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Revenue misses our estimate; order inflows robust

Sustenance of order inflows key to future outlook

* ENGR’s 2QFY22 revenue was 12% below our estimate, with the miss led by lower than expected revenue in the Consultancy segment. Operating profit came in line with our estimate, with a favorable revenue mix (54% share of Consultancy segment revenue) leading to higher than estimated EBITDA margin at 9.3% (est. 8.2%). Lower than expected other income led to adjusted PAT 15% below our estimates.

* Order inflows in 2Q/1HFY22 stood at INR11.7b/INR14.5b (+96%/+115% YoY), and ~30% higher v/s 1HFY20 levels, thereby indicating a revival in ordering activity in its key end-market of Oil and Gas. While Oil and Gas continues to remain a key end-market for ENGR, the management is exploring other endmarkets where its expertise can be implemented (Biofuels).

* Order book declined by 11% YoY to INR80.3b, with an order book-torevenue ratio at 2.8x – the lowest in the last four years. Owing to superior execution and lower than expected order inflows, a depleting order book remains a concern, though it is not alarming at this stage. We maintain our Buy rating with a TP of INR95/share (11x FY24 EPS).

Execution disappoints; profitability below our estimates

* 2QFY22 snapshot: Revenue stood at INR6.5b, down 5% YoY and 12% below our estimate. Two-year revenue CAGR stood at -5%. Lower operating leverage led to a 22% YoY decline in EBITDA to INR603m. EBITDA margin declined by 200bp YoY to 9.3%.

* Other income stood at INR284m (below our estimate of INR400m). PBT stood at INR832m, down 33% YoY and 11% below our estimate. The effective tax rate stood at 28.5% (v/s 25.3% YoY). Adjusted PAT stood at INR595m, down 36% YoY and 15% below our estimate.

* Segmental snapshot | Consultancy: Revenue stood flat YoY at INR3.5b in 2QFY22. PBIT declined by 150bp YoY to 25.5%. Order inflow stood at INR11.7b. Turnkey: Revenue fell 12% YoY to INR3b in 2QFY22. PBIT increased by 60bp YoY to 2.5%.

Segment-wise order inflow and order book position

* All orders bagged in 2QFY22 were in the Consultancy segment, with domestic/overseas orders of INR11.6b/INR48m. Order inflows in 1HFY22 stood at INR14.5b, up 30% v/s 1HFY20 levels.

* The order book for the Consultancy segment rose 20% YoY to INR53b, while that for the Turnkey segment declined by 40% to INR27.3b. Overseas orders constituted 12% of the total order book (INR9.6b).

Highlights from the management commentary:

* In the non-Oil and Gas space within the Consultancy segment, its decision to undertake new projects won’t solely be dependent on margin, but will be strategically evaluated on a case-to-case basis.

* ENGR aims to win ~INR18b worth of orders in 2HFY22.

Valuation and view

We maintain our earnings estimate and forecast a revenue/EBITDA/PAT CAGR of - 6%/14%/11% over FY21-24E. We expect a reversal in revenue mix in favor of the Consultancy segment to aid profitability over FY22-24E. We maintain our Buy rating with a TP of INR95 per share, assigning INR71 to its core business (11x FY24E core EPS) and INR24 for cash on its books.

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