Engineers India

Investors with a two/three-year perspective can consider an exposure to the stock of Engineers India.

A well-entrenched position in high-end project consulting provides the company an edge in participating in the reviving spends on hydrocarbon, metal and infrastructure projects.

Further, headway made in lump-sum turnkey projects and Engineering, Procurement and Construction (EPC) makes the company unique in the Indian listed space, comparable to international players such as Technip and McDermott International.

At the current market price of Rs 1,134, the stock trades at 12 times its expected per share earnings for FY-11. Though not strictly comparable, this valuation is at a discount to large infrastructure players. Investors can use any declines linked to broad markets to accumulate the stock. Investors may have to, however, stomach lumpiness in revenues across quarters.

Project consultancy has traditionally been Engineers India’s core business operation. However, over the last couple of years, with the aid of successful joint ventures, the company has ramped up its presence in turnkey projects. This has aided in a 107 per cent growth in revenues in FY-09 to Rs 1,532 crore.

Turnkey project division accounted for 46 per cent of sales last year. Key orders in the refinery segment during the year have resulted in the segment accounting for close to 70 per cent of the order inflows of Rs 3,929 crore for the year. These are clear indicators that this segment would emerge as the key revenue driver for the company over the next couple of years. We view this as a diversification strategy that would widen opportunities in the oil and gas space.

Even as the turnkey segment is expected to fast track sales growth, this segment’s profit margins are not as lucrative as the consulting division; perhaps that is why operating profit margins dipped marginally by about 2 percentage points to about 20 per cent, despite a superior profit margin.

While Engineers India has been a regular recipient of projects from other state-owned companies such as ONGC, GSPC, GAIL and public sector refineries, it has managed to break free from being typecast as a Government service provider by bagging projects from private players as well. This could also enrich profit margins.

Engineers India was perhaps one of the few companies unaffected by the slowdown in 2008. Even as earnings grew 61 per cent in FY-09 to Rs 345 crore, there was a 23 per cent increase in new orders, taking the order book to over Rs 7,000 crore (4.5 times the FY-09 revenues). A disinvestment in the Government’s holding, when it happens, could act as a trigger for the stock.

via BL