Engineers India Ltd posted a strong operational performance with sales and Ebitda jumping 47% and 9%, respectively, in Q4FY17, adjusted for Rs 900 m gratuity. Key highlights in our view are: (i) strong order inflow for Q4FY17/FY17 at Rs 32/57 bn, up 12x/3.5x, led by healthy domestic orders; (ii) Q4 started to witness an execution pick-up led by new orders with a 47% y-o-y jump in top line; and (iii) driven by improving margins in PMC and provision reversal, the Ebitda margins improved in FY17 to 21% vis-à-vis 13% in FY16. We reiterate our thesis of a strong capex push in downstream capacity addition benefiting EIL over the following 12-24 months. Maintain Buy with target price of Rs 200, even as we trim FY18e EPS by 15% following management commentary of most execution being pushed to FY19.
Uptick in execution; healthy PMC, provision reversal boost margin
Execution picked up finally as billing for new orders gathered pace. However, revenue stayed flattish for FY17 given drop in 9MFY17 and back-ended orders. Ebitda margin catapulted 700 bps to 27% led by strong uptick in PMC margins. This was despite a sharp 30% y-o-y jump in wage bill owing to 7th Pay Commission revision. In our view, we expect the Ebitda margins to increase by a reasonable 220 bps over FY17-19E as execution of new orders gathers pace.
Strong pick-up in downstream space, policy push: Potent catalysts
Management stated that most execution growth will be from FY19; however, we believe, given the rapid pace of activity in the domestic downstream space, EIL has a fair chance of reporting handsome growth in FY18 itself. Also, we perceive another tailwind in government’s push to propel refining capacity addition. We envisage the surging oil & gas capex to drive a much longer and larger capex cycle than all previous cycles. We expect this capacity addition to propel ordering pace over the next 12-15 months.
Outlook and valuation: Robust visibility; maintain ‘BUY’
Despite EIL’s strong outperformance over the past 12 months—80% return versus Sensex’s 25%—we believe the stock entails reasonable upsides given healthy order book visibility coupled with reasonable earnings growth visibility. We maintain ‘BUY/SO’.
Q4FY17 conference call:
Management expects only marginal revenue growth as new orders that EIL has secured were bagged during H2FY17 and these orders are not expected to generate significant revenue during FY18. But, 10-12% improvement in revenue is estimated in FY19.
In the turnkey segment, old jobs have been completed and new projects have commenced. This led to correction in turnkey revenue. Provision for gratuity (one-time expense) and manpower expense revision led to margin dip. The overseas sector will see some improvement in FY18 and the recovery in FY17 was not in line with management’s expectation, yet some chain assignments from the Middle East are expected. Overseas business is down due to crude oil price decline because of which OPEC countries have cut capex and downstream projects. Though a pick-up is expected in FY18, overseas revenues are likely to remain subdued. Petchem and refinery orders are expected, greenfield and brownfield.
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HPCL Barmer: In principle approval has been received, but the main project execution will start only in Q3 or Q4FY17. Pre-feasibility activities have been conducted and pre-project activities have commenced.
Rajasthan refinery and West coast refinery project: A big project and hence may not be awarded in the near term; also if it gets delayed then expansion of Gujarat Refinery may be awarded. Apart from these, expansion projects of existing refineries like Bina and Bhatinda may be awarded.
Most refineries are being integrated with petrochemical complexes as they are getting bigger and their integration is gradually picking. For example, Kochi has already started and the ones expected are Bina, Bhatinda, Gujarat Refinery, Panipat; West coast is also an integrated refinery with a future Petchem; even Dangote is also conceptualised in a similar manner.
Management expects more inputs from infra projects and EIL’s focus still remains on smart cities, waste & water waste projects like Namami Gange, airports and ports. But volumes in these projects are not expected to be as high as in refinery projects. In the fertiliser space, 4 plants are being expanded, of which 2 are Gorkhpur and Barauni.