Reiterating our positive view on EIL, we introduce and roll forward our target price on FY20 core earnings.
Reiterating our positive view on EIL, we introduce and roll forward our target price on FY20 core earnings. We move target price to Rs 221 (ascribe per of 25x on FY20 core earning; earlier price target at Rs 212 based on 26x FY19 earning estimate). In view of limited upside to our target price (significant run up in stock price post Q2FY18 result), we ascribe ‘accumulate’ rating on EIL. Our investment thesis is predicated on the following assumptions (1) increased awarding of large ticket domestic hydrocarbon orders, (2) direct awarding of greenfield orders to EIL on nomination basis by hydrocarbon majors, and (3) improvement in company’s margin profile driven by higher proportion of PMC (Project Management and Consultancy) orders in FY20. EIL stock has sharply risen since Q2FY18 result and currently at PER of 22.3x FY20 core EPS. We believe that company’s stock is reasonably discounting (1) potential growth in order inflows on back of improved business environment and (2) expected growth in margin and core earnings going ahead.
We move recommendation to ‘accumulate’ from ‘buy’ earlier with revised target price of Rs 221 (ascribe PER of 25x on FY20 core earnings). We believe that order inflows in domestic market be driven by brownfield expansion of several small sized refineries over FY18-19. As per industry interaction, we believe that viability of small sized refineries is threatened by (1) spiraling prices of crude oil (leading to vulnerable refinery margins), (2) inefficient infrastructure & poor product quality, (3) lack of enough volumes of feedstock for petrochemical plants and (4) increased cost related to regulatory & environmental compliance cost. In greenfield projects, we believe HPCL Barmer refinery (expected refinery cost is Rs 410 billion) and West Coast refinery (40 million tonne project; value Rs 1.4 trillion, PMC scope could be 5-7% of total cost) could get awarded over FY18-20. We project PMC order book to grow meaningfully over the next two years driven by domestic business. Current order book stands at record `88.8 billion with improved margin profile driven by PMC business.