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DOLAT CAPITAL

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August 8, 2014
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Engineers India
CMP: ` `` `` 274 Target Price: ` `` `` 380 Buy
BSE Sensex 25320
NSE Nifty 75,67
Scrip Details
Equity ` 1685mn
Face Value ` 5/-
Market Cap ` 92bn
USD 1.5bn
52 week High/Low ` 331 / 121
Avg. Volume (no) 381,183
BSE Code 532178
NSE Symbol ENGINERSIN
Bloomberg Code ENGR IN
Reuters Code ENGI.BO
Shareholding Pattern as on June14(%)
Promoter 69.37
MF/Banks/FIs 12.98
FIIs 8.55
Public / Others 9.10
Engineers India (EIL) annual report for FY14 highlights the companys efforts and successes in the international
markets. During the year, the company added new geographies/ clients in the international markets. Increasing
presence in the international markets insulates the company from the vagaries of capex cycle in India, in our
view. The company also highlights its initiatives and plans in the non-hydrocarbon segments. Key updates of
FY14 and the road ahead for the company is stated in our annual report analysis below. We maintain our
positive view on the company as we believe it to benefit from order flows both in domestic and international
markets. Recommend BUY on the stock with a target price of ` `` `` 380 per share.
Excerpts of MD&A
Step jump in the international business
During FY14, EILs intense focus on expanding its international business
met with considerable success. EIL was successful in expanding its footprints
in new geographies like Indonesia, Turkey, Angola and Nigeria. Upcoming
business opportunities for large scale projects are also envisaged in Algeria,
Oman and Bahrain.
Importantly, EILs efforts met considerable success as it was appointed as
Project Management Consultant for a 20 MMTPA Refinery and 600,000 TPA
Polypropylene plant in Nigeria. This order is to the tune of USD 139 mn and
would be booked in the order inflow for FY15E.
In Oman, EIL has been awarded PMC contract of USD 43 mn, for Liwa
Plastics Project of M/s ORPIC. The same will also be booked in FY15E. In
Bahrain, EIL has been pre qualified by M/s BAPCO for providing PMC services
for its refinery expansion project. EIL has bid for the project which is currently
under evaluation.
The Company strengthened its credentials in the fertilizer sector by securing
another prestigious PMC assignment this year for setting up a 1,900 TPD
Ammonia Plant for M/s PAU (Indonesia).
EIL has been successful in expanding its client base further with addition of
new clients in existing and diversified business segments. New overseas
clients added in the year were M/s PAU (Indonesia); M/s Gulf Petrochem
(Sharjah), M/s Sonangol (Angola), M/s PIC Kuwait and TPAO (Turkey).
EIL was successful in signing long term general engineering services
agreement with the M/s GASCO (UAE). Additionally, general engineering
services agreements with Equate (Kuwait) and BAPCO (Bahrain) were
extended for 2 years in FY14.
The recent bidding performance in large scale projects (viz. Dangote
Refi nery, ORPIC Petrochemi cal s and ensui ng BAPCO Proj ect) has
i ncreased EILs acceptabi l i ty i n the MENA regi on si gni fi cantl y. The
management i s hopeful to recei ve further i nqui ri es for l arge scal e
expansion projects from MENA region.
Financials
Year Net Sales % Growth EBIDTA OPM % PAT % Growth EPS(` `` ``) % Growth PER (x) ROANW(%) ROACE (%)
FY14 18,844 (23.2) 3,793 20.1 4,825 (23.8) 14.3 (23.8) 19.1 20.5 33.1
FY15E 20,242 7.4 4,453 22.0 5,280 9.4 15.7 9.4 17.5 20.6 33.3
FY16E 24,843 22.7 5,945 23.9 6,446 22.1 19.1 22.1 14.3 22.8 37.6
FY17E 28,733 15.7 6,953 24.2 7,271 12.8 21.6 12.8 12.7 23.2 37.6
Figures in ` mn
Sr. Analyst: Pawan Parakh Associate: Avinash Kumar
Tel : +9122 4096 9712 Tel: +9122 40969764
E-mail: pawanp@dolatcapital.com E-mail: avinashk@dolatcapital.com
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DOLAT CAPITAL
India Research
August 8, 2014 EIL
Domestic investments to pick up with stable government
FY14 was a muted year as domestic order flows declined 16.5% YoY to `
10.8bn. However, EIL is hopeful that with stable government at Centre, there will
be a renewed focus on revival of investment climate both in energy and
infrastructure sector.
The major consulting orders secured in the Refining sector include
1. Coke Chamber Replacement and Allied Modernization in Coker at Barauni
Refinery of IOCL
2. Licensor Selection & initial project activities for Rajasthan Refinery
3. Detailed Feasibility Report (DFR) for Numaligarh Refinery Expansion Project
4. DFR for Gujarat Refinery Expansion Project of IOCL.
In the Upstream and pipeline segment, EIL was awarded Consultancy Services
for:
1. Revamping of Unmanned Platform Phase-II for ONGC, Mumbai
2. Engineering assignments from Cairn Energy including Front End Engineering
Design for Sulphate Removal of Thumbli Saline Aquifer Water Project.
3. PMC services for Dahej LNG terminal Expansion from 10MTPA to 15 MTPA
for Petronet LNG.
4. The Company has also bagged PMC Services for Kochi-Coimbatore-Erode-
Salem LPG Pipeline Project and Irugur-Devangonthi Pipeline Project from
BPCL, Kochi.
Increasing focus on Non-hydrocarbon sectors
While majority of the order inflows received in FY14 were from hydrocarbon
sector, EIL is highly focused on sectors like Metallurgy, Fertilizers, Oil & gas
pipelines, Power (conventional & renewable), Water & waste management
sectors to support its long term growth plans.
EIL has received initial success (in terms of order flows) in these segments and
hopes to leverage on the same to bag larger projects going ahead. Few orders
in these segments include:
1. Detailed engineering assignment for Indogulf Fertilizer for their revamp project
of Ammonia and Urea plant at J agdishpur. EIL has also received PMC
contract for a large ammonia plant order from Indonesia as well.
2. EIL is executing a 103.5 MW captive cogeneration plant for BPCL and a
125 MW Solar Thermal plant for Reliance. The company has installed solar
PV systems at rooftops of three EIL owned buildings it plans to enter into
an SPV with other Oil majors for setting up similar solar power projects in
India.
3. In the water segment, EIL successfully executed work of Sardar Sarovar
Narmada Nigam Limited, Tertiary Treatment Reverse Osmosis Plant at
Chennai for CMWSSB and Interceptor Sewer Project for the abatement of
pollution in River Yamuna for Delhi J al Board.
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DOLAT CAPITAL
India Research
August 8, 2014 EIL
R&D focus continues
As at FY14, EILs patent portfolio has grown to 16 live patents and 13 pending
patent applications relating to various process technologies.
Despite decline in revenues in FY14, EILs focus on R&D continued. In FY14,
the company spent ` 209.3 mn on R&D which is an increase of 30% on a YoY
basis.
Financial Performance
Revenue and order book declines
EIL saw a consecutive year of decline in revenues for FY14. Revenue for the
year declined by 23% YoY to ` 18.8 bn. The decline in revenues was on expected
lines as weak investment cycle over last 2-3 years meant a steady decline in
EILs order book.
After witnessing a peak order book of ` 76 bn (as at FY11 end), EIL has witnessed
a consistent decline to ` 28 bn (as at FY14 end). Order inflow for FY14 declined
20% YoY to ` 11.5 bn.
The decline in revenues was visible in both segments (viz.PMC and LSTK).
While the PMC revenues declined marginally by 1% YoY to ` 11.7 bn, the LSTK
segment revenues declined sharply by 44% YoY to ` 7.1 bn.
Margins compressed but still healthy
EBITDA margins for FY14, though declined by ~400bps YoY, still stands healthy
at 20.1%.
Lower revenues and thereby negative operating leverage were the key reasons
for decline in EBITDA margins.
While contract expenses as % of LSTK sales increased ~1200bps to 95.9%;
employee expense as % of PMC sales increased 230bps YoY to 51.1%.
Exhibit 1: Operating cost components for EIL over the years
Source: Company, Dolat Research
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DOLAT CAPITAL
India Research
August 8, 2014 EIL
Higher other income aided by write backs
Other income for the year increased 6.2% YoY to ` 3.4 bn. It constituted ~48%
of the PBT for FY14.
During FY14, EIL had provision write backs of ` 1 bn (as against ` 699 mn for
FY13).
Interest income (on the back of C&CE of ~Rs24.8 bn) continued to be largest
component of other income at ` 1.8 bn.
Dupont analysis
RoE for FY14 stood at 19.6% (as against 25.8% in FY13). As can be seen in the
Dupont analysis in the table below, the dip was primarily due to lower asset turns.
While EBITDA margins declined, higher other income led to only 20bps YoY
compression in net margins. Revenue for FY14 declined 23% YoY leading to 870
bps decline in RoE.
Exhibit 2: Dupont Analysis
Dupont FY10 FY11 FY12 FY13 FY14
PAT margin 22.1% 19.8% 16.4% 25.8% 25.6%
Asset turns 1.78 1.84 2.11 1.10 0.77
Financial leverage 1.00 1.00 1.00 1.00 1.00
RoE 39.4% 36.4% 34.6% 28.3% 19.6%
Source: Company, Dolat Research
Consistent history of positive cash flow from operations
EIL generated cash flow from operations to the tune of ` 830 mn in FY14. On a
YoY basis, cash flow from operation has declined substantially by 2.6 bn, primarily
on account of fall in operating profits and higher contribution of other income. Despite
decline in revenues and margin contraction, the company has been able to generate
positive cash flows from operation, which we believe is highly commendable.
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DOLAT CAPITAL
India Research
August 8, 2014 EIL
Balance Sheet analysis
Sources of funds:
Government stake reduced to 69.4 % - This year the government divested its
stake in the EIL by 10% by a Follow-on Public offer (FPO). In addition, 1.03% of
equity capital of EIL was transferred to CPSE ETF. Consequently, the government
stake now stands reduced by 11.03% to 69.4%.
Dividend The company declared dividend of ` 6. 5 per share for FY14 (` 6.0 for
FY13). Historically EIL has maintained a dividend payout ratio of ~37%, but the
same has increased to ~53% for FY14.
Debt EIL continues to be a debt free company.
Capex For FY14, EIL did a capex of ~Rs780 mn primarily for its new office
buildings in Gurgaon, Navi Mumbai & Chennai.
Working capital EILs net working capital (ex-cash) as % of sales remained
stable at -28%. EIL continues to operate on negative working capital primarily on
account of substantial contribution of PMC business in the order book and execution.
Exhibit 3: PMC segment revenue and margin profile
Source: Company, Dolat Research
Exhibit 4: LSTK segment revenue and margin profile
Source: Company, Dolat Research
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DOLAT CAPITAL
India Research
August 8, 2014 EIL
Exhibit 5: Order book and order inflows
Source: Company, Dolat Research
Exhibit 6: Working capital as % of sales
Source: Company, Dolat Research
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DOLAT CAPITAL
India Research
August 8, 2014 EIL
INCOME STATEMENT ` `` `` mn
Particulars Mar14 Mar15E Mar16E Mar17E
Net Sales 18,844 20,242 24,843 28,733
Total Income 18,844 20,242 24,843 28,733
Total Expenditure 15,051 15,789 18,898 21,780
Raw Material 6,855 6,485 6,683 7,594
Employee Expenses 5,978 6,729 9,126 10,647
Other Expenses 2,218 2,574 3,090 3,539
Other Income 3,360 3,276 3,514 3,739
EBIDTA (Excl. Other Income) 3,793 4,453 5,945 6,953
EBIDTA (Incl. Other Income) 7,153 7,729 9,459 10,692
Gross Profit 7,153 7,729 9,459 10,692
Depreciation 145 186 250 305
Profit Before Tax & EO Items 7,008 7,543 9,209 10,387
Extra Ordinary Exps/(Income) (28) 0 0 0
Profit Before Tax 7,036 7,543 9,209 10,387
Tax 2,183 2,263 2,763 3,116
Net Profit 4,853 5,280 6,446 7,271
BALANCE SHEET
Particulars Mar14 Mar15E Mar16E Mar17E
Sources of Funds
Equity Capital 1,685 1,685 1,685 1,685
Other Reserves 22,933 25,073 27,986 31,332
Net Worth 24,618 26,757 29,671 33,016
Deferred Tax Liability (2,309) (3,754) (3,754) (3,754)
Total Capital Employed 22,309 23,003 25,917 29,262
Applications of Funds
Gross Block 2,724 4,042 5,042 6,042
Less: Accumulated Depreciation 1,545 1,731 1,981 2,286
Net Block 1,179 2,311 3,061 3,756
Capital Work in Progress 1,318 1,000 1,000 1,200
Invest ment s 7,366 7,366 7,366 7,366
Current Assets, Loans & Advances
Inventories 10 0 0 0
Sundry Debtors 3,431 2,496 3,063 3,542
Cash and Bank Balance 17,680 17,318 20,616 24,026
Loans and Advances 1,001 1,109 1,361 1,574
Other Current Assets 3,211 3,882 4,764 5,511
sub total 25,333 24,805 29,804 34,653
Less : Current Liabilities & Provisions
Current Liabilities 8,271 8,318 10,209 11,808
Provisions 4,615 4,159 5,105 5,904
sub total 12,887 12,478 15,314 17,712
Net Current Assets 12,446 12,327 14,490 16,941
Total Assets 22,309 23,003 25,917 29,262
E-estimates
IMPORTANT RATIOS
Particulars Mar14 Mar15E Mar16E Mar17E
(A) Measures of Performance (%)
Contribution Margin
EBIDTA Margin (excl. O.I.) 20.1 22.0 23.9 24.2
EBIDTA Margin (incl. O.I.) 38.0 38.2 38.1 37.2
Gross Profit Margin 38.0 38.2 38.1 37.2
Tax/PBT 31.0 30.0 30.0 30.0
Net Profit Margin 25.8 26.1 25.9 25.3
(B) As Percentage of Net Sales
Raw Material 36.4 32.0 26.9 26.4
Employee Expenses 31.7 33.2 36.7 37.1
Other Expenses 11.8 12.7 12.4 12.3
(C) Measures of Financial Status
Inventory Turnover Ratio (x) 1,875.4 0 0 0
Fixed Assets Turnover (x) 6.9 5.0 4.9 4.8
Working Capital Turnover (x) 1.5 1.6 1.7 1.7
Non Cash Working Capital (` Mn) (5,234) (4,991) (6,126) (7,085)
(D) Measures of Investment
EPS (`) (excl EO) 14.3 15.7 19.1 21.6
EPS (`) 14.2 15.7 19.1 21.6
CEPS (`) 14.8 16.2 19.9 22.5
DPS (`) 6.5 8.0 9.0 10.0
Dividend Payout (%) 45.6 51.1 47.0 46.3
Profit Ploughback (%) 54.4 48.9 53.0 53.7
Book Value (`) 73.1 79.4 88.1 98.0
RoANW (%) 20.5 20.6 22.8 23.2
RoACE (%) 33.1 33.3 37.6 37.6
RoAIC (%) (Excl Cash & Invest.) 228 146 168 197
(E) Valuation Ratios
CMP (`) 274 274 274 274
P/E (x) 19.1 17.5 14.3 12.7
Market Cap. (` Mn.) 92,321 92,321 92,321 92,321
MCap/ Sales (x) 4.9 4.6 3.7 3.2
EV (` Mn.) 74,640 75,003 71,705 68,295
EV/Sales (x) 4.0 3.7 2.9 2.4
EV/EBDITA (x) 19.7 16.8 12.1 9.8
P/BV (x) 3.8 3.5 3.1 2.8
Dividend Yield (%) 2.4 2.9 3.3 3.6
E-estimates
CASH FLOW
Particulars Mar14 Mar15E Mar16E Mar17E
Profit before tax 7,008 7,543 9,209 10,387
Depreciation & w.o. 145 186 250 305
Direct taxes paid (2,183) (2,263) (2,763) (3,116)
Chg. in Working Capital (1,629) (243) 1,135 959
Other 51 (1,445) (0) 0
(A) CF from Opt. Activities 3,392 3,778 7,830 8,535
Capex (751) (1,000) (1,000) (1,200)
Free Cash Flow 2,641 2,778 6,830 7,335
Inc./ (Dec.) in Investments (831) 0 0 0
(B) CF from Invt. Activities (1,582) (1,000) (1,000) (1,200)
Dividend Paid (Incl. Tax) (2,555) (3,140) (3,533) (3,925)
(C) CF from Financing (2,555) (3,140) (3,533) (3,925)
Net Change in Cash (745) (362) 3,298 3,410
Opening Cash balances 18,480 17,680 17,318 20,616
Closing Cash balances 17,680 17,318 20,616 24,026
E-estimates
DOLAT CAPITAL
This report contains a compilation of publicly available information, internally developed data and other sources believed to be reliable. While
all reasonable care has been taken to ensure that the facts stated are accurate and the opinion given are fair and reasonable, we do not take
any responsibility for inaccuracy or omission of any information and will not be liable for any loss or damage of any kind suffered by use of
or reliance placed upon this information. For Pvt. Circulation & Research Purpose only.
Dol at Dol at Dol at Dol at Dol at Capital Market Pvt. Ltd.
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Analyst Sector/Industry/Coverage E-mail Tel.+91-22-4096 9700
Amit Khurana, CFA Co-Head Equities and Head of Research amit@dolatcapital.com +91-22-40969745
Amit Purohit Consumer amitp@dolatcapital.com +91-22-40969724
Kunal Dalal Auto & Auto Ancillaries kunald@dolatcapital.com +91-22-40969749
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Pawan Parakh Capital Good pawanp@dolatcapital.com +91-22-40969712
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Abhishek Lodhiya Real Estate abhishekl@dolatcapital.com +91-22-40969753
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