ENGINEERS INDIA LTD: A DEBT FREE WITH HUGE UPWARDS POTENTIAL !!!

Scrip Code:  532178 / ENGINERSIN

CMP:  Rs. 123.95; Buy at Rs. 124 levels.

Short term Target: Rs. 150; Medium to Long term Target: Rs. 225; STOP LOSS – Rs. 114.08; Market Cap: Rs. 4,176.32 Cr; 52 Week High/Low: Rs. 257.25 / Rs. 121.70.

Total Shares: 33,69,36,600 shares; Promoters : 27,09,00,540 shares –80.40 %; Total Public holding : 6,60,36,060 shares – 19.60 %; Book Value: Rs. 66.41; Face Value: Rs. 5.00; EPS: Rs. 18.66; Dividend: 120.00 % ; P/E: 6.64 times; Ind. P/E: 7.32; EV/EBITDA: 4.83.

Total Debt: NIL; Enterprise Value: Rs. 4,163.94 Cr.

ENGINEERS INDIA LIMITED: ENGINERSIN was founded in 1965 and is headquartered in New Delhi, India. Engineers India Limited, an engineering consultancy company, providing designs, engineering, procurement, construction, and integrated project management services principally for the oil and gas, petrochemicals, fertilizer, and LNG industry segments in India and internationally. The company operates in two segments - Consultancy and Engineering Services, And Turnkey Projects. It offers pre project services, such as feasibility studies, environment impact assessment, technology and process licensor selection, and cost estimation services; and project implementation services, including project management, process design, detailed engineering, procurement, construction management, and commissioning and plant start-up assistance services. The company also provides project management consultancy services; and specialist services comprising heat and mass transfer equipment design, environment engineering, information technology, specialist materials and maintenance, plant operations and safety, refinery optimization studies, and yield and energy optimization studies. In process design services it provides conceptual designs and feasibility reports; design packages for open art process units for gas-processing and refineries and integrated utilities and offsite facilities, and offers a portfolio of more than 30 process technologies for application in oil and gas processing sector. Construction management services include services at site, including warehouse management, quality control and assurance, Health Safety and Environment (HSE), progress monitoring and scheduling. In addition, the company offers engineering, procurement, and construction and commissioning services; services related to certification, re-certification, safety audit, and onshore oil and gas facilities; and third party inspection for equipment and installations in the hydrocarbon and other sectors. It also serves non-ferrous mining and metallurgy, power, and infrastructure industries, as well as the Government of India. The company is locally compared with Mukand Engineers Ltd, RJ Shah & Company Ltd, Reliance Industrial Infrastructure Ltd, Shriram EPC Ltd, SPML INFRA Ltd, HOV Services Ltd, Hindustan Dorr-Oliver ltd, AIA Engineering Ltd and Sunil Hitech and Globally compared with Samsung Engineering from South Korea, Hyundai Engineering & Construction of South Korea, Petrofac from Middle East, Saipem from Abu Dhabhi, National Petroleum Construction Company of Middle East, Technip from French, Technicas Reunidas from Spain, Jacobs Engineering from California, Watabe Wedding Corporation of Japan, central Security Patrols Company Limited of Japan, Mortice Ltd of Singapore.

Investment Rationale:

EIL is a consultancy company & EPC contractor in the fields of petroleum refining, petrochemicals, pipelines, oil & gas terminals & storages, fertilisers, mining and metallurgy and infrastructure projects. The company is also working in diversified areas of water & waste management and has made inroads into the areas of nuclear, solar and thermal power. It has also expanded its operations internationally, and has provided a wide range of engineering consultancy services in the Middle East, North Africa and South East Asia. Management believes that the company will benefit from several pending orders from various PSU refineries over the next few years. Company believes that HPCL Ratnagiri refinery and petrochemical project which is estimated to cost Rs. 35,000 Cr might flow in Q4FY14 or FY15. Management believes that this PSU project could entail consultancy opportunity to EIL of nearly Rs. 1500 Cr to Rs. 2000 Cr. Engineers India (EIL) posted a YoY sales de growth, the fifth one in a row. Its Sales declined by 38.4 % YoY, mainly on account of a 66 % de-growth in Lump Sum Turnkey (LSTK) projects. EBITDA margins improved on account of higher share of consultancy revenues and better margins there. Other Income also de grew by 7.1 % YoY AT Rs. 68.03 Cr, PAT stood at Rs. 129.34 Cr, down 16.2 % YoY. Capital employed increased by 18.4 % YoY at Rs. 2340 cr. Company’s Consultancy EBIT margins in Q1FY14 stood at 39.2 % down by 2.40 % YoY and LSTK projects experienced a 3.30 % decline YoY to 7.1 %. The share of Consultancy in overall sales was 67.5 % as against 40.2 % in Q1FY13. EIL’s current order book stands at around Rs. 2960 Cr and the order inflow for Q1FY14 stood at Rs.110 Cr. EIL has meaningful investment in XII year plan in Hydrocarbon space which offers immense business opportunity. Company’s consultancy business enjoys strong margins and will continue for coming quarters also. Company’s current order backlog is around Rs. 2100 Cr in consultancy business. EIL has limited exposure of around 8% in overseas geographies which is expected to increase over a period of time.

Outlook and Valuation:

EIL, one of the leading designs, engineering consultancy and EPC companies of the country secured a Lump-Sum Turnkey Contact (LSTK) worth over Rs. 670 Cr from Chennai Petroleum Corp Ltd for construction of residuary up gradation project of Coker Block unit that will convert residual oil in the refinery into fuel. A coker or coker unit is an oil refinery processing unit that converts the residual oil into low molecular weight hydrocarbon gases, naphtha, light and heavy gas oils, and petroleum coke. The CPCL project comprises of delayed Coker Unit and LPG CFC Treating Unit. EIL's scope of work involves project management, residual process design, detailed engineering, procurement, inspection & expediting, tendering, construction management & supervision including quality assurance, assistance in start-up, pre-commissioning, commissioning & guarantee test runs for units and facilities of plant. The company statement says that the company won this job against competition from national and international companies in this field. EIL has envisaged a strategy of entering into joint ventures and strategic alliances with the appropriate players in India and abroad in order to widen the spectrum of offerings/ opportunities and to reduce systematic risk associated with various industries and geographies. The company currently has nearly ten such alliances including three overseas JVs. Company continues to win orders in international geographies mainly Middle East and expects further momentum through FY14. Management has stated that the company enjoys margins similar to domestic jobs in the international projects. Currently company derives nearly 10-12 % of revenues from international jobs and expects it to maintain going ahead. EIL has recently won the order from CPCL which will start contributing towards the end of this year. Orders in consultancy may provide some cushion to the margins, going forward. However, inflow continues to remain weak. Execution cycle for the current order book is stretched at two years. Thus, a revenue de-growth is expected in FY14E too. The stock is currently trading at 8.6x FY15E EPS with a negative bias in case the order inflow scenario slumps. The company’s FPO is planned in Q2FY14E. However in the turning O&G scenario the company will turnaround faster thus one can buy into this stock. At current price of Rs. 123.95, the stock is trading at P/E of 7.55 x for FY14E and 7.94 x the FY15E. EIL could post EPS of Rs. 16.40 for FY14E and Rs. 15.60 for FY15E. EIL stock has corrected significantly in the past few trading sessions partly on anticipation of probable equity dilution through FPO and possible delays in key refinery projects that would likely defer earning accretion in the current year. The stock is attractively valued at the current price but would likely underperform the broader market until clarity on anticipated equity dilution/FPO is received. However, the business of EIL continues to remain positive on the long term. One can 'BUY' on to EIL with an Short term price target of Rs 150 and for Medium to Long term investment it would be for Rs. 250.

KEY FINANCIALS	FY12	FY13	FY14E	FY15E
SALES (₹ Crs)	3,698.80	2,505.90	2,405.70	2,598.10
NET PROFIT (₹ Cr)	636.50	618.10	551.80	524.10
EPS (₹)	18.90	18.30	16.40	15.60
PE (x)	7.10	7.30	8.10	8.60
P/BV (x)	2.40	2.00	1.80	1.60
EV/EBITDA (x)	4.10	4.30	3.80	3.40
ROE (%)	38.70	30.30	23.10	19.50
ROCE (%)	38.70	30.20	23.10	19.50

I would buy ENGINEERS INDIA LTD with a Short term price target of ₹ 150.00 and for the Medium to Long term target it would be Rs. 250. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or ₹ 114.80 on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

READ HERE TO KNOW MORE ON LONG TERM INVESTING - CLICK HERE

VIEW THE POWER POINT PRESENTATION ON

RETURN ON CAPITAL