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Engineers India (EIL) reported strong 59% YoY sales growth to Rs6.8bn in Q2FY19. Revenue growth from the consultancy segment was flat YoY at Rs3.3bn while the turnkey segment grew 263% YoY to Rs3.5bn. Higher contribution from the low-margin LSTK segment and absence of any major provision write-backs led to reduction in margins. We believe, the margins will normalise over a period of time and be volatile as per the revenue mix of LSTK and provisions and write-backs on projects.
Strong orderbook worth Rs115bn (5.12x TTM sales) provides growth visibility. Order intake of Rs56bn in Q2FY19 was largely led by finalisation of the HPCL Barmer refinery order of Rs54bn. The medium- to long-term order intake is healthy, led by Numaligarh refinery, GAIL Kakinada petrochemical plant, IOCL Panipat, CPCL Nagapatinam, etc. We factor-in 10.2% earnings CAGR for FY18-FY20E and maintain BUY with a target price of Rs179 (22x FY20E earnings).
* LSTK segment to witness strong execution driven by Euro VI project:
LSTK segment witnessed strong execution driven by Euro VI conversion projects and this is likely to continue till Dec’18. Hence, though overall margins are expected to be impacted, absolute EBIDTA should witness growth. Likely provision write-back from the CPCL project during final negotiations can also boost overall margins.
* Large order win to boost growth visibility:
Company booked Rs54bn order from HPCL Rajasthan Refinery Ltd. for 9MMTPA greenfield refinery in Barmer and four units of petrochemical plant. Rs43bn is the LSTK portion with a completion deadline of Q3FY23 and Rs12bn is the consultancy portion (deadline: Q4FY24).
* Strong order pipeline:
Some large orders in the pipeline for the medium to long term are: 1) BPCL Numaligarh capacity expansion by 6-mmtpa, and 2) GAIL petrochemical plant in Kakinada (~Rs6bn) for the next two years. Additionally, the management expects to book one of IOCL’s brownfield expansions at Koyali, Barauni or Mathura. CPCL Nagapatinam and IOCL Panipat expansion projects are also in the pipeline.
* Maintain BUY:
Given the strong growth prospects and order pipeline, we maintain our BUY rating on the stock with a revised target price of Rs179 (earlier: Rs178). The stock is trading at attractive valuation of 14.6x FY20E earnings.
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