available at a P/E of 22.8 times its expected FY’08 earnings and 17.5 times expected FY’09 earnings. With around Rs 1000 crore of liquid funds (Rs 178 per share), the company is cash-rich. The company is also one of the best bonus candidates among the PSUs with book value set to cross Rs 200 and growth prospects being never as bright as now.
| | 0403 (12) | 0503 (12) | 0603 (12) | 0703 (12) | 0803(12P) | 0903(12P) |
| Sales | 1281.84 | 910.22 | 790.48 | 571.08 | 865.88 | 1438.66 |
| OPM (%) | 6.9 | 11.5 | 18.2 | 22.9 | 26.5 | 21.4 |
| OP | 88.11 | 104.60 | 143.51 | 130.73 | 229.51 | 308.11 |
| Other income | 52.27 | 73.55 | 66.67 | 82.27 | 109.81 | 131.77 |
| PBIDT | 140.38 | 178.15 | 210.18 | 213.00 | 339.32 | 439.88 |
| Interest | 1.83 | 2.28 | 0.88 | 0.07 | 0.00 | 0.00 |
| PBDT | 138.55 | 175.87 | 209.30 | 212.93 | 339.32 | 439.88 |
| Depreciation | 8.56 | 9.21 | 9.52 | 8.29 | 9.00 | 10.00 |
| PBT | 129.99 | 166.66 | 199.78 | 204.64 | 330.32 | 429.88 |
| Tax | 49.81 | 54.02 | 62.18 | 66.68 | 109.01 | 141.86 |
| Current Tax | 54.08 | 69.89 | 81.30 | 91.50 | | |
| Deferred Tax | -4.27 | -15.87 | -21.67 | -27.57 | | |
| FBT | 0.00 | 0.00 | 2.55 | 2.75 | | |
| PAT | 80.18 | 112.64 | 137.60 | 137.96 | 221.32 | 288.02 |
| Prior period items (PPT) | 0.00 | 0.00 | -1.04 | -5.03 | 0.00 | 1.00 |
| PAT after PPT | 80.18 | 112.64 | 138.64 | 142.99 | 221.32 | 288.02 |
| EPS* | 14.3 | 20.1 | 24.5 | 24.6 | 39.4 | 51.3 |
| Annualised on current equity of Rs 56.16 crore. | ||||||
| Engineers India: Results |
| | 0709 (3) | 0609 (3) | Var. (%) | 0709 (6) | 0609 (6) | Var. (%) | 0703 (12) | 0603 (12) | Var. (%) |
| Sales | 166.99 | 130.5 | 28 | 317.48 | 277.21 | 15 | 571.08 | 790.48 | -28 |
| OPM (%) | 28.1 | 26.2 | | 25.8 | 23.4 | | 22.9 | 18.2 | |
| OP | 46.97 | 34.14 | 38 | 81.94 | 64.86 | 26 | 130.73 | 143.51 | -9 |
| Other income | 29.93 | 18.14 | 65 | 54.81 | 32.69 | 68 | 82.27 | 66.67 | 23 |
| PBIDT | 76.90 | 52.28 | 47 | 136.75 | 97.55 | 40 | 213.00 | 210.18 | 1 |
| Interest | 0.00 | 0.00 | | 0.00 | 0.00 | | 0.07 | 0.88 | -92 |
| PBDT | 76.90 | 52.28 | 47 | 136.75 | 97.55 | 40 | 212.93 | 209.30 | 2 |
| Depreciation | 3.70 | 2.15 | 72 | 5.33 | 4.19 | 27 | 8.29 | 9.52 | -13 |
| PBT | 73.20 | 50.13 | 46 | 131.42 | 93.36 | 41 | 204.64 | 199.78 | 2 |
| Tax | 30.44 | 18.14 | 68 | 55.73 | 35.73 | 56 | 94.25 | 83.85 | 12 |
| Deferred tax | -5.70 | -2.38 | 139 | -10.91 | -6.16 | 77 | -27.57 | -21.67 | 27 |
| PAT | 48.39 | 32.77 | 48 | 86.46 | 60.59 | 43 | 137.96 | 137.60 | 0 |
| Short provision for earlier years | -1.21 | 0.00 | | -1.21 | 0.00 | | -5.03 | -1.04 | 384 |
| PAT after Short provision for earlier years | 49.60 | 32.77 | 51 | 87.67 | 60.59 | 45 | 142.99 | 138.64 | 3 |
| EPS (Rs)* | # | # | | # | # | | 24.5 | 24.6 | |
| * on current equity of Rs 56.16 crore. | |||||||||
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