Investment Shastra

Engineer’s India Ltd. FPO: Should you Invest?

Details of the issue:

Issue Date: 6th February – 12 February, 2014 (for retail investors)

Face Value: Rs. 5

Price Band: Rs. 145 to Rs. 150 (Rs. 6 discount on issue price for retail investors)

Issue Type: Government stake sale

Issue Size: 3.36 Cr. shares to be sold by Government

Money raised: Rs. 487.2 Cr. to Rs. 504 Cr.

Lot Size:100

So, what is the subscription offer? Here is a review of the Engineers India Limited FPO…

Engineers India Limited (EIL), a ‘miniratna’ PSU, is one of the leading engineering consultancy companies, with focus on oil and gas and petrochemicals industries. It has come out with an FPO of 3.36 Cr share of Rs. 5 each. The issue consists of a 10% stake sale by the President of India (i.e. dilution of 10% stake by the Government of India). The government holding in the company will come down to 70.4% post FPO from the present level of 80.4%. Not more than 50 per cent of the net issue will be allocated to Qualified Institutional Buyers (QIBs), 35 per cent for retail category and 15 per cent for High Network Investors (HNI), with up to 5% of the offer reserved for employees.

The price band for the issue has been fixed at Rs. 145 – 150. Retail investors and eligible employees of the company will get a Rs. 6 discount on the issue price. So, the effective price for them will be Rs. 144, if the issue is fixed on the upper end of the price band.

Tell me about Engineers India Limited …

EIL, a ‘Miniratna’ PSU, is an engineering consultancy company providing design, engineering, procurement, construction and integrated project management services,  principally focused on the oil and gas, petrochemicals,  fertilizer and LNG  industry  segments  in  India  and  internationally.  It is also a primary provider of engineering consultancy services for the GoI’s energy security initiative under its Integrated Energy Policy for strategic crude storages. EIL covers the entire spectrum of activities from concept to commissioning of a project.

The Company’s business is divided into two principal operating segments: the Consultancy and Engineering segment and the Turnkey Projects segment. Each segment contributes 50% shares in revenue. Consultancy business commands higher margins as compared to the turnkey business.

Use of proceeds:

The proceeds from the Offer will be remitted to the Selling Shareholder (i.e. Government of India) and the Company will not benefit from such proceeds of the Offer.

How has the performance of Engineers India Limited been?

Historical Financial Performance:

Good and consistent value creation for shareholders in the past ten years: Post FY09, the company has consistently clocked a ROCE of more than 30%. This has led to huge value creation for its shareholders.

Excellent growth in the last five years: The net sales have recorded a CAGR of 27% over last five years. The company has successfully transformed the growth into EPS for the shareholders. The EPS has recorded CAGR of 25% over the same period. However, in FY13 the company.

The margins are fluctuating: The company has fluctuating margins mainly due to the nature of its business. The company gets 50% of its revenues from turnkey business, which is low margin  and lumpy business.

Zero Debt with high cash balance: At the end of FY13, the company has cash balance of about Rs. 1900 Crore, large treasury investments and a steadily improving debtor turnover. The nil debt has helped the company to steadily improve the returns. The returns are among the best in industry.

Efficient Working Capital management: The company receivable days stand at 44 days which is among the best when compared with the industry peers. A negative cash conversion cycle of -52 days indicates that the company gets very high credit from its suppliers.

The company has performed well on growth parameters and has had a fair value creation history. As a result, the 10 Year X-Ray performance of Engineers India Limited has been rated as GREEN (Very Good).

What can we expect in the future? Here is an analysis…

Leadership position in refineries: EIL has leadership Position in Refineries and Petrochemicals in India. It has worked on a combined refining capacity of more than 150 MMTPA (3 million BPD) in India and has been involved in the establishment of seven out of the eight mega petrochemical complexes in India. In this segment, the company has recently forayed into new areas such as Strategic Storages.

Its long history and the government’s backing, has helped EIL create a good reputation. In addition its ability to turnaround projects within timelines has helped it create a good brand. This gives the company a huge competitive advantage as compared to its competitors.

Strong Balance Sheet: EIL has a cash of ~Rs.1900 crore with no debt on a consolidated balance sheet basis. Many EPC players in the country are finding it difficult to maintain their margins due to their leveraged balance sheets and the have to bear the impact of rising interest rates. However, EIL is much better positioned as it has zero debt on its books. High interest rates thus do not have such a large impact on the company.

Global Portfolio: EIL has expanded its portfolio to Middle East, African and South East Asian countries over the past year. This has helped the company to sustain the domestic downturn as it saw good order inflows from the Middle East. The company has also diversified its portfolio to fertilisers, metallurgy, power, pipelines etc.

But what are the concerns?

Dependent upon capex plans of refining, oil & gas, petrochemicals sector: As the company in into consultancy business, much of its order book depends on capital expenditures from its clients industries. This is the main reason why the company witnessed a slowdown in 2013.

Higher dependence on Turnkey business: 65% of its current order book being accounted for by the low-margin EPC contract business. This part of the company’s business is highly uncertain, as revenues are not recurring. Revenues from this segment are higher in the final stages of a project while they will be almost nil in their initial stages.

Cost and time overruns in execution of projects: Given the long term nature of its projects, the company always runs a risk of cost and time overruns.

On the whole, the long term future prospects of EIL appear to be GREEN (Very Good).

So, should I invest in Engineers India Limited’s FPO?

According to MoneyWorks4me analysis, at the IPO price band of Rs. 145-150, EIL would be trading at a discount as compared to its equity’s intrinsic value.

We expect the company will continue to grow its sales and profits, as the capex plans of refining, petrochemicals and Oil & gas sector revive. Even if the FPO closes at the upper end of the Price Band i.e. Rs. 150, retail investors will get it at an effective price of Rs. 144 as they are eligible for a 4% discount. A price of 144 is below the Discount Price and is an attractive buy price as per MoneyWorks4me analysis.

However, investors should keep in mind that big listing gains cannot be expected from this FPO and it is not a short term play.

We therefore advise retail investors to consider subscribing to the issue from a long term (2-3 years) perspective.

Technical Outlook on Engineers India Ltd.:

While analyzing the Weekly charts of “Engineers India Limited”, We found the stock looks good from long term perspective

~ The Stock had made a “Strong White Marubozu” in the 2nd week of September. The Candle has bullish implications.

~ After making the “White Marubozu” candle the stock has seen consolidation in the form of Downward “Sloping Channel”. The stock is now trading at the lower band of the Channel. This consolidation should be considered healthy and be used as an opportunity to create longs.

~ There is a “Positive Divergence” between the stock price and the RSI.

Engineers India Ltd. Technical Chart

Disclaimer: This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations or needs of an individual client or a corporate/s or any entity/ies. The person should use his/her own judgment while taking investment decisions.

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Aliya Sayyed

Manager - Equity Research; Total 10 years works experience ranging from equity analysis, portfolio management, and financial planning. MBA in Finance. Passionate about equity research. Likes reading Finance, business, and classic fiction. Spends free time with friends and family.

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