Ambit - Engineers India - The Real Indian Engineers - 9dec2011

Engineering and Construction
December 09, 2011
Engineers India
Bloomberg: ENGR IN EQUITY Reuters: ENGI.NS
BUY
Accounting: AMBER Predictability: GREEN Earnings Momentum: AMBER INITIATING COVERAGE

Nitin Bhasin
Tel: +91 22 3043 3241 nitinbhasin@ambitcapital.com Chhavi Agarwal Tel: +91 22 3043 3203 chhaviagarwal@ambitcapital.com
The real Indian engineers

Amongst its Engineering & Construction (E&C) peers, EIL has an unmatched cash flow profile and RoEs (37%-40%). Specific, yet scalable, hydrocarbon engineering and project management skills, a large talent pool and Government ownership drive its competitiveness. Rising investments in the hydrocarbons sector by Government related companies (XIIth 5-year plan suggests 2x XIth plan investments) will fuel EILs growth. Whilst there can be near-term growth deceleration, the present valuations (12x FY13 core eps) do not reflect the firms competitiveness and its cash flow generating capability. Competitive positioning: STRONG Change to this position: POSITIVE The E&C sectors overhang has led to EILs stock price declining 37% over the past year despite revenue growth remaining strong (up 40% YoY in 1HFY12) and the firms business capabilities being robust. In an industry where companies are shedding strength with rising debt, we recommend EIL due to: Government sponsored enterprises to invest twice in the XIIth plan v/s the XIth plan: The cyclical nature of refinery and petchem investments can lead to a lack of orders for a brief period. But Government sponsored plans to increase their refinery capacity [by 60% (74mmtpa) by investing US$18bn in greenfield capacities and US$13bn in upgradations] will provide EIL with growth visibility over FY12-FY17. Further, greenfield petchem capex is expected to be closer to US$8bn. Slippage risks are low owing to Government support for energy PSUs and fewer procedural problems in expansions. Superlative capabilities with flexibility: EILs scalable hydrocarbon engineering/project management skills, extensive experience and Government ownership make its offerings flexible not only E&C services across the contracts spectrum (design to EPC) but also critical path projects, tweaking the usual EPC models (offering open book estimates, OBE) and entering into longterm relationships (MoUs, nominations) with energy PSUs. The cost-sensitive nature of large projects keeps the threat from the high-cost global majors low. Unrivalled CFOs and RoEs: Over FY08-FY11 EIL leveraged its rising investments by capturing a bigger share of hydrocarbon spend by taking up low EBITDA margin (10%-12%) high volume lumpsum turnkey (LSTK) jobs (144% CAGR) instead of high EBITDA margin (40%) low volume consulting jobs (22% revenue CAGR). Hence, op cashflows (CFO) rose and RoEs moved to 37%-40% from mid-teens earlier, overriding the declining EBITDA concerns. Valuations projecting near-term concerns into long-term? Despite a radically better CFO/RoE profile, EILs stock trades in line with peers. Paltry orders in FY12 and a growth deceleration beyond FY13 have led to a gradual derating. We do expect lower revenue growth over FY13-FY15, but believe EILs multiple should retrace lost ground as the refinery opportunity gets supplemented with fertilizer capex, thus addressing growth concerns. A higher investible float than many peers addresses low free float concerns.
Exhibit 1: Key financials
Y/E March (` mn) Operating Income EBITDA Net Profit (Adj) Adjusted EPS (`) ROE (%) P/E (x) FY09 15,529 3,243 3,497 10.4 27.0% 20.4 FY10 20,140 5,045 4,444 13.2 34.7% 16.1 FY11 28,482 6,694 5,339 16.0 40.8% 13.2 FY12E 37,535 7,988 6,581 19.5 39.5% 10.9 FY13E 45,769 8,809 7,426 22.0 37.2% 9.6
Recommendation
CMP: Target Price: Upside (%) EPS (FY12): Variance from consensus (%): `212 `290 37 `19.5 8
Stock Information
Mkt cap: 52-wk H/L: 3M ADV: Beta: BSE Sensex: Nifty: `71bn/US$1,381mn `352/203 `52mn/US$1.0mn 0.6x 16,488 4,944
Stock Performance (%)

1M Absolute Rel. to Sensex 3M 12M YTD -13.9 -16.6 -37.2 -36.4 -7.8 -12.6 -20.9 -16.8
Performance (%)
25,000 20,000 15,000 10,000 Dec-10 Apr-11 Aug-11
Sensex EIL LTD
450 350 250 150 Nov-11
EIL trading at a 24%/ 15% discount to its 3-yr / 5-yr averages (x)
36 27 18 9 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 (x)
1 yr fwd PE 3 yr avg.
5 yr avg.
Source: Company, Ambit Capital research Note: Financials pertain to standalone entity
Source: Bloomberg, Ambit Capital research
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Please refer to the Disclaimers at the end of this Report.
Engineers India
Company Financial Snapshot

Profit and Loss (consolidated)
Y/E March (` mn) Net sales Operating exp EBITDA Depreciation Interest Expenses PBT ex EO Tax Consolidated Adj. PAT Profit and Loss Ratios EBITDA Margin (%) Adj Net Margin (%) P/E (x) EV/EBITDA (x) Dividend Yield (%) 23.3% 18.7% 13.4 8.1 2.4% 21.3% 17.5% 10.9 6.0 3.7% 19.2% 16.2% 9.6 4.8 5.2% FY11 28,482 21,847 6,635 148 (1,225) 8,043 2,704 5,339 FY12E 37,535 29,547 7,988 167 (1,741) 9,750 3,169 6,581 FY13E 45,769 36,960 8,809 190 (2,153) 11,001 3,575 7,426
Company Background Engineers India (EIL) is a public sector unit (PSU) providing design, engineering, procurement, construction and integrated project management services mainly to the petrochemical and oil and gas refining sectors. Presently, the Government holds 80.4% equity after EIL completed a follow on public offering in 2010 raising `12bn by offering a 10% stake. EIL was started in 1965 and has more than four decades of experience in providing project consultancy and engineering services across the entire value chain of the hydrocarbon industry. Whilst the hydrocarbon segment accounts for ~90% of the order book, EIL also provides project management, third party inspection and quality assurance services in the infrastructure and fertilizers sectors. EIL has international operations in the MENA region. However, it presently forms less than 2% of the consolidated revenues.
Balance Sheet (consolidated)

Y/E March (` mn) Total Assets Fixed Assets Current Assets Other Assets Total Liabilities Total networth Current Liabilities / Provisions Balance Sheet Ratios ROE (%) RoCE (%) Net Debt/Equity (x) P/BV (x) 40.8% 32.9% (1.4) 4.8 39.5% 31.7% (1.6) 3.9 37.2% 29.2% (1.2) 3.3 FY11 14,899 852 27,224 6,889 14,899 14,899 20,067 FY12E 18,400 931 34,921 6,889 18,400 18,400 24,342 FY13E 21,481 1,066 43,398 6,889 21,481 21,481 29,872
Cash Flow (consolidated)

Y/E March (` mn) PBT Depreciation Tax Net Working Capital CF from Operating Activities Capital Expenditure CF from Investing Activities Dividend paid CF from Financing Activities Net change in cash Closing cash balance Free Cash Flow FY11 8,042 148 (2,710) 333 4,530 (151) (3,088) (1,347) 37 4,219 FY12E 9,750 167 (3,169) 893 5,659 (250) 1,733 (1,566) 5,825 5,409 FY13E 11,001 190 (3,575) 1,307 6,476 (325) 2,121 (3,080) 5,518 6,151
(1,347) (1,566) (3,080) 17,981 23,806 29,324
EILs growth has not led to any compromise on cash generation or its return profiles
Despite continuing earnings upgrades, EILs 1-year forward multiple has witnessed a de-rating
35 28 (x) (Rs) 30 24 18 12 6 0 Jun-07 Jun-08 Jun-09 Jun-10 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Jun-11 Dec-11
8 6 4 2 -
Rs bn
120% 90% 60% 30% 0%
21 14 7 0
FY07
CFO
FY08
FY09
FY10
FY11
FCFF RoE (RHS)
Revenue growth (RHS)

Source: Ambit Capital Research, Company
1-yr. fwd. P/E
1-yr fwd. Rolling EPS (RHS)
Source: Ambit Capital Research, Bloomberg
Ambit Capital Pvt Ltd
Engineers India
EILs Background
Exhibit 12: Segmental overview of EIL
Segments Scope of work Revenue share (%) FY2010 Project designing and engineering services, mainly in the petrochemical and oil & gas sectors. Preparation of feasibility reports, concept designs, process technologies and front-end engineering designing (FEED). Also provides specialist services such as environmental engineering, specialist materials, maintenance services etc. Offers turnkey project management solutions, which includes all services ranging from the product designing stage to the project commissioning stage. In addition to the services provided in the consulting and engineering segment, EIL provides procurement, supply chain management, cost engineering, planning and scheduling construction management, and project commissioning services FY2011 FY2011 (%) Rev EBIT growth margin
Consultancy and Engineering segment
53
40
44
Lumpsum turnkey (LSTK) contracts
47
60
81
12
Total (%)
Source: Ambit Capital research, Company
41
25
Exhibit 3: Whilst EBITDA and PAT margins have dropped with the rising share of the LSTK segment
30 24 18 12 6 FY06 FY07 FY08 FY09 FY10 FY11 Consultancy revenues EBITDA margin (RHS)
Rs bn
Exhibit 4: CFO, FCF and RoCEs have remained high
30% 24% 18% 12% 6% 0% LSTK revenues PAT margin (RHS)
8 6 4 2 -
Rs bn
35% 28% 21% 14% 7% 0%
FY07
FY08
CFO
FY09
FCFF
FY10
FY11
RoCE (RHS)
Source: Ambit Capital research, Company, Note: We have taken consolidated financials for our analysis
Source: Ambit Capital research, Company, Note: We have taken consolidated financials for our analysis
Engineers India
Exhibit 5: EILs SWOT analysis
Strengths Weaknesses
Leading Indian hydrocarbon-focused E&C player providing project

consultancy and project management services to Indian oil majors
The increasing revenue share of the low-margin LSTK segment is

lowering the overall EBITDA margin; EBITDA margin declined to 20.9% in 1HFY12 (1HFY11: 24.3%)
The largest pool of experienced project engineers in India with
extensive domain knowledge across the entire hydrocarbon value chain an asset-light business model has led to significant improvement in the working capital and gross block turnover ratios over FY08-FY11 (FY11: 7.4x and 14.9x, respectively from FY08: 1.1x and 4.9x, respectively) `22bn at end of 1HFY12) provides strength to capitalize on longterm opportunities by entering new markets or by acquiring niche capabilities
Relatively weak player in the Middle Eastern countries (such as

Oman, Bahrain, Kuwait, Abu Dhabi etc) in comparison with other large international players like Bechtel, Tecnimont, Linde Engineering, Uhde Engineering etc. of the orders are from PSUs
High revenue growth (56% CAGR over FY08-FY11), coupled with
Highly dependent on PSUs for order flow growth, as more than 90% Despite high revenue growth, CFO and FCF have declined from the
peak of FY09 due to marginal increase in working capital
Debt-free and cash-rich balance sheet (cash and investments of
Excessive dependence on the hydrocarbon sector for the order flow

and revenue growth, as it accounts for ~90% of the current order book of `63bn
Opportunities
Threats
In the XIIth 5-Year Plan, oil refineries plan to invest `1.5 trillion for
capacity expansion and modernization of existing facilities. 90% of such capex is expected to be incurred by the PSUs, where EIL has strong relationships diversifying into new and high growth verticals such as water treatment, city gas distribution and renewable energy
Increasing competition both from Indian players such as L&T, Punj
Lloyd and international players such as Tecnimont (Italian), Foster Wheeler (US), Uhde GmbH (Germany) in the LSTK segment can adversely impact EILs order flow growth. At the end of 1HFY12, order book declined to `63bn (FY11 end: `75bn) due to lack of any sizable Government orders in 1HFY12
Replicate engineering expertise in the existing domains by
Postponement of capex plans by the PSUs in the hydrocarbon sector
Expansion of the overseas operations (mainly in Middle East North
Africa) with relatively cheaper manpower from India can boost EILs international order flow and revenue growth Indian oil and gas majors such as ONGCs investments in Latin America
Participate in the E&C opportunities in the international projects of
Exhibit 6: Porters analysis of the Indian Hydrocarbon EPC industry

Bargaining power of suppliers MEDIUM Raw material suppliers for the LSTK projects are present in abundance; therefore, they have low bargaining power. There is a shortage of skilled and experienced project engineers in the hydrocarbons space in India. Hence such engineers have higher bargaining power. Competition HIGH Limited competition in project engineering consultancy segment the and Bargaining power of buyers MEDIUM Petrochemical and oil and gas companies in the public/ private sectors are the key clients. Preferred bidder status of EIL for the centre/state owned large oil and gas companies keeps the bargaining power of customers medium. In India, there are few consultancy companies (such as EIL) which are present across the hydrocarbons value chain.
Competition is high in the LSTK segment as 10-11 players (domestic/international) bid for LSTK project Whilst there are only two domestic players (L&T and Punj Lloyd) a large number of international players bid for the LSTK project. International players further subcontract the packaged LSTK contract to smaller contractors
Barriers to entry
HIGH Technical engineering capabilities and extensive domain knowledge in the hydrocarbon value chain are the biggest entry barriers for new entrants. Trained project engineers with significant experience in domain such as offshore , refinery and petchem are another entry barriers.
Threat of substitution
LOW Unchanged Improving Deteriorating Once the consultancy contract is awarded, there is no threat of substitution. However, the LSTK contracts could be sub-divided into smaller contracts and subsequently awarded to various contractors.
Source: Ambit Capital research, Industry
Engineers India
The hydrocarbon opportunity remains big

The cyclical nature of refinery and petchem investments can lead to a lack of orders for a brief period. However, Government sponsored plans to increase refinery capacity by 33% (50mmtpa) by investing US$18bn in greenfield capacities and US$13bn in upgradations provide EIL with growth visibility over FY12-FY17. Further, greenfield petchem capex XIIth 5-Year Plan is expected to be closer to US$8bn. Slippage risks are low due to intensive Government support to energy PSUs and lower procedural problem in expansions. Strengthening and deepening of capabilities in segments like infrastructure and fertilizer will provide additional growth impetus.
LSTK refers to fixed lumpsum payment for the EPC contract where scope of work includes from the start-up of the facility to a level of operational status.
Historical revenue growth was driven by investments in the refining and petrochemical segments
EIL is one of the few Indian project management companies, which is present across the entire value chain in the hydrocarbon space. Historically, the hydrocarbon sector has accounted for more than 95% of EILs order book, with the refining and petrochemical segments forming ~65%-70% of the entire order book. Over FY07-FY11, increasing investments in the hydrocarbon industry, mainly in the petrochemical and refining segments, drove the order flow and revenue growth for the company. Over FY07-FY11, whilst the refining and petchem capex grew at a CAGR of 31% and 7% respectively, EILs overall revenue grew at a CAGR of 45% driven by large contracts received in the LSTK segment. However, the cyclical nature of refinery and petchem investments can lead to lack of orders for a brief period of time, as seen in FY08 and FY10 and possibly in FY12.
Exhibit 8: However, the cyclical nature of these investments leads to cyclical order flow, mainly in the LSTK segment
50 40 30 20 10 FY07 FY08 FY09 FY10 FY11 1HFY12
LSTK order flow (Rs bn)
Exhibit 7: EILs revenues are driven by PSUs capex in the refining and petchem segments (` bn)
300 250 200 150 100 50 FY07 FY08 FY09 FY10 FY11
Refining c apex (LHS) EIL revenues (RHS)
30 25 20 15 10 5 Petchem capex(LHS)
Total order flow (Rs bn)
Source: Ambit Capital research, Company, Ministry of Petroleum and Natural Gas; Notes: (a) We have included investments by IOCL, HPCL, BPCL, CPCL, MRPL and GAIL for our analysis (b) For FY10 and FY11, petrochemical and refinery capex are estimated figures and actual capex can be higher than estimates
. which continue to offer significant opportunities over FY12E-17E

In the XIIth 5-Year Plan (FY12-FY17), PSU refineries plan to invest `882bn (US$18bn) for refining capacity augmentation and another `662bn (US$13bn) for revamping their existing facilities, laying onshore pipelines, setting up storage terminals and other allied activity. Similarly, in the petrochemical segment, PSUs are indicating an investment of ~`415bn (~US$8bn) over the next 4-5 years for the greenfield projects (capacity expansions).
Engineers India
Exhibit 9: Huge capex plans of the oil and gas refining PSUs for the next 10 years
1,800 1,500 1,200 900 600 300 XIth five year plan XIIth five year plan XIIIth five year (FY07-12) (FY12-17) plan (FY17-22) 573 882 1,198 662
Rs bn
Exhibit 10: 90% of the order book is dependent on the investments in the hydrocarbon sector
Fertilizers, 4% Infra, 4% Storage/ terminals, 28% O&G processing, 3% Refineries, 12%
Petrochemical, 31%
Pipelines, 17%
Source: Ambit Capital research, Company Notes (a) XIth plan capex plans shows total opportunity (refining and others) (b) XIIIth plan capex shows only projected investments in Greenfield projects (b) XIIIth plan capex is calculated as: projected capacity addition by PSUs*capex expected to be incurred for 1MMTPA capacity addition in XIIth plan * inflation @5%
The LSTK opportunity over FY12-17 for EIL will emerge from (i) 100% of the investments in the petchem and refinery capacity augmentation; and (ii) 20% of the investments in the refinery revamping. The balance 80% of the spend on Upgradation/pipelines/storage will provide consultancy opportunity which is typically 7% of the total project/ capex spend. We do not have data for the petchem capex apart from the Greenfield spend data shared by respective companies. We believe that the combined investments imply a ~`1.5tn opportunity for EIL over the next five years. However, we highlight that until FY14, EILs revenue growth will be mainly driven by refining capex, as investments in the petchem segment are cyclical in nature and the major investments for greenfield projects are expected from CY13 onwards.
Exhibit 11: Refining and Petrochemical segments offer a huge opportunity in 12th Five Year Plan (FY12E-17E)
Particulars Refinery Planned investments (` bn) (FY12-17) % of inv. as revenue potential for EILs LSTK segment % of inv. as revenue potential for EILs Consultancy segment Best-case revenue potential Petrochemical Planned investments (` bn) (FY12-16) % of inv. revenue potential for EILs LSTK segment % of invst. as revenue potential for EILs Consultancy segment Best-case revenue potential Best case potential from refineries and petchem for EIL EIL's competitive strength LSTK Consultancy Competitive intensity LSTK Consultancy High Low Moderate High High High Moderate High 415 100% 7% LSTK: 100% 415 415 29 415 1,466 882 100% 7% LSTK: 100% 662 20% 7% LSTK: 20% +Consultancy: 7% on the bal. inv. (80%) 1,544 1,014 108 1,051 Greenfield/ Grassroots projects Upgradation /pipelines/storage Total (` bn)
Source: Ambit Capital research, Company, Industry, Ministry of Petroleum and Natural Gas Notes (a) For refinery segment, we have taken planned investments by IOCL, HPCL, BPCL, CPCL, MRPL and GAIL (b) For petrochemical segment, we have taken planned expansion investments by OPaL, IOCL(Paradip), GAIL (Pata), Assam Cracker.(c) LSTK and Consultancy opportunities are mutually exclusive in nature.
Engineers India
Exhibit 12: CFO & debt have funded refining/petchem capex of PSU's
200 150 100 50 MRPL BPCL HPCL IOCL CFO (F10, FY11) Capex ( FY10, FY11) (Rs bn)
Capex plans of refining PSUs have Government support

Despite their not so abundant cash flow generation, refineries have developed, financed and are implementing ambitious capital investment programmes. This is because the Government demonstrates a willingness to support refineries as instruments of public policy. Refineries are considered as vehicles of the Government to provide affordable energy to serve the public purpose and develop India into a major exporter of petroleum products. The explicit guarantee by the Government that refineries will be kept solvent and profitable over time helps these refineries whilst raising capital. Therefore, despite their low cash flows, refineries continue to incur substantial capex.
Source: Ambit Capital research, Company Note: We have added the consolidated data for last two years for IOCL, HPCL and IOCL, and stand-alone data for MRPL.
Relatively smaller, but fast additional impetus to growth
growing
segments
can
provide
Other than hydrocarbons EIL also provides consultancy and engineering services in the infrastructure and fertilizer sectors, which together account for ~8% of the total order book: 1. In the infrastructure sector, EIL undertakes project consultancy jobs in the niche segments which require extensive designing and engineering solutions. EIL is mainly foraying into: Water/Waste water treatment segment: EIL is presently executing the sewer project for abatement of pollution in the river Yamuna for the Delhi Jal Board (order size: `1.5bn) and is considering to provide project consulting services for large desalination projects. Further, it is also looking to enter into PPP contracts for providing operations and maintenance services for the existing water/waste water treatment projects. City gas distribution (CGD): EIL also plans to undertake strategic city gas distribution projects by operating the city gas pipeline networks on a PPP basis. In this regard, EIL has already signed a memorandum of understanding (MoU) with Gujarat State Petroleum Corporation (GSPC) and is participating in the new projects expected to be awarded by the Petroleum and Natural Gas Regulatory Board (PNGRB). Energy efficient buildings: EIL is also exploring project consultancy opportunities for modernization of Government buildings, educational institutions and airports, in order to make them more energy efficient. 2. In the fertilizer sector, EIL is a relatively smaller player and is developing pre-qualification strengths (in terms of experience) by taking up select consultancy contracts. EIL is aggressively looking for opportunities in this segment and is considering partnerships with companies such as National Fertilizers Ltd for taking up LSTK projects in this sector. In the XIIth Five Year Plan, large investments are planned for capacity augmentation for various fertilizers such as urea, ammonia and phosphate. Whilst the concerns regarding the policy on gas pricing and the uncertainty over gas availability have limited large-scale investments in this sector, nutrient based subsidy mechanism introduced by the Government in CY10 is a positive step and will create investment opportunities in the fertilizer sector. Under this mechanism, market forces would determine the fertilizer prices and there will be greater incentive for fertilizer companies to invest in the sector.
Engineers India
EIL has superlative capabilities with flexibility

In the Engineering, Procurement, and Construction (EPC) contracts, the contractor executes the turnkey project and provides services ranging from the product designing stage to the project commissioning stage.
EILs scalable hydrocarbon engineering/project management skills, extensive experience pool and Government ownership make it flexible in terms of not only offering E&C services across the contracts spectrum (design to EPCM to EPC/LSTK) but also enables it to take up critical path projects, tweak the usual EPC models (offering Open Book Estimates) and enter into long-term relationships (MoUs, nominations) with energy PSUs. Cost-dependent awarding of large projects keeps the threat from the high-cost global majors at a low.
I. Presence across the entire hydrocarbon value chain

In the Engineering, Procurement, and Construction Management (EPCM) contracts, the contractor manages the complete project on behalf of the client and ensures that the whole project is completed as required and in time.
Expertise in offering the entire spectrum of services, ranging from project conceptualization to commissioning, in the hydrocarbon space, makes EIL the preferred choice amongst PSU clients. EIL has a track record of executing large and complex projects in the hydrocarbon space and has developed technical expertise to offer customized engineering solutions to clients. The company has developed 30 process technologies in the oil and gas sector and has secured patents for 12 such process technologies (patent for 16 technologies awaited).
Exhibit 13: EIL is present across the entire hydrocarbon value chain
Segment EIL's scope of activities Offshore platforms Oil and Gas Infra Petro Offshore/ Storage and chemical onshore Refinery Pipelines and Fertilizer processing terminal
Consultancy and Engineering Conceptual designing, Front-end engineering designing (FEED), preparation Process design of detailed project feasibility report (DFR), services preparing process technologies for application across sectors. Raw material management, contract Procurement management, purchase, expediting, services inspection and logistics Services such as piping, mechanical engineering, electrical and control systems, Engineering services civil engineering, structural and architectural engineering. Safety audit of onshore/offshore oil and Certification gas facilities, third party inspections mainly services done through 100% subsidiary Certification India Ltd. Warehouse management, quality control, Construction health safety, undertakes total management responsibility from soil survey to mechanical completion. Lumpsum turnkey (LSTK)/project segment Developing project execution plans, detailed plans, progress tracking and EPC services reporting, integration of the engineering, procurement logistics, construction, logistic, construction and commissioning works. Commissioning Project testing, conducting performance services guarantees etc.
Engineers India
Competitive landscape of the Indian hydrocarbon industry

Extensive domain knowledge, clear understanding of process technologies, track record of executing complex oil and gas projects and a team of experienced project engineers at the project site are the pre-requisites for winning hydrocarbon EPC contracts in India. Therefore, only a few domestic players with specialized expertise in the hydrocarbon sector and few large international companies (with decades of EPC experience and a global presence) are present in the Indian hydrocarbon industry. International players have either acquired or formed JVs the small Indian hydrocarbon consultancy/EPC firms and their Indian offices are primarily used as support offices for servicing their international arms. However, some international players such as Toyo Engineering, Linde Engineering, and Uhde Engineering have operations in India as well. The table below highlights the main Indian and international players in the Indian hydrocarbon EPC industry.
Exhibit 14: Key players in the Indian hydrocarbon EPC industry
Country of incorporation Services offered by the parent company globally Consultancy and LSTK/EPC Engineering Oil & Gas Pet chem Infra Oil & Gas Pet chem Infra Presence in India Key clients in India Global support office NA NA NA NA Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes India as a source of business NA Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No No No Yes Yes Yes IOCL, ONGC, HPCL etc GAIL, IOCL, Reliance etc GAIL, IOCL, GSPL etc HPCL MRPL, Reliance, Petronet ISPRL OPaL, NFL, IOCL Reliance, IOCL, BPCL, Essar ONGC, Petronet LNG, GSPC, Petronet, IOCL HPCL, IOCL Reliance Industries OPaL, Nagarjuna Fertilizers IOCL NA NA NA NHAI and other private companies ONGC, GAIL Essar
Companies
Domestic players EIL L&T Punj Lloyd Process System Eng. International players Toyo Engg. India Linde India Tecnimont ICB Uhde India Foster Wheeler India Mott MacDonald Jacobs India Bechtel India Samsung Eng India Pyramid consultancy Worley Parsons India Saipem India projects Fluor India SNC Lavalin Shaw Group CB&I Japan Germany Italy Germany US US US UK S. Korea Russia Australia Italy US Canada US US X X X X X X X X X X X X X India India India India X X X X
Source: Ambit Capital research, Company, Company websites, press articles, industry
Engineers India
EIL is ahead of its peers in India

We assess the competitive positioning of EIL, both for project consultancy and LSTK segments. Hydrocarbon sector constitutes 92% of the order book and the other two sectors (infrastructure and fertilizers) together account for less than ~8% of the current order book, thus we assess EILs competitive positioning in the hydrocarbon sector only. Our analysis and discussions with EILs clients, competition and consultants suggest that, in hydrocarbon E&C industry, EIL is a very strong player both in project consultancy as well as in LSTK segments. Moreover, we highlight that due to competition with limited competitive offerings, it has a leadership position in hydrocarbon consultancy segment.
Leadership position in the hydrocarbon project consultancy segment

EIL has more than four decades of experience in providing project designing and engineering services in the hydrocarbon industry (mainly refinery and petrochemical sectors) and has a technical staff of more than 3,000 engineers which give the company an edge over others (both Indian and international players). Competition from other two large domestic players is limited as L&TValdel execute mostly upstream projects only (EIL is present mainly in midstream and downstream) and PL Engineering is a very small player which compared to EIL and lacks the bandwidth to bid for complex jobs. On the other hand, whilst a large number of international players are present in India, the cost of operations for international players is more than twice that for domestic players, due to higher staff costs. Given that consultancy projects are small ticket-sized (`0.5bn-`1.0bn) contracts, international players do not find it profitable to bid for standalone project consultancy jobs.
Strong position in the hydrocarbon LSTK segment

Competition is relatively higher in the LSTK segment, especially from international players such as Samsung Engineering, Saipem India, Linde Engineering, Toyo Engineering etc. As the LSTK projects in hydrocarbon industry are large ticket-sized contracts (`2.5bn-`20bn), international players are more interested in bidding for LSTK jobs. However, EILs experience of executing large grassroots projects (both in the refinery and petrochemical segments) in India and the preferred contractor status (that the Government gives EIL in PSU contracts), places it ahead of peers in the LSTK segment. Whilst some civil companies such as Simplex and Patel Engineering want to execute LSTK contracts in the hydrocarbon sector, these companies are at most confined to sub-contractor works in storage or pipelines for mechanical/structural works.
Exhibit 15: EIL's competitive positioning across sectors
Key players in Segments Hydrocarbon India: EIL, L&T Valdel (upstream), PL Engineering Subsidiaries of international players like: Toyo Engineering (Japan), Tecnimont (Italy), Uhde GmbH (Germany), Foster Wheeler, Mott Macdonald (US), India: EIL, L&T, Punj Lloyd Subsidiaries of international players like: Saipem (Italy), Samsung Engineering (South Korea), Linde Engineering Infrastructure Construction companies either have their own designing teams or they partner with other international consulting companies Construction companies such as L&T, IVRCL, NCC, Gammon India, Punj Lloyd, Simplex etc. International players like HOCHTIEF, Leighton, Vinci and other Malaysian players Fertilizers EIL's competitive positioning Hydrocarbon Infrastructure Fertilizers
Consultancy and Engineering
India: EIL, Patel Entreprises, HDO Promantec Consultants Very etc. International Strong players: KBR (US), Uhde GmbH (Germany), Tecnimont (Italy) etc. India: HDO, L&T, etc. International players: KBR (US), Uhde Strong GmBH(Germany), Tecnimont (Italy) etc. 92%
Moderate
Low
LSTK/EPC
Low
Low
% share of EIL's order book Source: Ambit Capital research, Company, industry participants
4%
4%
10
Engineers India
Materially stronger in the greenfield/grassroots projects

We highlight that EIL, with its competitive strengths particularly in the greenfield/grassroots projects is well established to capitalize on the refining and petchem opportunities. EIL has the experience of executing eight greenfield refinery projects, from the conceptual stage to the commissioning stage, and of establishing seven out of eight mega-petrochemical complexes in India. EIL has also worked on the modernization and revamping of 49 refinery projects in India.
Exhibit 16: EIL is a strong player for large-ticket sized, complex greenfield projects in the hydrocarbon industry
Particulars LSTK/EPC projects Greenfield refineries Refinery modernization Refinery shut down Refinery storage and terminal Greenfield petrochemical Petrochemical modernization Engineering and consultancy projects Offshore platforms Onshore processing Water/waste water treatment Fertilizers Metals and metallurgy Government and institutional buildings City gas distribution (CGD) Refinery storage and terminal Petrochemical modernization Refinery modernization Large Large Few Very few Few Large Few Few Large Large Small Medium Medium Small Small Medium Large Small Small Small Moderate Moderate High Moderate High High Low Moderate Moderate Moderate International International Domestic/International Domestic Domestic Domestic Domestic International International International Medium High Medium Medium Medium Medium High Moderate Moderate Moderate High High Low Low Medium Medium Low Moderate High High Few Large Few Moderate Very few Few Very large Medium Small Small Very large Large High Moderate Low High Moderate Moderate Domestic/ International Domestic/ International Mostly domestic Domestic/ International International Domestic/ International Very High High Moderate Moderate Very High High Very High High High Moderate Very High High Project No. of jobs Size Intensity Competition Key players Complexity EIL's strengths
Source: Ambit Capital research, Company, Industry
However, EIL is a small player in the international markets Despite having international operations for more than three decades, the international business account for less than 2% of EILs consolidated revenues. EIL entered the international market in 1975 and has operations in Middle Eastern countries like Kuwait, Abu Dhabi, Oman, etc. However, compared to international players like Bechtel, Technip, Foster Wheeler, etc., EIL is a smaller player as it does not have large offices in the international markets with requisite number of technical engineers, and this a requirement to bid for large projects in the international markets. However, EIL is now focusing on its international business and is exploring opportunities in existing geographies (Middle Eastern countries) and newer geographies (such as China and Singapore). As the scale of international contracts in the hydrocarbon space is more than twice that of contracts in India, even winning a few large projects from the international markets can significantly drive EILs order flow and revenue growth. The company in the past has done design and EPC jobs in Abu Dhabi for National Petroleum Construction Company and Abu Dhabi company for processing station and onshore oil operations, respectively. For participating in Middle Eastern opportunities, EIL may look at forming JVs with local construction companies who may be short of required hydrocarbon E&C skills. EIL has also taken up consulting jobs from ONGC in latters recent foray in Latin America and EIL will continue to be part of projects planned by Indian national energy companies in their international forays.
11
Engineers India
II. Talented and experienced employee base

The pool of technically qualified and experienced engineers in India is EILs key competitive strength compared with the other domestic and international players. Our discussions with industry experts highlight that hydrocarbon project management jobs require specialized and intensive engineering skills which are developed by an engineer with industry experience over a period of 8-10 years. EIL presently, has a large base of 3,417 employees, with ~82% of the employees being technically qualified engineers with more than 10-15 years of industry experience. In comparison, international players have an employee base of only 800-1,000 engineers in India and depute engineers in India from the overseas offices for specific projects; this can be very expensive. We note this provides an edge to EIL for wining large Greenfield/Grassroot projects.
Low attrition levels

EIL has successfully maintained a low attrition rate ~2.0%-2.5% over the last 10 years, as the company has incorporated attractive policies for employee recruitment, training and retention:
Civil and mechanical engineers are recruited annually from the top 5-6 engineering colleges in India and are imparted extensive industry training for developing technical and cross-functional skills. Incentive programs like performance-linked variable pay structure, profit sharing programs (5% of the net profit is distributed to employees) to employees at specific levels and above, lucrative retirement benefit plans etc. are followed for retaining employees at the middle and senior management levels. Moreover, external factors such as limited number of attractive job opportunities within Indian hydrocarbon industry, lack of willingness from employees to move to Middle Eastern countries due to personal/ family issues have also helped EIL to maintain low attrition levels.
Higher value addition per employee compared to peers

Over FY08-FY11, relatively higher revenues and EBITDA growth in comparison with employee growth have led to a significant improvement in EILs per employee metrics. EILs revenue per employee has improved significantly over FY08-FY11 and is, presently, comparable with international peers like Technip and Worley Parsons. EIL, in FY11, has the highest EBITDA per employee amongst all its peers.
Exhibit 17: EILs revenue per employee and EBITDA per employee have significantly improved over FY08-FY11 and is now comparable with international peers (US$000)
Revenue per employee Company Fluor ** Foster Wheeler ** L&T * Jacobs *** Saipem ** Worley Parsons**** EIL Ltd * Technip ** CY07/ FY08 405 369 203 257 471 143 60 566 CY08/ FY09 530 465 239 295 483 180 111 475 CY09/ FY10 608 376 249 258 469 157 136 425 CY10 /FY11 531 336 254 227 479 174 185 389 CY07/ FY08 18 39 25 16 57 17 14 31 EBITDA per employee CY08 /FY09 28 45 29 18 69 20 24 51 CY09/ FY10 36 38 39 13 73 14 34 55 CY10/ FY11 19 29 39 13 79 17 43 49 Costs per employee CY09/ FY10 NA NA 18 NA 68 54 33 NA CY10/ FY11 NA NA 19 NA 70 61 34 NA
Source: Ambit Capital research, Company, Bloomberg Notes (a) We have taken consolidated data for our analysis(b)* Year ending March,** year ending December,***year ending September,****year ending June. (b) We have taken 1US$=Rs45 average exchange rate for EIL and L&T, 1EURO=1.65US$ for Technip and Saipem for our analysis
12
Engineers India
III. Multiple relationship modes with PSUs

Unlike other Engineering and Construction companies, which can only win a contract through competitive bidding, EIL has a significant advantage on account of being a public sector enterprise. It receives orders from the PSUs through the following three mechanisms: 1. Nomination by the Ministry of Petroleum and Natural Gas, for PSUs hydrocarbon projects; 2. Negotiated settlement basis where the company has signed a MoU with the PSUs for their
3. Competitive bidding basis where EIL is the lowest bidder and competes with both national and international players, Contracts won through nomination and negotiated settlements strengthen EILs pre-qualification strengths (in terms of experience). EIL receives 25-30% on a competitive bidding basis and the balance of the contracts on negotiated settlement basis or on account of nomination basis. The experience, capabilities and the flexibility offered by EIL to large PSUs is the prime reason PSUs do not go for competitive bidding. Secondly, specialized jobs/critical path jobs require fast execution and specific experience which may not be available with many other consultants.
IV. The OBE model helps EIL win large contracts

In FY2007, EIL introduced the open book estimate (OBE) contract model which provides a provision to convert a consultancy contract to an LSTK contract. Under such contracts, clients can work with EILs EPC partner early in the scoping/designing phase, and progressively firm up the lumpsum turnkey contract. This model is beneficial for both clients as well as EIL owing to there being no hidden costs and greater flexibility and a shorter execution cycle compared with the earlier LSTK model. OBE contracts ensure control over the time and expenses of the project and increases the certainty of outcome. Moreover, lower capital requirements enable EIL to earn higher RoCEs under this model. In FY11, EIL had won three large contracts worth `31.5bn (42% of the order book at the end of FY11) through the open book estimate (OBE) route.
V. Low cost of operations compared to global peers

In India, EPC projects are mainly awarded to the lowest bidder and Indian players have an advantage over the global players, as their operational costs are lower than those of international peers. For the LSTK projects in the hydrocarbon sector, whilst the difference between the bid submitted by EIL and L&T is ~5%-7%, the difference between the bid submitted by EIL and international players (such as Technimont, Uhde India etc.) is as high as 30%-100%. This is because international players do not have a large operational base in India and they have to reallocate their international resources (manpower) to India for executing large projects. This result in higher operating costs for international players compared with Indian players. Therefore, cost-dependent awarding of large projects gives an edge to Indian players like EIL and L&T versus the global players.
13
Engineers India
Business strengths visible in unrivalled CFOs and RoEs

Over FY08-FY11, EIL leveraged Indias rising investments in refineries/petchem by capturing a bigger share of the spend by taking up low EBITDA margin (10%-12%) high volume lumpsum turnkey (LSTK) jobs (144% CAGR) instead of high EBITDA margin (40%) low volume consulting jobs (22% revenue CAGR). Hence, EILs CFOs have grown quickly and RoEs moved to 37%-40% from mid-teens earlier, overriding the declining EBITDA concerns. High cash holdings (`21bn) provide working capital flexibility to ward off the competition threat in LSTK jobs.
Growth was driven by the LSTK segment over FY08-FY11

Exhibit 18: Over FY08-FY11, high revenue growth in LSTK segment drives over growth .
120% 80% 40% 0% FY07 -40%
LSTK rev.share LSTK revenue gr. (RHS)
Exhibit 19: however EBIT margin for LSTK jobs is significantly lower than consultancy projects
50% 40% 30%
120% 80% 40% 0% FY08 FY09 FY10 FY11 -40%

Consultancy rev. share Overall revenue gr. (RHS)
20% 10% 0% FY07 FY08 FY09 FY10 FY11
LSTK EBIT margin
Consultancy EBIT margin
However, the cash flows and returns have increased significantly

Exhibit 20: Over FY08-FY11, cash flows also got much larger
6,000 4,500 3,000 1,500 FY06 FY07 FY08 FY09 FY10 FY11
CFO (Rs mn) Net debt/equity (x) (RHS) FCF (Rs mn)
Exhibit 21: and return ratios moved to 37%-40% from mid-teens

45% 36% 27% 18%
(0.5) (1.0) (1.5) (2.0)
9% 0% FY07 FY08 FY09 RoEs

FY10 RoCEs
FY11
14
Engineers India
Superior financial international peers
performance
compared
to
domestic
and
Whilst EIL is a relatively small player compared with other large domestic and international players (in terms of revenues), its financial performance is significantly superior to peers on all financial parameters. Over FY09-FY11, while all peers (domestic and international) posted either a revenue decline or a muted revenue growth rate (5%-15%), EIL has posted a revenue growth of 35%. EILs margins (EBITDA and PAT) and returns ratios (RoE and RoCE) are also far superior to that of other peers.
Exhibit 22: EILs performance is superior to domestic/international peers in the hydrocarbon space
Company Engineers India * Punj Lloyd* L&T * Toyo Engineering * Foster Wheeler ** Jacobs Engg.*** Worley Parsons **** Saipem ** Fluor ** Technip ** Revenue CAGR EBITDA margin (CY06-08)/ CY08-10)/ CY09/ CY10/ (FY07-09) (FY09-11) FY10 FY11 63% 35% 25.1% 23.3% 53% 41% 21% 40% 16% 29% 16% 26% 4% -18% 13% -31% -23% -5% -2% 5% -3% -10% 3.9% 15.6% 8.8% 10.1% 4.9% 9.2% 15.6% 5.9% 12.9% 6.2% 15.4% 6.0% 8.6% 5.9% 9.5% 16.4% 3.5% 12.6% PAT margin CY09/ CY10/ FY10 FY11 21.9% 18.7% -1.0% 12.5% 4.1% 6.9% 2.5% 5.8% 7.1% 3.1% 2.6% -0.8% 8.6% 2.4% 5.3% 3.2% 6.5% 7.6% 1.7% 6.9% RoE CY09/ CY10/ FY10 FY11 34% 40% -4% 31% 12% 57% 9% 17% 24% 23% 7% -2% 19% 6% 24% 11% 20% 23% 11% 14% RoCE CY09/ CY10/ FY10 FY11 39% 59% -26% 32% 10% 43% 14% 53% 21% 30% 20% -39% 19% 5% 22% 22% 62% 17% 16% 34% CFO/EBITDA CY09/ CY10/ FY10 FY11 149% 128% -406% 51% 97% 74% 80% 93% 74% 101% 105% 210% 4% 166% 73% 61% 74% 84% 101% 46%
Source: Ambit Capital research, Company, Bloomberg Notes (a) We have taken consolidated data for our analysis(b)* Year ending March,** year ending December,***year ending September,****year ending June. (b) We have considered CFO before taxed paid for our analysis
EIL has generated positive cash flows over the last five years
We compare EILs FCF with that of other Indian E&C companies and international project management companies present in the hydrocarbon space. We find that unlike most of its Indian peers, EIL has generated positive cash flows (CFO) over the last four years mainly on account of the low working capital requirement and increasing profitability. However, comparing EIL with other international peers, we find that all the EPC companies present in the hydrocarbon space have generated positive cash flows.
Exhibit 23: Unlike other Indian E&C players, CFO has always remained positive for EIL
(` mn) EIL L&T Punj IVRCL NCC HCC Simplex Gammon India CCCL Voltas Blue Star FY08 + + + FY09 + + + FY10 + + + + + + FY11 + + + + + -
Exhibit 24: Like other international players, EIL also generates positive CFO
Company EIL * Toyo Engineering* Foster Wheeler** Jacobs Engineering *** Worley Parsons **** Saipem ** Fluor ** Technip ** CY07/ FY08 + + + + + + + + CY08/ FY09/ + + + + + + + CY09/ FY10 + + + + + + + + CY10/ FY11 + + + + + + + +
Source: Ambit Capital research, Company, Bloomberg, Note: We have taken consolidated data for EIL, Voltas, Blue Star, Simplex, Punj Lloyd and CCCL and stand-alone for others
Source: Ambit Capital research, Company, Bloomberg Notes (a) We have taken consolidated data for our analysis(b)* Year ending March,** year ending December,***year ending September,****year ending Jun
15
Engineers India
Superior financial performance v/s Indian E&C companies

Unlike other E&C companies which are presently being impacted by deteriorating financial performance (muted revenue growth, declining margins and returns, rising debt:equity and negative cash flow generation), EIL continues to post strong performance on all financial parameters. Over FY08-FY11, increasing contribution of the LSTK segment in overall revenues has led to revenue and EBITDA growth of 56% and 55% respectively. Further, the turnover and the return ratios have also improved significantly over FY08-FY11 and are far ahead of those of other E&C companies in India.
Exhibit 25: EILs performance is ahead of Indian peers
Company EIL L&T Punj IVRCL NCC HCC Simplex Gammon India CCCL Voltas Blue Star Revenue growth (%) (FY08-FY11) 56 8 (2) 14 13 10 19 33 14 17 8 EBITDA margin (%) FY11 23.5 12.5 5.2 9.5 9.6 13.5 9.8 4.8 7.5 8.5 8.5 RoE (%) 40.8 19.4 (2.0) 8.2 12.0 4.7 12.1 (3.6) 7.7 29.2 32.1 RoCE (%) 32.9 32.1 1.3 10.2 8.2 7.1 9.7 3.5 8.4 21.5 20.3 WC turnover (x) 7.4 8.4 1.5 2.7 2.3 1.7 3.1 3.3 2.6 5.0 5.6 GB turnover Debt:equity (x) (x) 14.9 0 10.5 2.4 6.5 6.0 2.2 3.5 3.4 10.7 12.5 8.2 0.3 0.9 1.1 0.9 1.0 2.3 1.1 0.7 0.1 0.7
Source: Ambit Capital research, Company, Bloomberg, Note: We have taken consolidated data for EIL, Voltas, Blue Star , Simplex, CCCL, and Punj Lloyd and standalone for others.
16
Engineers India
Key assumptions and estimates

Exhibit 26: Key assumptions and estimates (` mn, unless otherwise stated) (consolidated data)
Key assumptions Order book YoY growth (%) Consultancy segment YoY growth (%) LSTK segment YoY growth (%) Order flow YoY growth (%) Consultancy Segment YoY growth (%) LSTK segment YoY growth (%) Revenues YoY growth (%) Consultancy Segment YoY growth (%) LSTK segment YoY growth (%) EBITDA EBITDA margin PBIT PBIT margin(%) Consultancy Segment YoY growth (%) LSTK segment YoY growth (%) PBT before EO PBT margin Adjusted PAT Net margin Working capital turnover (incl. cash) Gross block turnover FY11 74,843 20.0% 25,840 -11.4% 49,003 47.6% 40,957 337.2% 8,210 74.6% 32,746 602.0% 28,482 41% 11,528 7% 16,953 81% 6,635 23.3% 6,982 24.5% 5,025 43.6% 1,956 11.5% 7,985 28.2% 5,339 18.7% 7.4 14.9 FY12E 54,808 -26.8% 21,235 -17.8% 33,573 -31.5% 17,500 -57.3% 7,500 -8.7% 10,000 -69.5% 37,535 32% 12,105 5% 25,430 50% 7,988 21.3% 8,009 21.3% 5,084 42.0% 2,924 11.5% 9,750 26.0% 6,581 17.5% 10.7 18.0 FY13 E 45,539 -16.9% 15,025 -29.2% 30,514 -9.1% 36,500 108.6% 6,500 -13.3% 30,000 200.0% 45,769 22% 12,710 5% 33,059 30% 8,809 19.2% 8,848 19.3% 5,211 41.0% 3,637 11.0% 11,001 24.0% 7,426 16.2% 8.6 19.2 FY14 E 43,263 -5.0% 10,115 -32.7% 33,149 8.6% 46,800 28.2% 7,800 20.0% 39,000 30.0% 49,075 7% 12,710 0% 36,365 10% 8,940 18.2% 8,966 18.3% 5,148 40.5% 3,818 10.5% 11,155 22.7% 7,530 15.3% 6.5 17.9 Order flow in both the segments is highly dependent on the PSUs investment plans in the oil and gas segment, which are inherently lumpy and cyclical in nature. Therefore, whilst we expect order flow to decline in FY12 (due to deferment in PSUs capex plans in light of the high oil subsidy burden), we expect order flow to be significantly high in FY13 and FY14 as expected in12th Five Year Plan. We expect high revenue growth in the LSTK segment (revenue CAGR of 26% over FY11-FY14) to continue to drive the overall revenue growth (revenue CAGR of 18% over FY11-FY14). However, we expect muted growth in the project consultancy segment (revenue CAGR of 3% over FY11-FY14) as a delay in the oil & gas PSUs capex in FY12 will keep the revenue growth moderate in FY12 and FY13. Increasing share of the low margin LSTK business segment in the revenue mix is lowering the overall EBITDA margin While we expect PBIT margins of the consultancy segment to remain high (north of 35%), a decline on a YoY basis expected on account of increasing competition from international players. We expect margins to decline due to increasing raw material and subcontractors costs in the LSTK contracts. However, an increasing share of the high OBE contract model in LSTK jobs, will keep margins ahead of the industry average (industry average ~8%) Declining share of high margin consultancy business and increasing share of low margin LSTK business in the revenue mix is lowering net earnings on a YoY basis. However, PBT and PAT margins remain significantly ahead of that of other engineering and construction companies. Despite high revenue growth, increasing cash component is lowering the working capital turnover in FY13 and FY14. High revenue growth and low capex needs is driving gross block turnover Significant decline in the order flow coupled with high revenue growth in FY12 leads to a decline in the order book. However, we expect order flow to pick up in the LSTK segment in FY13 and FY14 after a sharp decline in FY12 as refining orders pick-up. Comments for key assumptions up to FY14
17
Engineers India
Ambit v/s consensus

Exhibit 27: Ambit v/s consensus
Particulars Revenue (` mn) FY2012 FY2013 EBITDA (` mn) FY2012 FY2013 EPS (adjusted) (`) FY2012 FY2013 18.0 22.1 19.5 22.0 8.5% -0.3% 7,788 9,038 7,988 8,809 2.6% -2.5% 36,018 41,968 37,535 45,769 4.2% 9.1% Consensus Ambit Divergence Comments In 1HFY12, EIL has already achieved a revenue growth of 40% on a YoY basis. We expect YoY revenue growth of 25% for 2HFY12 compared to consensus estimate of 18%. Hence our FY12 estimate is higher than consensus. Due to an increasing share of the LSTK segment in revenue mix, we expect EBITDA margin to decline to 20.6% and 18.4% in FY12 and FY13, respectively, However, consensus expects margin to be ~21.5% for FY12 and FY13. Higher revenue growth estimates and higher interest income estimates compared to consensus, leads to a divergence of 8.5% from consensus in FY12.
Source: Ambit Capital research, Bloomberg
Forensic Accounting
Exhibit 28: Engineers India on our forensic accounting score
Field Score Comments In our forensic analysis of 360 companies, Engineers India is clubbed under the miscellaneous sector (as per the BSE500s sector classification) and has a cumulative accounting score of 193 compared to a market average score of 196. EIL scores high on CFO/EBITDA and the other loans and advances as percentage to networth metric. However, the company scores poorly on the contingent liability as percentage to networth and average advances recoverable cash or kind as percentage of revenue. In various interviews, EIL has made timely announcement regarding order flow and the revenue growth In the last six months, there has not been any significant change to the consensus FY12 and FY13 estimates
Accounting
AMBER
Predictability Earnings momentum
GREEN AMBER
Source: Company, Ambit Capital research
18
Engineers India
Valuation - DCF based

We believe that DCF is the best method to value project management companies given that the key value drivers in a DCF based valuation are free cash flows based on revenue growth, operating profitability, working capital and gross block turnovers and a discount rate apt for the risks inherent to the industry.
DCF based value of `290/share

Our valuation of `290/share for the consolidated business uses the DCF based valuation. We use WACC of 15% and a terminal growth rate of 3% (applied from FY2025 onwards). We expect revenues to grow at a CAGR of 18% over FY11FY14E, mainly driven by the growth in the LSTK segment (revenue CAGR of 26% over FY11-FY14E). However, we expect muted revenue growth in the project consultancy segment (3% revenue CAGR over FY11-FY14E). Increasing share of the LSTK segment in the revenue mix will lower the overall margins; therefore we expect EBITDA margin to gradually decline to 17.5% in FY14 (compared with 23.5% in FY11). Post FY14, we model a moderated revenue growth rate in the range of 5%-18% and expect EBITDA margin to remain in the range 13.5%-15%. We expect the high gross block turnover and low working capital requirement to result in meaningful positive free cash flows from FY14 onwards. High revenue growth and low capex requirement will continue to keep gross block turnover high, and we expect, gross block turnover to increase to 19x in FY14E (from 15x in FY11). Whilst high revenue growth in the LSTK business will increase the overall working capital requirement, we expect working capital cycle to remain negative over FY11-FY14. Our DCF-based valuation for the consolidated business implies a valuation of 15x and 13x for FY12E and FY13E earnings respectively.
Exhibit 29: DCF value for the consolidated business
8,000 6,000 4,000 2,000 0 FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22E FY23E FY24E FY25E 45% 36% 27% 18% 9% 0%
Exhibit 30: Terminal value - main component of total valuation

Particulars PV of the forecasting period up to FY25 (` mn) Terminal value (` mn) Enterprise value (` mn) Less: net debt at March-12 (` mn) Implied equity value (` mn) Implied equity value (`/share) Source: Company, Ambit Capital research Implied valuation %age share of valuation 56% 20% 76% 24%
(Rs mn)
54,410 19,605 74,015 (23,806) 97,821 290
PV of FCFF RoIC (post tax) (RHS)
WACC (RHS) RoE (RHS)
19
Engineers India
Relative valuation
In India, EIL is the only listed player which is present across the entire hydrocarbon value chain, therefore, it has no direct Indian peers for the company. In the absence of such direct peers, we compare EIL with other project management companies such as Voltas and VA Tech. We also include construction companies (such as L&T, Punj, CCCL and Simplex) in the peers list, which execute civil jobs in the hydrocarbon space. Some of these construction companies such as L&T and Punj Lloyd also provide consultancy services in the hydrocarbon sector. Based on FY13 P/E multiples, we observe that, whilst EIL is trading in line with other project management companies (Voltas and VA Tech) and at a premium to the construction companies (Simplex and CCCL), but it is trading at a discount to L&T and Punj Lloyd. We believe that, given the superior margins and returns, EIL deserves to trade at a premium to both project management companies (Voltas and VA Tech) and mid-sized construction companies (Punj, Simplex and CCCL), and in line with large construction companies like L&T. We also compare EIL with global E&C players, which are large project management companies and which also have a presence in the Indian hydrocarbon market. Based on FY13 P/E multiple, we observe that EIL is trading at a significant discount to its international peers such as Worley Parsons, Toyo Engineering, Fluor and Technip. Whilst EIL is a small player in comparison to international companies, we highlight that given EILs technical capabilities, superior margin and return ratio profile, it deserves to trade at a premium/in line with international peers.
Exhibit 31: EILs relative valuation
Mcap Particulars US$ mn Revenue EBITDA Revenue (US$mn) margin CAGR (%) (%) CY10/ (FY09CY10/ FY11 11) FY11 11,456 633 1,150 1,744 1,012 274 439 13.3% 35.4% 9.4% -18.2% -1.1% 4.3% 15.7% 15.4% 23.3% 8.7% 6.2% 11.7% 9.1% 9.8% PAT margin (%) CY10/ FY11 8.6% 18.7% 6.9% -0.8% 2.7% 4.3% 2.4% RoE CY10/ FY11 19.4 40.2 29.2 (2.0) 12.1 10.8 7.9 RoCE CY10/ FY11 31.9 38.8 42.3 (26.2) 13.8 13.5 18.8 P/E (x) CY11/ FY12 16.0 11.7 11.7 17.7 8.9 12.8 40.1 17.0 12.8 18,414 10,035 20,849 5,605 10,382 4,068 1,993 5.1% -9.8% -3.4% -1.6% -4.9% -23.0% -30.9% 16.4% 12.6% 3.5% 9.5% 5.9% 8.6% 6.0% 7.6% 6.9% 1.7% 6.5% 3.2% 5.3% 2.4% 22.5 14.2 10.5 19.8 10.7 23.8 5.9 20.6 20.3 29.8 53.4 14.4 42.8 9.8 16.0 16.1 16.2 17.3 14.1 13.2 22.8 16.5 16.1 CY12/ FY13 13.8 9.6 9.9 10.0 6.9 10.6 7.2 9.7 9.9 13.9 14.1 14.3 14.6 12.6 10.3 14.8 13.5 14.1 EV/EBITDA (x) CY11 /FY12 11.3 6.9 8.7 7.2 4.9 5.6 6.3 7.3 6.9 8.6 7.4 6.1 10.6 7.4 5.1 0.3 6.5 7.4 CY12 /FY13 9.8 5.9 7.1 6.1 4.2 4.6 4.3 6.0 5.9 7.7 6.3 5.5 9.2 6.7 4.3 0.2 5.7 6.3
Indian Engineering and Construction companies* L&T EIL Voltas Punj Lloyd Simplex VA Tech CCCL 14,900 1,380 563 308 211 179 66
Average Construction companies Construction companies - Median Global E&C companies present in the hydrocarbon space Saipem** Technip** Fluor** Worley Parsons**** Jacobs Engineering*** Foster Wheeler** Toyo Engineering* 19,461 10,182 9,147 6,749 5,479 2,277 713
Average Global E&C companies present in hydrocarbon space Global E&C companies - Median
Source: Ambit Capital research, Bloomberg, Company Notes (a) We have taken consolidated data for analysis (b)Mcap is as on 8th Dec-2011 (c) * Year ending March,** year ending December,***year ending September,****year ending Jun
20
Engineers India
A comparison of EIL with L&T

Historically (over FY07-FY09), EIL had traded at a significant discount to L&T as the financial performance and returns ratio of EIL were significantly lower than L&T. However over FY09-FY11, EIL has not only generated superior returns (compared with L&T), but has also bridged the gap on a P/E multiple basis. We believe that the continuous superior performance of EIL over L&T will bridge the gap further between the two companies.
Exhibit 32: Despite better RoEs, EIL trades at a discount to L&T. However, the gap has significantly narrowed
60 50 40 30 20 10 0 Jun-07 Jun-08 Jun-09 Jun-10 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Jun-11 Dec-11 40% 30% 20% 10% FY07 FY08 FY09 FY10 L&T FY11 FY12E FY13E EIL
Exhibit 33: EILs RoEs have improved over FY08-FY11 and are significantly higher than L&T
50%
L&T (x)
EIL (x)
Source: Ambit Capital research, Bloomberg, Company Note (a) We have taken consolidated data for EIL and stand-alone for L&T
Source: Ambit Capital research, Bloomberg, Company (a) We have taken consolidated data for EIL and stand-alone for L&T (b) For FY12 and FY13, we have taken consensus estimates for L&T and our estimates for EIL
Cross cycle valuation

EIL is currently trading at one-year forward consensus P/E of 11.7x which is a 24% and 15% discount to its 3-year average and 5-year average, respectively. However, EIL is trading at a significant discount to its peak 1-year forward PE of 31x. Whilst we do not expect EIL to trade near its peak PE multiple in the medium term, we believe that given strong financial performance and return ratios, EIL should trade close to its five-year historical PE of 14x. Whilst we do expect lower revenue growth over FY13-FY15, but believe EILs multiple should retrace lost ground as the refinery opportunity gets supplemented with fertilizer capex, thus addressing growth concerns.
Exhibit 34: EIL is trading at lower than its 5-year historical average P/E of 14x
500 400 300 200 100 0 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Apr-11 Oct-11 12 6x (Rs) 24 18
Exhibit 35: EIL is trading at lower than its 5-year historical average P/B of 4.2x
500 400 300 200 100 0 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Apr-11 Oct-11 (Rs) 6.5x 5x 3.5x 2x
Source: Ambit Capital research, Bloomberg, Company
Source: Ambit Capital research, Bloomberg, Company
21
Engineers India We also highlight that the 1-year forward P/E multiple should take cognizance of the fact that quality of earnings are improving over the last 2 years. Whilst over FY07-09, other income (mainly interest income earned on cash in fixed deposits) contributed to 35%-40% of the PBT, over FY09-11, share of other income fell to only ~20%-22% of the PBT. Therefore, core business now constitutes ~80% of PBT compared to 60%-65% earlier. If we adjust the forward earnings for the other income, then EIL is presently trading at 13x 1-year forward core business eps. This is at a discount of 40% and 33% to its 5-yr and 3-yr historical average of 22x and 19x, respectively.
Exhibit 36: Other income as proportion of PBT has significantly declined over FY09-11
Particulars (` mn) Other income PBT Other income as % of PBT FY07 805 2,093 38% FY08 1,341 3,035 44% FY09 2,215 5,327 42% FY10 1,830 6,709 27% FY11 1,596 8,102 20%
Exhibit 37: Based on core earings, EILs is trading at discount of 40% to its 5-yr average P/E of 22x
50 40 30 20 10 0 (x)
Source: Ambit Capital research, Company Note : Other income is mainly interest income in the cash and liquid investments
May-07
Nov-09
Aug-08
Mar-08
Jun-09
Jan-09
Sep-10
Dec-06
Feb-11
Apr-10
Jul-11
Adj. 1-yr. fwd. P/E
1-yr. fwd. P/E
Source: Ambit Capital research, Company, Bloomberg
Can excessive cash be a drag on multiples and returns?

At the end of September 2011, EIL has a cash balance of `22bn (cash and investments) and given the negative working capital cycle and asset-light business model, we expect the cash balance to further increase over FY12E-FY17E. Whilst traditionally (over FY06-FY11) EIL had been a conservative player and had parked the excessive cash in fixed deposits, it is currently planning to utilize the cash for diversifying into new segments and geographies. This will help the company to achieve its long-term objective of becoming a global player with `100bn topline in the next 10 years. Presently, EIL is exploring the following opportunities: Increasing its international presence: EIL plans to bid for large contracts in the international markets which have a longer execution cycle, higher working capital needs and which require larger number of project engineers at the project site. EIL can deploy its cash for setting up offices in the international markets (already opened a new office in China) for executing these large projects. Undertake PPP projects in growing segments: EIL has plans to venture via the PPP route into the fast growing sectors such as water treatment and city gas distribution. By taking up a minority equity stake (~10%) in the PPP project, EIL can undertake the EPC contracts for such PPP projects (large-ticket sizes) which can drive growth and margins in the new segments.
Dec-11
22
Oct-07
Engineers India
Key catalysts
Catalysts over the next 6-9 months
In 1HFY12, EIL has received orders worth only `5bn and the company will likely have a minuscule order flow growth in FY12. an increasing subsidy burden is delaying the capex plans of the oil refining companies; hence, EIL has not received any large order in the LSTK segment over the last eight months. Any large order in the LSTK segment over the next six months can significantly drive order flow growth and the share price of the company. In 1HFY12, project consultancy segmental revenue grew by only 4% YoY, which lowered the overall EBITDA margin (400bps decline on a YoY basis). Therefore, high growth in the consultancy segment revenues can drive EBITDA margin and the cash flow generation.
Catalysts over the next 15-18 months

Our interaction with industry experts highlights that petrochemical capex is cyclical in nature and the large investments for capacity expansions by the petrochemical companies will occur FY13E onwards. As EIL is a market leader in the Indian petrochemical industry for greenfield projects, any large investment in this segment will drive order flow in the LSTK segment. Whilst EIL is currently focusing on developing the pre-qualification strength in the infrastructure and fertilizer segments, any large project consultancy orders in these segments will drive revenue growth and EBITDA margin.
Key risks to our BUY stance

Like other engineering and construction companies, EILs financials and stock price performance are exposed to the macro risks of delayed order inflows, inflationary pressures and rising input costs. However, key specific risks to our BUY call are: Increase in the employee costs: Given that talented employee base is the key competitive strength and accounts for ~20%-23% of the consolidated revenues, any significant increase in the employee costs in proportion to increase in value addition per employee can lower the EBITDA margin. Increasing competition in Indias hydrocarbon sector from international players who offer attractive remuneration can force EIL to increase employee salaries in order to retain talent, which can adversely impact margins. However, if we compare the growth in salaries per employee to the growth in value addition per employee (calculated as revenues less procurement and raw material costs), we find that whilst salaries per employee has grown at 9% CAGR value addition per employee had grown at 20% CAGR over FY08-FY11. The rising share of LSTK revenues provides EIL with an opportunity to improve the value addition on a per employee basis as is visible from exhibit 38, and absorb the rising employee costs.
23
Engineers India
Exhibit 38: Value addition per employee is significantly higher than cost per employee
Particulars (` mn, unless specified) Consolidated revenues (A) Revenue per employee (`.) Procurement costs (B) Subcontractors bills ( C) Value addition by EIL (A-(B+C)) Number of employees Value addition per employee Staff costs Staff costs per employee EBITDA per employee
FY07 5,828 2.3 327 411 5,090 2551 2.0 2,494 1.0 0.55
FY08 7,536 2.7 368 562 6,606 2804 2.4 3,349 1.2 0.65
FY09 15,529 5.0 4,955 1,912 8,662 3102 2.8 3,903 1.3 1.05
FY10 20,140 6.1 5,558 3,021 11,560 3301 3.5 4,911 1.5 1.53
FY11 28,482 8.3 8,119 6,485 13,878 3417 4.1 5,240 1.5 1.96
Increasing subsidy burden on oil and gas refining companies can further delay their investment plans: Over the last five years, capex plans of the oil and gas refining companies such as IOCL, HPCL, BPCL are dependent on the annual subsidy burden (losses arising due to rising international crude prices). For FY12E, the subsidy burden is expected to be `999bn, (highest in the last five years) and this has resulted in the postponement of oil refineries capex plans for the current fiscal. Any significant increase in the subsidy burden over FY12E-FY14E can further lower expected capex, adversely impacting EILs order flow and revenue growth. Intense competition from international players: Due to lack of significant opportunities outside India, international EPC players could start aggressively penetrating the Indian hydrocarbon market. As EIL bids for most of the projects on a competitive bidding basis, such increasing competition can reduce the growth in its order flow.
24
Engineers India Balance sheet (consolidated)

Y/E March (` mn) Share capital Reserves and surplus Total net worth Loans Sources of funds Gross block Net block Capital work-in-progress Investments Cash and bank balances Sundry debtors Inventories Loans and advances Other current assets Total current assets Current liabilities Provisions Current liabilities and provisions Net current assets Deferred tax assets Application of funds
FY09 562 13,543 14,105 14,105 1,711 582 60 1,515 19,215 3,090 334 2,231 2,057 26,927 12,961 3,190 16,151 10,776 1,169 14,104
FY10 562 10,981 11,542 11,542 1,864 634 118 975 17,945 3,259 432 1,854 2,137 25,626 14,037 3,195 17,231 8,395 1,420 11,542
FY11 1,685 13,214 14,899 14,899 1,966 632 219 5,128 17,981 3,278 2,137 2,575 1,252 27,224 15,452 4,615 20,067 7,157 1,761 14,899
FY12E 1,685 16,715 18,400 18,400 2,216 711 219 5,128 23,806 4,422 1,305 3,037 2,351 34,921 18,214 6,128 24,342 10,579 1,761 18,400
FY13E 1,685 19,797 21,481 21,481 2,541 846 219 5,128 29,324 5,517 1,732 3,942 2,882 43,398 22,480 7,392 29,872 13,526 1,761 21,481
Income statement (consolidated)

Y/E March (` mn) Operating income YoY growth Total expenses EBITDA YoY growth Net depreciation/amortisation EBIT reported Net interest expense/(income) Other income Adjusted PBT Reported PBT Provision for taxation Adjusted consolidated PAT YoY growth Reported consolidated PAT YoY growth
FY09 15,529 106.1% 12,285 3,243 78.7% 110 3,133 (1,439) 755 5,327 5,326 1,829 3,497 75.1% 3,512 77.3%
FY10 20,140 29.7% 15,094 5,045 55.6% 132 4,914 (1,497) 298 6,709 6,701 2,266 4,444 27.1% 4,405 25.4%
FY11 28,482 41.4% 21,847 6,635 31.5% 148 6,487 (1,225) 331 8,043 7,985 2,704 5,339 20.1% 5,314 20.6%
FY12E 37,535 31.8% 29,547 7,988 20.4% 167 7,821 (1,741) 188 9,750 9,750 3,169 6,581 23.3% 6,581 23.8%
FY13E 45,769 21.9% 36,960 8,809 10.3% 190 8,619 (2,153) 229 11,001 11,001 3,575 7,426 12.8% 7,426 12.8%
25
Engineers India Cash flow statement (consolidated)

Y/E March (` mn) PBT Depreciation Interest expense/ (income) Other income Direct taxes paid Change in working capital CFO (before exceptional) Exceptional items CFO (post -exceptions) Purchase of fixed assets Investment Dividend received Interest Income CFI Dividends paid CFF Net Cash Cash at the beginning Cash at the end Free cash flow
FY09 5,327 110 (1,474) (30) (2,159) 4,176 5,950 (1) 5,949 (220) (49) 19 1,554 1,320 (757) (757) 6,512 12,703 19,215 5,731
FY10 6,709 131 (1,531) (195) (2,383) 867 3,598 (8) 3,589 (217) 540 28 1,549 2,070 (6,930) (6,930) (1,270) 19,215 17,945 3,373
FY11 8,042 149 (1,265) (20) (2,710) 333 4,530 (58) 4,471 (253) (4,154) 18 1,294 (3,088) (1,347) (1,347) 37 17,945 17,981 4,219
FY12E 9,750 167 (1,795) (188) (3,169) 893 5,659 5,659 (250) 188 1,795 1,733 (1,566) (1,566) 5,825 17,981 23,806 5,409
FY13E 11,001 190 (2,218) (229) (3,575) 1,307 6,476 6,476 (325) 229 2,218 2,121 (3,080) (3,080) 5,518 23,806 29,324 6,151
Ratio analysis (consolidated)

Year to March
EBITDA margin EBIT margin Net margin (Adj) Dividend payout ratio Net debt/Equity Working capital turnover (x) Gross block turnover (x) RoCE RoE
FY09 20.9% 20.2% 22.5% 29.6% (1.4) 2.1 9.3 15.9% 27.0%
FY10 25.1% 24.4% 22.1% 135.1% (1.6) 3.2 11.3 25.4% 34.7%
FY11 23.3% 22.8% 18.7% 31.7% (1.2) 7.4 14.9 32.5% 40.4%
FY12E 21.3% 20.8% 17.5% 40.0% (1.3) 10.7 18.0 31.7% 39.5%
FY13E 19.2% 18.8% 16.2% 50.0% (1.4) 8.6 19.2 29.2% 37.2%
Valuation parameters (consolidated)

Year to March
EPS (`) Diluted EPS (`) Book value per share (`) Dividend per share (`) P/E (x) P/BV (x) EV/EBITDA (x)
FY09 10.4 10.4 42 3.1 20.4 5.1 16.1
FY10 13.2 13.2 34 17.7 16.1 6.2 10.6
FY11 15.8 15.8 44 5.0 13.4 4.8 8.1
FY12E 19.5 19.5 55 7.8 10.9 3.9 6.0
FY13E 22.0 22.0 64 11.0 9.6 3.3 4.8
26
Engineers India
Institutional Equities Team

Saurabh Mukherjea, CFA Research Analysts Aadesh Mehta Anand Mour Ankur Rudra, CFA Ashvin Shetty Bhargav Buddhadev Chandrani De, CFA Chhavi Agarwal Dayanand Mittal Gaurav Mehta Hardik Shah Krishnan ASV Nitin Bhasin Pankaj Agarwal, CFA Parita Ashar Puneet Bambha Rakshit Ranjan, CFA Ritika Mankar Ritu Modi Shariq Merchant Sales Name Deepak Sawhney Dharmen Shah Dipti Mehta Pramod Gubbi, CFA Sarojini Ramachandran Production Sajid Merchant Kausalya Vijapurkar Praveen Mascarenhas Production Editor Database (022) 30433247 (022) 30433284 (022) 30433251 sajidmerchant@ambitcapital.com kausalyavijapurkar@ambitcapital.com praveenmascarenhas@ambitcapital.com Regions India / Asia India / Asia India / Europe India / Asia UK Desk-Phone (022) 30433295 (022) 30433289 (022) 30433053 (022) 30433228 +44 (0) 20 7614 8374 E-mail deepaksawhney@ambitcapital.com dharmenshah@ambitcapital.com diptimehta@ambitcapital.com pramodgubbi@ambitcapital.com sarojini@panmure.com Industry Sectors Banking / NBFCs FMCG Technology / Education Services Automobile Power / Capital Goods Metals & Mining Construction / Infrastructure Oil & Gas Derivatives Research Technology / Education Services Banking Construction / Infrastructure / Cement NBFCs Metals & Mining / Media / Telecom Power / Capital Goods Mid-Cap Economy Cement Consumer Desk-Phone (022) 30433239 (022) 30433169 (022) 30433211 (022) 30433285 (022) 30433252 (022) 30433210 (022) 30433203 (022) 30433202 (022) 30433255 (022) 30433291 (022) 30433205 (022) 30433241 (022) 30433206 (022) 30433223 (022) 30433259 (022) 30433201 (022) 30433175 (022) 30433292 (022) 30433246 E-mail aadeshmehta@ambitcapital.com anandmour@ambitcapital.com ankurrudra@ambitcapital.com ashvinshetty@ambitcapital.com bhargavbuddhadev@ambitcapital.com chandranide@ambitcapital.com chhaviagarwal@ambitcapital.com dayanandmittal@ambitcapital.com gauravmehta@ambitcapital.com hardikshah@ambitcapital.com vkrishnan@ambitcapital.com nitinbhasin@ambitcapital.com pankajagarwal@ambitcapital.com paritaashar@ambitcapital.com puneetbambha@ambitcapital.com rakshitranjan@ambitcapital.com ritikamankar@ambitcapital.com ritumodi@ambitcapital.com shariqmerchant@ambitcapital.com Head of Equities (022) 30433174 saurabhmukherjea@ambitcapital.com
27
Engineers India
Explanation of Investment Rating

Investment Rating Expected return (over 12-month period from date of initial rating) >5% <5%
Buy Sell
Disclaimer
This report or any portion hereof may not be reprinted, sold or redistributed without the written consent ot Ambit Capital. AMBIT Capital Research is disseminated and available primarily electronically, and, in some cases, in printed form.
Additional information on recommended securities is available on request.

DISCLAIMER 1. AMBIT Capital Private Limited (AMBIT Capital) and its affiliates are a full service, integrated investment banking, investment advisory and brokerage group. AMBIT Capital is a Stock Broker, Portfolio Manager and Depository Participant registered with Securities and Exchange Board of India Limited (SEBI) and is regulated by SEBI 2. The recommendations, opinions and views contained in this Research Report reflect the views of the research analyst named on the Research Report and are based upon publicly available information and rates of taxation at the time of publication, which are subject to change from time to time without any prior notice. 3. AMBIT Capital makes best endeavours to ensure that the research analyst(s) use current, reliable, comprehensive information and obtain such information from sources which the analyst(s) believes to be reliable. However, such information has not been independently verified by AMBIT Capital and/or the analyst(s) and no representation or warranty, express or implied, is made as to the accuracy or completeness of any information obtained from third parties. The information or opinions are provided as at the date of this Research Report and are subject to change without notice. 4. If you are dissatisfied with the contents of this complimentary Research Report or with the terms of this Disclaimer, your sole and exclusive remedy is to stop using this Research Report and AMBIT Capital shall not be responsible and/ or liable in any manner. 5. If this Research Report is received by any client of AMBIT Capital or its affiliate, the relationship of AMBIT Capital/its affiliate with such client will continue to be governed by the terms and conditions in place between AMBIT Capital/ such affiliate and the client. 6. This Research Report is issued for information only and should not be construed as an investment advice to any recipient to acquire, subscribe, purchase, sell, dispose of, retain any securities. Recipients should consider this Research Report as only a single factor in making any investment decisions. This Research Report is not an offer to sell or the solicitation of an offer to purchase or subscribe for any investment or as an official endorsement of any investment. 7. If 'Buy', 'Sell', or 'Hold' recommendation is made in this Research Report such recommendation or view or opinion expressed on investments in this Research Report is not intended to constitute investment advice and should not be intended or treated as a substitute for necessary review or validation or any professional advice. The views expressed in this Research Report are those of the research analyst which are subject to change and do not represent to be an authority on the subject. AMBIT Capital may or may not subscribe to any and/ or all the views expressed herein. 8. AMBIT Capital makes no guarantee, representation or warranty, express or implied; and accepts no responsibility or liability as to the accuracy or completeness or currentess of the information in this Research Report. AMBIT Capital or its affiliates do not accept any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of this Research Report. 9. Past performance is not necessarily a guide to evaluate future performance. 10. AMBIT Capital and/or its affiliates (as principal or on behalf of its/their clients) and their respective officers directors and employees may hold positions in any securities mentioned in this Research Report (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). Such positions in securities may be contrary to or inconsistent with this Research Report. 11. This Research Report should be read and relied upon at the sole discretion and risk of the recipient. 12. The value of any investment made at your discretion based on this Research Report or income therefrom may be affected by changes in economic, financial and/ or political factors and may go down as well as up and you may not get back the full or the expected amount invested. Some securities and/ or investments involve substantial risk and are not suitable for all investors. 13. This Research Report is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied in whole or in part, for any purpose. Neither this Research Report nor any copy of it may be taken or transmitted or distributed, directly or indirectly within India or into any other country including United States (to US Persons), Canada or Japan or to any resident thereof. The distribution of this Research Report in other jurisdictions may be strictly restricted and/ or prohibited by law or contract, and persons into whose possession this Research Report comes should inform themselves about such restriction and/ or prohibition, and observe any such restrictions and/ or prohibition. 14. Neither AMBIT Capital nor its affiliates or their respective directors, employees, agents or representatives, shall be responsible or liable in any manner, directly or indirectly, for views or opinions expressed in this Report or the contents or any errors or discrepancies herein or for any decisions or actions taken in reliance on the Report or inability to use or access our service or this Research Report or for any loss or damages whether direct or indirect, incidental, special or consequential including without limitation loss of revenue or profits that may arise from or in connection with the use of or reliance on this Research Report or inability to use or access our service or this Research Report. Conflict of Interests 15. In the normal course of AMBIT Capitals business circumstances may arise that could result in the interests of AMBIT Capital conflicting with the interests of clients or one clients interests conflicting with the interest of another client. AMBIT Capital makes best efforts to ensure that conflicts are identified and managed and that clients interests are protected. AMBIT Capital has policies and procedures in place to control the flow and use of non-public, price sensitive information and employees personal account trading. Where appropriate and reasonably achievable, AMBIT Capital segregates the activities of staff working in areas where conflicts of interest may arise. However, clients/potential clients of AMBIT Capital should be aware of these possible conflicts of interests and should make informed decisions in relation to AMBIT Capitals services. 16. AMBIT Capital and/or its affiliates may from time to time have investment banking, investment advisory and other business relationships with companies covered in this Research Report and may receive compensation for the same. Research analysts provide important inputs into AMBIT Capitals investment banking and other business selection processes. 17. AMBIT Capital and/or its affiliates may seek investment banking or other businesses from the companies covered in this Research Report and research analysts involved in preparing this Research Report may participate in the solicitation of such business. 18. In addition to the foregoing, the companies covered in this Research Report may be clients of AMBIT Capital where AMBIT Capital may be required, inter alia, to prepare and publish research reports covering such companies and AMBIT Capital may receive compensation from such companies in relation to such services. However, the views reflected in this Research Report are objective views, independent of AMBIT Capitals relationship with such company. 19. In addition, AMBIT Capital may also act as a market maker or risk arbitrator or liquidity provider or may have assumed an underwriting commitment in the securities of companies covered in this Research Report (or in related investments) and may also be represented in the supervisory board or on any other committee of those companies. Additional Disclaimer for U.S. Persons 20. The research report is solely a product of AMBIT Capital 21. AMBIT Capital is the employer of the research analyst(s) who has prepared the research report 22. Any subsequent transactions in securities discussed in the research reports should be effected through THINKEQUITY LLC. or another U.S. broker-dealer. 23. The research analyst(s) preparing the research report is resident outside the United States and is/are not associated persons of any U.S. regulated broker-dealer and that therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account.
Copyright 2011 AMBIT Capital Private Limited. All rights reserved.
Ambit Capital Pvt. Ltd. Ambit House, 3rd Floor 449, Senapati Bapat Marg, Lower Parel, Mumbai 400 013, India. Phone: +91-22-3043 3000 Fax: +91-22-3043 3100 28

Ambit - Engineers India - The Real Indian Engineers - 9dec2011

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Ambit - Engineers India - The Real Indian Engineers - 9dec2011

Uploaded by

Copyright:

Available Formats

Engineering and Construction

December 09, 2011

Accounting: AMBER Predictability: GREEN Earnings Momentum: AMBER INITIATING COVERAGE

The real Indian engineers

Stock Performance (%)

450 350 250 150 Nov-11

Source: Bloomberg, Ambit Capital research

Please refer to the Disclaimers at the end of this Report.

Company Financial Snapshot

Balance Sheet (consolidated)

Cash Flow (consolidated)

(1,347) (1,566) (3,080) 17,981 23,806 29,324

120% 90% 60% 30% 0%

FCFF RoE (RHS)

Revenue growth (RHS)

1-yr. fwd. P/E

1-yr fwd. Rolling EPS (RHS)

Source: Ambit Capital Research, Bloomberg

Ambit Capital Pvt Ltd

Consultancy and Engineering segment

Lumpsum turnkey (LSTK) contracts

Exhibit 4: CFO, FCF and RoCEs have remained high

30% 24% 18% 12% 6% 0% LSTK revenues PAT margin (RHS)

35% 28% 21% 14% 7% 0%

Ambit Capital Pvt Ltd

Leading Indian hydrocarbon-focused E&C player providing project

The increasing revenue share of the low-margin LSTK segment is

The largest pool of experienced project engineers in India with

Relatively weak player in the Middle Eastern countries (such as

High revenue growth (56% CAGR over FY08-FY11), coupled with

Debt-free and cash-rich balance sheet (cash and investments of

Excessive dependence on the hydrocarbon sector for the order flow

Increasing competition both from Indian players such as L&T, Punj

Replicate engineering expertise in the existing domains by

Postponement of capex plans by the PSUs in the hydrocarbon sector

Expansion of the overseas operations (mainly in Middle East North

Participate in the E&C opportunities in the international projects of

Source: Ambit Capital research, Company

Exhibit 6: Porters analysis of the Indian Hydrocarbon EPC industry

Source: Ambit Capital research, Industry

Ambit Capital Pvt Ltd

The hydrocarbon opportunity remains big

Total order flow (Rs bn)

. which continue to offer significant opportunities over FY12E-17E

Ambit Capital Pvt Ltd

Source: Ambit Capital research, Company

Ambit Capital Pvt Ltd

Capex plans of refining PSUs have Government support

Relatively smaller, but fast additional impetus to growth

Ambit Capital Pvt Ltd

EIL has superlative capabilities with flexibility

I. Presence across the entire hydrocarbon value chain

Ambit Capital Pvt Ltd

Competitive landscape of the Indian hydrocarbon industry

Ambit Capital Pvt Ltd

EIL is ahead of its peers in India

Leadership position in the hydrocarbon project consultancy segment

Strong position in the hydrocarbon LSTK segment

Consultancy and Engineering

Ambit Capital Pvt Ltd

Materially stronger in the greenfield/grassroots projects

Source: Ambit Capital research, Company, Industry