Engineers India Ltd - Stock Valuation and Financial Performance

Engineers India | Market Cap 3976 Cr.

CMP 70 | P/E 6.5x FY22

Recommendation | Hold/Reduce

Results: Engineers India (EIL) reported 57% growth in sales year on year. Sales growth was back to FY19 levels and margins were lower due to higher share of turnkey projects.

Click here for 10 year X-ray

Key highlights:

• Engineers India has two businesses, turnkey (low margin contractual projects) and consultancy (high margin design projects). Consultancy contributed to 49% of overall sales while Turnkey contributed 51%. In a normal year, EBIT (Operating profit) margin for consultancy is 25% while turnkey is around 5%.
• In past few quarters, turnkey projects reported only 2% of margin due to slow execution however, it during Q1 the margins were 3%, which explains lower operating profit margins versus FY19.
• The operating margins for Consulting business and Turnkey business was 30% and 3% (versus 39% and 6% in previous quarter) respectively.
• The order book of EIL as of end of FY21 stood Rs. 7500 Cr ~2.2x current sales. Consultancy order book growth is better than turnkey order book growth rate which bodes well for high margin.

Outlook: As expected, EIL saw pick up in execution in turnkey projects. It also expects increase in order book from few large orders of petrochem (IOC & HPCL JV)/, hydrocarbon and refineries (Cavery) over next 12 months. The execution in turnkey segment is expected to stay healthy in FY22 as projects like HPCL Barmer and HPCL Vizag refinery has entered execution phase. 

Q1FY22 experienced low order inflow, of just Rs. 282 Cr. Large ticket turnkey projects are expected to witness traction in FY22 and may lead to strengthening of order book.

MoneyWorks4me Opinion: We had recommended buy on Engineers India at Rs. 100-110/share as we liked high margin (25-30%), asset light consultancy business (no investment required), high cash & investments per share (~44/share), very high dividend and buyback yield and low valuation (consultancy business at 10x P/E after assigning ‘0’ value to Turnkey projects business). Cash per share has reduced to 23-30/share as part of it was used to acquire minority stake in Numaligarh Refinery. (MRP reduced to factor the same)

The stock has come off from our purchase price and adjusted for dividend, it is 15-20% below purchase price.

Despite sales and profits recovering to pre-covid levels, the stock price has not recovered. Order book execution is now happening at a reasonable pace, but the order inflows are low to offset execution of existing order book resulting in lower Order book to sales ratio each quarter. (higher the better)

Even if there is an expectation of increase in refining and petchem capacity by public and private refineries, the order inflows for Engineers India do not reflect the same.

We recommend to Reduce/Hold existing allocation due to uncertainty and numbers not reflecting our expected outcome. We would like to see improvement over next quarter before we recommend an exit.

Engineers India | Market Cap 4,749 Cr.

CMP 84.5 | P/E 7.5x FY22

Recommendation | Buy

Results: Engineers India (EIL) reported 31% growth in sales year on year. Operating profit increased 17% improved margin in turnkey projects.

Click here for 10 year X-ray

Key highlights:

• Engineers India has two businesses, turnkey (low margin contractual projects) and consultancy (high margin design projects). Consultancy contributed to 37% of overall sales while Turnkey contributed 63%. In a normal year, EBIT (Operating profit) margin for consultancy is 25% while turnkey is around 5%.
• In past two quarters, turnkey projects reported only 2% of margin due to slow execution however, it during Q4 the margins were back to normal levels. This led to improvement in overall operating profit.
• The operating margins for Consulting business and Turnkey business was 39% and 6% (versus 25% and 1% in previous quarter) respectively.
• The order book of EIL as of end of FY21 stood Rs. 7,982 Cr ~2.5x current sales. Consultancy order book growth is better than turnkey order book growth rate.
• The company has declared a final dividend of Rs. 0.60 per share for FY21, alongwith total buyback acceptance ratio of 64% and 1.4 interim dividend, total dividend yield on our purchase price is ~6%.
• Net profit was hit by one off provision towards default in principal in employee provident fund trust.

Outlook: EIL management expects pick up in execution in turnkey projects over next 6 months. It also expects increase in order book from few large orders of petrochem (IOC & HPCL JV)/, hydrocarbon and refineries (Cavery) over next 12 months. The execution in turnkey segment is expected to stay healthy in FY22 as projects like HPCL Barmer and HPCL Vizag refinery has entered execution phase. 

Although the order inflow in FY21 was muted at Rs. 1,569 Cr (-3% year on year) as barring consultancy projects no large turnkey projects witnessed finalization. Large ticket turnkey projects are expected to witness traction in FY22 and can lead to further strengthening of current order backlog of Rs. 800 Cr. 

MoneyWorks4me Opinion: We had recommended buy on Engineers India as we like high margin (25-30%), asset light consultancy business (no investment required), high cash & investments per share (~44/share), very high dividend and buyback yield and low valuation (consultancy business at 10x P/E after assigning ‘0’ value to Turnkey projects business). The stock had come off significantly due to broad market correction. Today adjusted for dividend also, it is 15% below our recommended price. We expect stock price to recover since business is not impacted to an extent of stock price erosion. 

The company has a promising business outlook given existing healthy ordering pipeline and government plans to double refining capacity complimented by healthy balance sheet with current cash balance of Rs.1,250 Cr (Rs. 22 cash per share). Also the recent buyback program conclusion augurs well for the long term return ratio profile of the stock. 

P.S. We do not recommend the stock for those who are already exposed to PSUs (Do not exceed 15% of portfolio to PSUs). We do not suggest to averaging down any stock unless recommended by us. 

Engineers India (EIL) has announced record date for Buyback eligibility. Buyback dates are yet to be announced.

Buyback Plan

EIL has announced buyback of Rs 587 Cr, which is 11% of equity. Buyback is usually a form of dividend where investors have to tender their shares equivalent to the eligible number. This amount is equivalent to a dividend.

Total shares to be bought back : 6.99 Cr. (11% of total shares)

Record Date: bought on or before 30th December

Buyback shares reserved for retail investors (less than Rs. 2 Lacs): 1.05 Cr.

Profit per share from current price: 6 (Buyback price – Current price)

Acceptance ratio: 30%* (For every 100 shares, 30 shares will be bought back by the company at Rs. 84/share) for individuals with less than 2500 shares as on 30th December.

Buyback Yield: ~2.5%+ yield for retail investor with less than Rs. 2 Lacs holding; ~1% yield for retail investors with more than Rs. 2 Lacs

What do we suggest? 

We recommend to tender ALL shares in buyback offer irrespective of eligible shares. (Broker websites will have provision for the same).

For those who own more than 2500 shares on record date can expect ~11% shares being bought back at Rs 84/share; ~1% buyback yield.

For those who own less than 2152 shares on record date can expect ~30% shares being bought back at Rs 84/share; ~2.5%+ buyback yield

Our fair value estimates are higher than the buyback price, hence we recommend to buy the same number of shares from open market that were accepted in buyback if the prices remain below Rs. 84/share.

Even if your purchase price is more than Rs. 84/share, you can always buy same numbers of shares from open market as current price of EIL is below Rs. 84/share.

*[As per March’20 annual report, retail shareholders own 4 Cr, 1.04 Cr reserved for retail means acceptance ratio of at least 25-30%] 

Engineers India | Market Cap 4,640 Cr.

CMP 73 | P/E 6x FY22

Engineers India Ltd | Market Cap: 4,288 Cr

CMP 68 | P/E 5x FY22

Recommendation | BUY/HOLD

Click here for 10 year X-ray

Results: Engineers India (EIL) reported 36% decline in sales to Rs. 468 Cr and 85% decline in operating profit. The operating margins fell due to lower margins in Consultancy & Engineering Projects business.

Key highlights:

• Order inflows were down 91% year on year to Rs. 81 Cr. Orders in the Consultancy segment stood at Rs. 68 Cr, with Rs. 64.4 Cr generated from the domestic market and rest from overseas. Order inflow in the Turnkey segment stood at Rs. 13 Cr.
• The order book declined 20% year on year to Rs. 9110 Cr, with order book to sales multiple of 3.1X, the lowest in last four years.
• Order book for the Consultancy segment decreased 12% year on year to Rs. 4230 Cr, and that for the Turnkey segment declined 26% year on year to Rs. 4880 Cr. Orders from overseas formed ~14% of the total order book.

Outlook: Order inflows came primarily from the Hydrocarbon segment. With the on-going slackness due to COVID-19, management expects order inflow of Rs 1500 Cr in FY21. Cash in hand stood at Rs 2500 Cr, with company evaluating options such as higher dividend pay outs and investments into strategic assets to boost ROEs. The management expects the margin for Turnkey to ~3% based on orders in hand. The margins for Consultancy are expected to be ~25% once complete normalcy is resumed.

Moneyworks4me Opinion: We have BUY call on Engineers India as we like high margin (25-30%), asset light consultancy business (no investment required), high cash per share (50/share), very high dividend yield (4%) and low valuation (consultancy business at 10x P/E after assigning ‘0’ value to Turnkey projects business). The stock had come off significantly due to broad market correction. Today adjusted for dividend also, it is 25% below our recommended price. We expect stock price to recover since business is not impacted to an extent of stock price erosion.

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Results: Engineers India (EIL) reported 40% growth in sales to Rs. 864 Cr and 23% growth in operating profit, which is lower than sales growth due to higher mix of low margin turnkey projects.

Key highlights:

• As of March 2020, total order book stood at Rs. 9,500 Cr.Out of which, 47% belonged to consultancy business and 53% belonged to turnkey business. (This is 3x annual sales)
• During the year, revenue form consultancy grew by 16% and turnkey business grew by 50%.
• During the quarter, operating margins for Turnkey project stood at 3% (vs 6% in Q4FY19). The operating margins for Consultancy business stood at 34% (vs 29% in Q4FY19).
• New order inflows during FY20 were of Rs. 1,617 Cr from high margin Consultancy segment.

Outlook: Although some of the company’s projects were operational even during lockdown, the availability of labour remains a challenge and can lead to delay in execution in future. The company adopted work from home for design and document related jobs.

EIL expects Rs. 1600 Cr of order inflow in FY21 mainly from Consultancy business. As of now, no major international project in pipeline. The company is currently focused on executing large Turnkey projects. The capex requirement in FY21 is of Rs. 60 Cr. For FY21, company expects operating margins from Consultancy business to be in range of 25-30% and Turnkey business in range of 3-4%.

We have BUY call on Engineers India as we like high margin (25-30%), asset light consultancy business (no investment required), high cash per share (50/share), very high dividend yield (4%) and low valuation (consultancy business at 10x P/E after assigning ‘0’ value to Turnkey projects business). The stock had come off significantly due to broad market correction. Today adjusted for dividend also, it is 25% below our recommended price. We expect stock price to recover since business is not impacted to an extent of stock price erosion. We recommend HOLD.