Engineers India Rating: Buy- Q2FY21 showing was better than expected

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November 28, 2020 3:00 AM

Consultancy margins were strong; FY21/22e EPS up 10/9%; Numaligarh is an overhang; TP revised to Rs 97

The fertiliser plant, in which EIL had invested, is complete and will shortly commence operations; hence, we have factored in the same in our SoTP valuation.The fertiliser plant, in which EIL had invested, is complete and will shortly commence operations; hence, we have factored in the same in our SoTP valuation.

Engineers India (EIL) has reported better-than-expected execution and strong margins in consultancy segment. IOCL Panipat order may get delayed and hence, the management has reduced the order intake guidance for FY21e to Rs 11 bn vs Rs 16 bn earlier. However, given the strong orderbook of Rs 91 bn (3x TTM sales) and an encouraging order intake pipeline, growth outlook is healthy. Factoring in better-than-expected performance, we raise FY21e earnings by 10% and FY22e earnings by 9%.

The fertiliser plant, in which EIL had invested, is complete and will shortly commence operations; hence, we have factored in the same in our SoTP valuation.

Given the delay in order intake and the uncertainty regarding investment towards Numaligarh refinery, we cut our core valuation multiple to 15x vs 18x and maintain our Buy rating with a revised TP of Rs 97 (earlier: Rs 95).

Healthy execution implies gradual easing of operations: Execution on HPCL Barmer has gained traction and HPCL Vizag project is also progressing well. This, along with gradual improvement in onsite project activities, have supported better-than-expected growth.

Healthy consultancy margins, LSTK fails to cheer: Consultancy segment margins witnessed healthy rebound to 27% versus 14% in Q1FY21. However, LSTK margins continue to be under stress at 2% and this may be low given the type of projects under execution.

Overhang in investment towards Numaligarh refinery will impact valuation: EIL, along with Oil India, have submitted EoI for due diligence of investment towards Numaligarh refinery. However, we believe, this will be an overhang from a valuation standpoint.

Maintain BUY: EIL has strong balance sheet with net cash of Rs 29.8 bn to tackle the same. The company announced buyback of 69.9mn shares at Rs 84, which will aid in improvement in return ratio. We have factored in the company’s 26% stake in Ramagundam due to the completion of the plant.

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