Engineers India (EIL) announced that it has bagged ~ Rs 50-billion order from HPCL Rajasthan Refinery, which includes Rs 11 billion of consultancy work. The project execution order is for 9 mmtpa greenfield refinery in Barmer and four units of petrochemical plant.
Historically, the company has witnessed strong correlation with order intake and return on capital employed. Hence, we believe, finalisation of this long-awaited order and healthy order intake pipeline led by certain petchem and refinery expansions will aid overall re-rating of the stock; it should also lead to ROCE improvement and earnings improvement.
Also, this order has taken the back of the envelope order book to a life-time high of Rs 120 billion (~6x TTM sales, 43% of consultancy), providing growth visibility. While change in revenue mix, closure of projects leading to provision write back keeps the margins volatile, overall absolute Ebitda is expected to witness healthy growth, supporting overall earnings growth.
Given better-than-expected order intake, we raise FY20E earnings by 12% to Rs 8.1 and reiterate ‘buy’ with a revised target price of Rs 178. With the Rs 50-billion order win, EIL’s overall order book is at a life-time high of Rs 120 billion.
The future pipeline is also healthy with (1) BPCL Numaligarh capacity expansion by 6 mmtpa, (2) IOCL petchem capex in Paradip, Panipat etc., (3) CPCL Nagapatinam 6 mmtpa greenfield project.
The domestic oil demand continues to be resilient and this should prompt state-owned refineries to pursue brownfield and greenfield expansions. Domestic state-owned refiners are planning to spend $35 billion on expanding their petrochemical output, anticipating a boom in demand, and this should aid GRMs.