ENGR posted in-line revenues for Q4/FY18 with 15/23% y-o-y growth led by pick-up in BS VI norms.
Engineers India (ENGR) posted good execution for Q4/FY18, indicating the government’s strong focus on BS-VI norms. However, we believe: a) tapering pipeline of new orders in domestic market and delayed mega refinery project pose challenges to our order intake growth assumptions; and b) there exists possibility of deferrals/delays in large projects around elections which could hamper capex towards large lumpy projects in the oil and gas sector.
Hence, earnings warrant normalised valuation multiples (vs. peak cycle multiple). Accordingly, we trim FY19/20E earnings by 8/10% and revise our target PE multiple to 18x (24x earlier). Downgrade to Hold with a revised TP of Rs 140 (Rs 205 earlier).
Q4/FY18 performance: Key inferences — ENGR posted in-line revenues for Q4/FY18 with 15/23% y-o-y growth led by pick-up in BS VI norms. However, EBIDTA adjusted for oil & gas investment provisioning grew 54/45% for Q4/FY18, albeit on a low base, and stood below our/consensus estimates with EBIT margins of PMC/LSTK segments declining by 800/1,630bps to 26.6/7% y-o-y.
Select projects to drive FY19/20E orders; most others sluggish: ENGR has a healthy long-term pipeline given expansion of refining capacity and petchem by OMCs. However, in past 10-12 months, there has been no major traction in the projects (evident from ENGR’s dismal FY18 order intake) primarily due to deferments (Barmer, Numaligarh, etc). Also, we believe, while Barmer seems more or less finalised and will be awarded in next 1-2 months, number of projects expected to be awarded in FY19/20E seems much lower than our previous expectations. Hence, we prune our FY19/20E intake by 19/18% .
Outlook and valuation: Lull in fresh intakes — ENGR maintains its leadership position in domestic oil & gas space while maintaining its niche in PMC space. However, slower pace of ordering by OMCs could hamper its revenue visibility in near to medium term, thereby posing downside risk to our FY18-20E growth. At CMP, the stock trades at 20x/18x FY19/20E EPS. Downgrade to ‘HOLD/SP’ from ‘BUY/SO’ with a target price of Rs 140 (18x FY20E EPS).