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Order inflows key to further outlook Adverse revenue mix and higher provisioning affect margin

* ENGR’s 3QFY21 revenue was above our estimate, with the beat entirely owing to higher revenue in the Turnkey segment. Operating profit came in 24% lower than our estimate, owing to an adverse revenue mix (57% share of Turnkey segment revenue) and lower margin owing to higher provisioning on a YoY basis.

* The buyback proposal for acquisition of 69.9m shares (~11% of total shares) at INR84/share began on 22 Dec’20 and is expected to be completed by 5 Feb’21. The same would happen via a tender offer. The Government of India (GoI) will participate, with a stipulation of maintaining its shareholding at 51% post buyback (51.5% at present). If fully subscribed, the buyback would entail a cash outgo of INR7.2b. (Current cash on book: ~INR25b).

* Order inflows in 3Q/9MFY21 stood at INR1.9b/ INR8.6b (-48%/-41% YoY), thereby raising concerns as the management attributed the same to delay in ordering activity and shifting of some orders in FY22E.

* Order book (OB) declined 18% YoY to INR83b, with OB-to-revenue ratio at 2.9x – the lowest in the last four years. Despite superior execution and lower order inflows, a depleting order book remains a concern, though it is not alarming at this stage. We cut our FY22E/FY23E EPS estimate by 5% each and maintain our Buy rating with a new TP of INR85/share (from INR90/share).

Revenue above our estimate; adverse mix affects profitability

* 3QFY21 snapshot: Revenue stood at INR8.4b, down 6% YoY and 13% above our estimate. The beat on revenue was owing to higher revenue in the Turnkey segment (57% of total revenue). EBITDA stood at INR751m, down 12% YoY (24% below our estimate). EBITDA margin fell 60bp YoY to 9% owing to adverse revenue mix. PBT stood at INR1.2b, down 19% YoY (largely due to lower other income). Adjusted PAT stood at INR882m, down 19% YoY (26% below our estimate).

* Segmental snapshot: Consultancy - 3QFY21 revenue fell 2% YoY to INR3.5b, (11% below our estimate). EBIT margin stood at 25.4% (+70bp YoY). Order inflow stood at INR1.9b. Turnkey - 3QFY21 revenue stood at INR4.8b, down 9% YoY (40% above our estimate). EBIT margin stood at 1.4% (-160bp YoY).

Segment-wise order inflow and order book position

* All orders bagged in 3QFY21 were in the Consultancy segment, with domestic/overseas orders of INR1.8b/INR59m.

* OB for the Consultancy segment fell 8% YoY to INR42.4b, while that for the Turnkey segment declined 27% YoY to INR40.6b. Overseas orders constituted 28% of total Consultancy segment OB (INR11.9b).

Highlights from the management commentary:

* The management guided at Turnkey/Consultancy margins of 2-3%/25-27% based on current OB.

* In the Turnkey segment, ENGR is executing the Rajasthan refinery and HPCL projects, which were won at competitive prices. Hence, there are provisions being made for these projects, which led to lower margin YoY. Any reversal of provisions in the future could lead to higher margin.

* Lower other income was due to reduced interest rate on fixed deposits.

* ENGR expects INR1b of orders from Numaligarh refinery and some orders from the Kaveri basin in 4QFY21. Its FY22 order inflow target stands between INR15b and INR20b.

Valuation and view

We cut our FY22E/FY23E EPS estimate by 5% each. We forecast a revenue/EBITDA/PAT CAGR of -1%/24%/16% over FY21-23E. We expect a reversal in revenue mix in favor of the Consultancy segment to aid profitability over FY21-23E. We maintain a Buy with a TP of INR85 per share, assigning INR49 to its core business (10x FY22E core EPS) and INR36 for cash on its books.

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