Engineers India - Numbers disappoint, Favorable Industry developments shaping-up - IndiaNivesh

Engineers India reported a bad set of numbers. The reported top-line of the company was at Rs 6.0 bn way below our expectations of Rs 7.4 bn. Reported top-line declined by 23.7% on year-over-year basis (32.8% & 10.4% fall in Turnkey & Consultancy business, respectively).

At the EBITDA front, company reported an EBITDA of Rs 1.3 bn against our expectations of Rs 1.9 bn. On other hand, reported EBITDA margins of the company were at 21.7% (vs. 23.0% a year ago & 25.3% in previous quarter).

32.8% fall in year-over-year Turnkey business top-line led to 44.1% fall in the year-over-year sub-contracting charges (to Rs 871.8 mn). Increased contribution of Consultancy business (47.9% in Q3FY13 vs. 40.8% in Q3FY12) coupled with marginal cool-down in raw material prices, translated to 25.3% year-over-year fall in construction materials (to Rs 1.9 bn).

If we look at Q3FY13 segment-wise EBIT margins, both, Consultancy & Turnkey business on a year-over-year basis, witnessed margin compression scenario. Unadjusted EBIT margins of Consultancy business declined from 45.0% a year ago to 41.5% in Q3FY13. Further, Turnkey business witnessed 261 bps unadjusted EBIT margin compression on a year-over-year basis to 7.6%.

EIL reported a PAT of Rs 1.3 bn, below our expectations of Rs 1.7 bn. Despite EBITDA margin compression, PAT margins expanded on a year-over-year basis by 279 bps to 21.9%. PAT margin expansion has been on a/c of (1) 50.6% surge in other income (to Rs 669.3 mn), (2) 12.8% decline in tax expenses (to Rs 632.9 mn).

During the quarter EIL reported Rs 544 mn of Order Inflows (OI's). In the first nine months of FY13E, EIL has reported OI to the tune of Rs 12.8 bn. With 1 more quarter to go in FY13E, EIL would have a daunting task of reporting OI's in the range of Rs 17.2-22.2 bn to attain its FY13E OI guidance of Rs 30-35 bn. In our opinion the company will miss-out on the guidance if no quick decission is taken by various govt. agencies, through which it gets orders.

After adjusting for revenues booked during the quarter, Order Book at Q3FY13-end stands at Rs 38.7 bn (thereby giving revenue visibility for next 5-7 quarters).

In Q4FY13 EIL reported EPCM related order worth Rs 440 mn from OIL for their Naharkatiya- Barauni pipeline crude oil pipeline project. This project is expected to be executed in 24 months.

At CMP of Rs 221, EIL is trading at FY13E and FY14E, P/E multiple of 12.2x and 10.2x, respectively. Historically in the last 3 years, EIL has traded at 1-year forward P/E band of 15.2x.

In the last 6 months, EIL has delivered negative 5% returns, mainly on concerns on slow-down in order book of the company. Yesterday's announcement of Cabinet Committee on Infrastructure (CCI) where they are likely to review ~47 projects (some of them held by ONGC, RIL, Cairn), indicates that Government has realized the severe slow-down in the capex cycle and the need to revive investment cycle in the Hydro-Carbons space.

Even though EIL has participated in bids worth ~Rs 2 bn (most of them Turnkey projects), and another Rs ~Rs 15 bn worth of projects under negotiation, we sense that projects are getting deferred as of now. With reform announcements here to stay, increased activity in the Hydro-Carbons vertical and given the strong market position of EIL in this vertical, we are confident that for any revival in this space, EIL would be the biggest beneficiary.

After taking into account declining order book levels, revised estimates, we have reduced our FY14E price target from Rs 289 to Rs 247, indicating 12.0x multiple. Given the limited 11.6% upside potential in the stock from current levels, we revised downwards our rating by one notch to HOLD.

Source : Equity Bulls

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