Buy Engineers India Ltd For Target Rs.75 - HDFC Securities
Engineers India (EIL), a Navratna public sector enterprise, is one of the oldest companies in the Indian public sector. Over the years, the company has emerged as a market leader in the Indian hydrocarbons segment with expertise in design, engineering and project implementation. EIL has prestigious clientele which comprise both PSU and private firms such as BPCL, HPCL, IOCL, Vedanta etc. It has strong management team and a workforce of about 2800 experienced professionals and technical personnel. Besides, national oil companies in most of the Middle East countries are also its clients. The company has established an outstanding track record in design, engineering and execution of cross-country pipelines.
Weak crude prices in the last few years and consequent deferral of capex spending by its key customers has affected fortunes of the company. Total order book of the company in Q1FY21 were at its lowest (an overall ~20% dip YoY to Rs 9116.8cr; consultancy dropped by 12% YoY, and Turnkey declined by 26% YoY) compared to past few years. Further, order inflow is also expected to be at a humble Rs 1500cr during FY21 considering the uncertainties posed by COVID 19. Nevertheless, EIL’s efforts in boosting its returns by adopting strategic measures such as dividend payouts and investments into profitable assets makes it an attractive bet for the longer term. Order book in the consultancy segment is expected to turnaround over FY20-22E. EIL has always maintained an excellent order book execution record which should add to its top-line.
Fuel price de-regulation and rules to implement BS6-compliant facilities coupled with expansion programs are helping EIL garner more revenues. Also, diversification across sectors, should help the company sail during these difficult times. EIL reported decent performance even during these trying times. This instills faith in the ability of the management.
Pick-up in activity is being seen where the company’s HMEL site has already started 90% of its construction activities. Further, government policy reforms like Atmanirbhar Bharat, Make In India, Bio-Fuels, Digital India, SMART City, AMRUT, Pradhanmantri Urja Ganga Yojana (Pipelines, CGD Networks, Fertilizer Plants), Sagarmala, etc. with renewed focus on Infrastructure especially Ports & Airports, PCPIRs, Namami Gange, Affordable Housing, etc are expected to improve the orderbook and execution of the company.
Valuations and Recommendations:
Large order book, pick-up in oil demand in both international and domestic areas, coupled with diversification efforts, bode well for the company. We expect EIL’s Rev/EBITDA/PAT to grow by 16%/44%/31% in F22 over FY21. EIL has a very strong balance sheet with FY22E cash and cash equivalents worth Rs. 42.8 per share. The large order book, visibility of fresh order inflows, lean assets model and exciting return ratios mean that the stock has the potential to do well going forward. However, recent reports suggest that Oil India Ltd and Engineers India Ltd-led consortium have agreed to buy 48% stake in Numaligarh Refinery from BPCL. We therefore consider only 50% of cash per share in the calculation of SOTP Value. We assign a P/E multiple of 11x core FY22E EPS + 50% FY22E cash for base case fair value of Rs. 70.5, and a P/E multiple of 11.0xcore FY22E EPS +50% FY22E cash for bull case fair value of Rs. 75 over the next two quarters. We feel that investors can buy the stock at the CMP (10.2xcore FY22E EPS +50% FY22E cash) and add on dips to Rs.59.5 (8.5xcore FY22E EPS +50% FY22E cash).
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