Strong order flows and superior execution to boost Engineers India

Jitendra Kumar Gupta Moneycontrol Research

Engineers India in the past had principally grappled with two big issues: tepid growth in order inflows and execution delays. Both have changed for the better. Order inflows have improved--as against an order book of Rs 5000 crore about a two years ago, the company is now sitting on orders worth Rs 8800 crore, which is about 6 times its fiscal 2017 revenue. During the September 2017 quarter, the company bagged orders worth Rs 1608 crore, which was significantly better than Rs 150 crore orders bagged in the corresponding quarter last year and Rs 344 crore orders won in June 2017 quarter.

Moreover, with stability in the hydrocarbon sector along with the government's focus on speeding up investments particularly for the oil PSUs, it should help Engineers India speed up work at some of the existing projects.

Good quarter

This is also reflected in September quarter results with the company posting strong 26 percent year-on-year growth in revenues. Growth was largely driven by 50 percent growth in project management and consultancy business, which accounts for 22.3 percent of total revenue. Interestingly, the turnkey segment, bounced with 22 percent year-on-year growth in revenues as against 31 percent decline reported in the last quarter.

Improvement in the core turnkey project segment is a good indication of improvement in execution cycle and easing working capital issues. Since this segment accounts for 78 percent of the revenue, it also means better margins in the coming quarters. This is precisely the reason that drove the margin improvement in the September by almost 470 basis points to 32.3 percent. With the core business contributing, the company is hopeful of maintaining the operating margins in the coming quarters.

Moreover, the pace of order inflows particularly of the larger size is expected to kick in with many oil PSUs finalizing capex. High capacity utilisation coupled with improved profitability and reduction in subsidy have boosted free cash flow for PSU OMCs, which is likely to drive capacity expansions. We expect EIL to be an early beneficiary of a pick-up in the investment cycle of the hydrocarbon space over the next 2-3 years.

What is interesting is that it has enough room to accommodate these orders. To put it in perspective, in FY17 the company reported revenues of close to Rs 1480 crore, which is less than half of its revenues in FY12 at Rs 3723 crore. Thankfully, it is now sitting on a strong order book. This is also reflecting in management’s future guidance. While addressing the analysts call, the management said that they are looking for about 15 percent revenue growth for the entire FY18 and 25 percent revenue growth in FY19, which is quite encouraging. The management also said that with the execution improving, the second half of the current financial year would be better.

Valuations

Meanwhile, a part of this optimism about improving prospects is already in the price. The stock price has gained close to 21 percent in the last one month and at Rs 181 per share it is currently valued at 23 times its FY19 estimated earnings. Considering earnings growth is expected to be high over the next two to three years, current valuations may sustain. The other comfort factors that could support the valuations is that, it is a debt-free company, generating  30 percent operating margins and making strong return on equity (after adjusting for cash). The company is sitting on cash of over Rs 2500, which is about 25 percent of its market capitalisation.

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