Engineers India - Healthy growth outlook; stress in near-term margin - ICICI Securities

Engineers India (EIL) reported in-line execution though lower margins under LSTK impacted overall earnings. Tendering activity of CPCL Nagapattinam has gathered pace and this is expected to be ordered in parts; some portion of the order is expected in Q4FY21E. However, given the strong orderbook of Rs83bn (3x TTM sales) and an encouraging order intake pipeline, growth outlook is healthy. Factoring-in the stress in LSTK margins, we cut our FY21E and FY22E earnings by 7% and 2%, respectively. We roll forward our valuation to Sep'22 earnings and maintain BUY with a revised target price of Rs98 (previously: Rs97). The fertiliser plant, in which EIL had invested, is complete and will shortly commence operations, hence we have factored-in the same in our SoTP valuation.

- Healthy execution implies gradual easing out of the shadow of pandemic: Execution on HPCL Barmer has gained traction and HPCL Vizag project is also progressing well. Barmer project has reached ~20% completion, both under consultancy and the LSTK segments.

- Stable consultancy margins, LSTK fails to cheer: Consultancy margins improved 80bps YoY to 25.4%. However, LSTK margins continue to be under stress at 1.4%; we believe, this may be due to the type of projects currently under execution.

- Overhang in investment towards Numaligarh refinery will impact valuation: EIL, along with Oil India, has submitted an expression of interest for due diligence of investment towards the Numaligarh refinery. This continues to be an overhang on the valuation front.

- Strong order pipeline, delay in finalisation to impact timelines: Some large orders in the near-term pipeline include: 1) IOCL Panipat capacity expansion by 10mmtpa; and 2) HMEL petrochemical expansion (Rs6bn-7bn); however, IOCL order can slip to H1FY22E. Additionally, Bina refinery capacity expansion by 7.5mmtpa and Mangalore refinery capacity expansion by 10mmtpa are also in the pipeline. CPCL Nagapatinam expansion by 9mmtpa will be split into three packages, each worth Rs3bn-4bn. Management expects one portion of this to be ordered in Q4FY21E.

- Maintain BUY: EIL has a strong balance sheet with net cash of Rs29.8bn to tackle. The buyback of 69.9mn shares at Rs84 will aid in improvement in the return ratio. We have factored-in the company's 26% stake in Ramagundam due to the completion of the plant. We introduce FY23E earnings are roll forward our valuation to Sep'22.

Shares of ENGINEERS INDIA LTD. was last trading in BSE at Rs.73.85 as compared to the previous close of Rs. 72.85. The total number of shares traded during the day was 291929 in over 1822 trades.

The stock hit an intraday high of Rs. 75.75 and intraday low of 73.4. The net turnover during the day was Rs. 21811595.

Source : Equity Bulls

Keywords