Buy Engineers India; target of Rs 298: SPA Research

SPA Research's research report on Engineers India

EIL reported better than expected set of numbers on the back of sharp improvement in operating margins. While revenues declined by 24.6% on the back of 66.9% dip in turnkey segment's revenue, operating margins improved by 1322 bps YoY to 27.7% driven by shift in sales mix to high margin consultancy segment and partly owing to provision write back on one of the LSTK project which EIL had provided for during 4QFY16. Order inflows in the last quarter grew by 15.7% to INR 1.5 bn, resulting in 47.4% growth in order backlog to INR 50.9 bn (3.8x book to bill). We continue to retain our BUY rating with a revised target of INR 298 on the stock.

Our thesis of expected revival in domestic hydrocarbon space owing to improved balance sheet of domestic Oil PSUs, seems to be finally playing out, as order inflows for EIL grew strongly over the last quarter. Robust order backlog of INR 50.9 bn in addition to expected inflows of +INR 43 bn over the next 20 months will drive growth in near term. Superlative operating margins and low capital requirements ensures high free cash flows. Increased liquidity in form of cash and cash equivalent of INR 27.6 bn (INR 82/ share) provides stability. We continue to retain our BUY rating on the stock with a target of INR 298, based on 22x FY18E EPS of INR 13.5.