The government on Thursday fixed the floor price of Rs 189 per share for selling its 10 per cent shareholding in Engineers India that would fetch it about Rs 637 crore.
The floor price fixed for sale of 3.36 crore shares through an offer of sale (OFS) on Friday, is at a discount of 2.4 per cent to the closing price of Rs 194.05 on BSE on Thursday.
The OFS of the Engineers India has been fully subscribed.
Below are the three reasons why Angel Broking is bullish on Engineers India OFS.
To ride on Hydro-carbons capex cycle: Reduction in oil subsidy during FY2014-15 has led to improvement in cash flows of PSU oil marketing companies (OMCs) in the last 12-18 months. According to the brokerage house, improved cash flows and higher utilisation levels of OMCs would drive the next leg of capex on their part. Angel Broking anticipates OMCs to pursue capex of Rs 57,000-67,500cr during FY2016-18E. Rs 13,000-15,500cr of such capex should see awarding in the next 12 months.
Engineers India (EIL) is engaged in design and consulting works, which is front ended, and draws business when an OMC pursues capex. Given that domestic consulting players lack bandwidth and are unable to meet qualification criterion for getting contracted coupled with foreign players lacking comfort to work with domestic PSUs, positions EIL to emerge as strong beneficiary from uptick in the Hydro-carbon awarding activity. Also, order wins from international markets could act as fillip in terms of the company achieving order inflow growth in future. On the whole, EIL may report order book CAGR of 13 per cent during FY2015-18E to Rs 5,214cr.
Margins to improve, going forward: On the back of improved outlook on the order book, Angel Broking expects revenues to report a 3.6 per cent CAGR during FY2015-18E. Given the expected shift in business mix, EBITDA margins to improve from 13.3 per cent in FY2015 to 19.1 per cent in FY2018E. Given the company’s cash rich status, and its minimal capex requirement, EBITDA margin expansion to flow down to PAT level. The brokerage house believes PAT margins of Engineers India to expand from 18 per cent in FY2015 to 24.2 per cent in FY2018E.
Attractive valuations: EIL’s stock price in recent times has corrected owing to weakness in order awarding and depressed earnings being reported. At closing price of Rs 194 on Thursday, EIL stock factors in all the near-term concerns. At the offer-for-sale (OFS) price of Rs 189, EIL stock trades at FY2017E P/E multiple of 16.5x. On considering 5 per cent discount for retail investors, translating into an OFS price of Rs 180, EIL stock is available at FY2017E P/E ratio of 15.7x which is attractive considering the cash rich status of the company (Rs 2,279 cr cash as of 2QFY2016) and its strong market positioning within the domestic Hydro-Carbons consulting space. Further, this space is likely to see strong awarding activity from here-on. Accordingly, given the attractive valuation, Angel Broking recommend investors to apply for EIL shares in the OFS.