Buy Engineers India; target Rs 312: Sushil Finance

“Engineers India (EIL) is one of Asia’s leading engineering companies, providing engineering consultancy & turnkey project contracting services across hydrocarbon value chain. It is the only player in Indian hydrocarbon sector which provides complete ‘Concept to Commissioning’ services under one umbrella, through its range of services such as feasibility studies, project management, planning & scheduling, process design & construction management. EIL is having immense experience and long track record of executing several large projects, which include more than 49 projects in refinery, 7 in petrochemicals, 37 in pipelines, 240 offshore and onshore oil & gas projects, 26 in mining & metallurgy etc. It also has technical alliances with leading global players for the technologies used in various projects. Hence, with its strong technical capabilities and vast experience of executing large projects in past, the Company continues to be one of the leading service providers for most of the Public Sector Units (PSUs) in oil & gas sectors.”

“As per draft paper on 12th plan by planning commission, India’s oil and gas requirements are expected to reach 204.8 mtoe & 87.2 mtoe respectively by FY17. India would need to invest to the tune of Rs. 2.8 trillion in the oil and gas sector during the 12th Plan period for expanding domestic and international infrastructure, be it in terms of refining capacity (302 MMTPA by 2017), pipelines (additional 15,500 km) and city gas distribution network (over 200 cities to be covered). Hence, investments in these segments will drive growth for consultancy & EPC players in hydrocarbon segment. EIL, being a premier engineering consultancy and EPC company with vast experience and long track record, is best placed to benefit from the capex of these segments. EIL expects business opportunities worth Rs. 1,550 bn in hydrocarbon sector (including Rs. 880 bn in refinery) during 12th Plan period.”

“EIL’s current order book position stands at Rs. 56 bn (1.6x its TTM Rev), while its YTD (Apr-Jan 2012) order inflows remained sluggish at about Rs. 7.0 bn as most of upcoming projects in hydrocarbon segments are in finalization stage and likely to be awarded from Q1FY13 onwards. Though EIL expects its FY12 order inflows to be muted at Rs. 15 bn, the ordering environment is expected to improve significantly from FY13 onwards as three major refinery orders from BPCL & HPCL are likely to be awarded in H1FY13. IOCL, India’s largest refiner, is also expected to invest in capacity expansion for next 4-5 years, creating business opportunities for EIL. Hence, we expect EIL’s order inflows to remain very strong for next 2-3 years as 62 MMTPA refining capacity is expected to be added during FY12-17 along with investment for expansion of pipeline and Oil & Gas exploration capacity. Going forward, with its current order book position & prospective order pipeline, the visibility of top-line growth for two years is very clear and EIL is expected to deliver Revenue CAGR of ~21% during FY11-14E.”

“The Indian infrastructure sector provides attractive opportunities, given the expected USD 1-trillion investments in the next five years. Hence, leveraging its strong engineering consultancy and EPC capabilities, EIL is exploring opportunities in high growth area like renewable energy, nuclear power, infrastructure, city gas distribution and fertilizer. The work on developing entry-level strategies and acquisition of requisite skill sets in these potential areas has already been initiated. These sectors are expected to contribute significantly for the next 3-5 years and will diversify EIL’s business portfolio. Considering its decent order book and strong growth expected in order inflows in next two years, we expect EIL’s Consolidated Revenues to grow by 26.7%, 21.2% & 16% in FY12E, FY13E & FY14E, respectively. EIL also has strong balance sheet with negative working capital and high cash to tune of Rs. 21 bn (Rs.62 cash per share). The CMP of Rs.252 discounts its FY13E & FY14E consolidated EPS of Rs.21.5 & Rs.24 by 11.7x & 10.5x, respectively. We have valued EIL at 13x its FY14E earnings, which would be still ~ 15% discount to 5 years mean and re-instate coverage with target price of Rs 312. Buy the stock,” says Sushil Finance research report.

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