Engineers India - Pick of the Week

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Pee Vee
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Posts: 453
Joined: Mon Dec 26, 2016 10:45 pm

Engineers India - Pick of the Week

Post by Pee Vee »

Engineers India (EIL), a Navratna public sector enterprise, is one of the oldest companies in the Indian
public sector. Over the years, the company has emerged as a market leader in the Indian hydrocarbons
segment with expertise in design, engineering and project implementation. EIL has consistently grown its
revenues & profitability over the last 10 years at > 10% CAGR in FY08-18. Company operates into mainly
two segments 1) Consultancy projects (53% orderbook) 2) Turnkey Projects (LSTP) (~47% orderbook). It
derived ~78% revenues from Consultancy and 22% from Turnkey.

This is despite weak crude prices in the last two years and, consequent, deferral of capex spending by its
key customers. Core competency in consultancy of complex & high-value projects, diverse presence across
geographies, cash rich, best-in-class working capital cycle, reliability in execution and natural beneficiary
of large & critical government projects place the company in a sweet spot.

Investment Theme:

Strong moat, best placed to capitalise on upcoming capex cycle

EIL has a strong moat in the hydrocarbon consultancy segment. This is because of its experience in
executing large projects in this segment. This evident from the fact that EIL has footprints in most of the
refineries setup in India. Even in the petrochemical space, EIL has been a market leader establishing seven
out of nine mega complexes. Thus, EIL is one of those vital companies that have helped to build capabilities
in the Indian hydrocarbon sector. We believe such capabilities are likely to act as key entry barriers and
enable EIL to have a strong competitive advantage over any upcoming local and foreign competitor. With
recovering oil & gas prices, we estimate huge spends by EIL’s key client i.e. India’s major hydrocarbon
majors over the next few years. For EIL, we peg this opportunity at ~Rs 7,000-8,000 crore (domestic
consultancy & turnkey) and expect this to propel EIL’s topline and bottomline over FY18-20E.

View and valuation:

Despite healthy dividend pay-out (< ~65%) and buyback (6.2% of total equity), EIL’s balance sheet
continues to remain healthy with zero debt and cash balance of ~Rs 2500 cr which may lead to another
buyback or special dividend as well. With strong order backlog of Rs 7229 cr (~3.5x book-to-bill), we
expect healthy execution in FY19-20E. We highlight that FY19 and FY20E will witness higher executions
from the turnkey segment (order book mix: consultancy 53%, turnkey 47%), leading to overall decline in
margins. We expect EIL to deliver revenue, EBITDA and PAT CAGR of 23%, 16% and 16%, respectively,
in FY18-20E. Currently, EIL trades at ~16x FY20E EPS. We recommend Engineers India (EIL) as Buy at
CMP of Rs 128 and add on dips to Rs 117 with sequential price targets of Rs 144 and Rs 165 over the next
4-6 quarters.

Research report on Engineers India Ltd
Pee Vee
Site Admin
Posts: 453
Joined: Mon Dec 26, 2016 10:45 pm

Re: Engineers India - Pick of the Week

Post by Pee Vee »

Engineers India was up 5% yesterday. Wonder how much upside is there in the stock.
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