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Stable performance

Engineers India’s (EIL) Q1FY22 performance was largely in line with expectations. Order pipeline remains strong with the likely finalisation of umbrella contracts from BPCL, greenfield refinery in Nagapatinam, and petchem expansions by PSU refineries.

Company invested Rs7bn for 4.3% stake in Numaligarh refinery along with Oil India Ltd. The proportion of consultancy orders in the orderbook has increased and order prospects are healthy. Taking into account the investment in NRL and Ramagundam Fertilisers, and healthy growth prospects, we maintain BUY on the stock with an unchanged target price of Rs116.

* Healthy execution implies gradual easing out of the shadow of pandemic: Execution on HPCL Barmer has gained traction and HPCL Vizag project too is progressing well. This has resulted in 92% YoY growth recovery in LSTK execution to Rs3.7bn, and 33% YoY under consultancy to Rs3.7bn on a low base.

* Strong recovery in segmental margins aided earnings growth: Consultancy margins strongly rebounded to 30% vs 14% in Q1FY21, and LSTK margins improved by 160bps YoY to 3.2%. Unallocable expenses too reduced further supporting overall EBIDTA margin expansion by 960bps YoY to 14.2% vs our estimate of 12.9%.

* Strong order pipeline: Some large orders in the near-term pipeline include: (i) CPCL Nagapatinam expansion by 9mmtpa – to be split into three packages (one large, and two small portions {management expects one portion to be ordered in FY22E}); (ii) one medium-sized order from Numaligarh; (iii) BPCL-related umbrella order of ~Rs2.5bn; (iv) HMEL petrochemical expansion (Rs6bn-7bn); and (v) MRPL petchem expansion.

* Maintain BUY on healthy growth outlook and benign valuation: EIL has a strong balance sheet with net cash of Rs15.3bn, despite Rs7bn investment in Numaligarh and ~Rs6.5bn of buyback. Company has witnessed improvement in cashflows and reduction in working capital. Given the investment in various assets and the cash balance, we have valued the core profit separately and added back the cash and the investments in Numaligarh and fertiliser business. RoEs are expected to trend high due to lean balance sheet and free cashflows, which are set to be positive. Given the healthy growth outlook, we maintain BUY on the stock with an unchanged target price of Rs116.

Valuation and risks

The current valuation at 8.5x FY23E and 9.7x FY22E earnings is benign given the strong balance sheet with 23% RoE projection for FY23E. Accounting for the high cash balance, we value the core business separately and add back the cash with 70% weightage factoring-in the risk of any likely further investment towards asset ownership.

Given that the Ramagundam facility is complete and will soon commence operations, we have also factored-in the company’s 26% stake worth Rs4.5bn into our valuation as well as the investments in NELP and Numaligarh. We arrive at our target price of Rs116, implying a multiple of 15x to FY23E core earnings. Delay in order finalisation, loss of market share, and delay in execution are some of the major risks.

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