Engineers India FPO Analysis

Engineers India (EIL), the public sector undertaking under the ministry of petroleum and natural gas, is engaged in the business of project implementation and engineering consultancy services primarily for the hydrocarbon sector in India and overseas. Of late, the company has also extended its consultancy and turnkey service to other sectors including non-ferrous mining & metallurgy and infrastructure sector. It offers a complete range of project services including design, engineering, procurement, construction, and project management.



Incorporated in India in 1965, it has provided a range of engineering consultancy and project implementation services for more than 49 refinery projects, including eight green field refinery projects, seven petrochemical complexes, 35 oil and gas processing projects, 205 offshore platforms projects, 37 pipeline projects, 11 ports and storage and terminals projects, eight fertilizer projects and 26 mining and metallurgy projects. In the infrastructure space, it has provided a range of engineering consultancy services for more than 26 projects, including for airports, highways, flyovers, bridges, water and sewer management, as well as energy-efficient "intelligent" buildings. It has also completed 16 turnkey projects, including refinery and petrochemicals projects and offshore platforms.

The company also proposes to diversify its operations to other sectors such as water & waste management, city gas distribution, power, fertilizers, coal to liquid, etc.

The company has leveraged its track record in India to successfully expand its operations internationally, and have provided a wide range of engineering consultancy services on various international projects, particularly in the Middle East, North Africa and South East Asia. It has established strategic international offices in Abu Dhabi, London, Milan and Shanghai to expand its international operations.

The company's business is divided into two principal operating segments, i.e., consultancy & engineering project segment (C&EP) and lump sum turnkey project (LSTK). Projects where it provides services such as project engineering consultancy, project management and project implementation are included in the C&EP segment. Projects that it undertakes on a turnkey basis are included in the LSTK segment.

It has two joint venture companies: TEIL Projects and Tecnimont EIL Emirates – Consultores E Servicos. TEIL is a JV with Tata Project. EIL has a 50% stake and targets small EPC businesses in the hydrocarbon sector. In Tecnimont, EIL has a 30% stake with the balance 70% held by Tecnimont of Italy. This JV looks at PMC and EPC jobs in the oil & gas industry in the United Arab Emirates.

Being an offer of sale, all the issue proceedings of the FPO will go to the selling shareholder, i.e., the Government of India.

Strengths

The company over the years has worked on more than 400 projects for both Indian and global energy majors and has developed a strong track record. Given this strong project track record, it has attained leadership position in project execution across the hydrocarbon value chain in India. Moreover, having worked on 17 out of the 20 refineries in the country and seven out of the country's eight petrochemical plants/complexes, the company has natural advantage when it comes for revamp/de-bottlenecking /expansion/modernization, going forward.

Order book end of March 31, 2010, was Rs 6236.84 crore, which translates into 3 times its FY 2010 revenue. Of the total order book, the share of C&EP is 47% and that of LSTK 53%. The order book is to be executed in 2.5 years. Moreover, majority of the LSTK projects in the order book are OBE (open book estimate) contracts, where the company will get fixed margin with the risk of the volatility in commodity price shifted to client.

EIL is a zero debt and cash rich company (Rs 1764 crore cash and bank balance as of March 2010), with strong operating cash flow.

Weaknesses

Since majority of its business comes from the hydrocarbon sector, its fortunes are largely correlated to the activity and expenditure levels in the energy sector globally, which in turn are correlated to the oil and gas prices. Any downturn in the sector globally will dry down the order flow and heighten competition in the global as well as the domestic markets, leading to pressure on margin. The company gets about 95-97% of it revenue from the hydrocarbon sector.

The company's foray into new sectors such as water, utility power projects, city gas pipeline, etc. will decrease its reliance on the hydrocarbon sector and give a larger canvass/opportunity to play/tap. But it lacks experience in these new sectors. As a new entrant, the company might be forced to compromise on profits for initial volume. This might affect the profitability of the company.

Though it enjoys domestic leadership in the hydrocarbon sector, it faces intense competition from US, European, Japanese and Korean companies in the global market. It lacks qualification for high value complex projects.

The company has paid a special interim dividend of Rs. 100/-per share (on face value of Rs, 10/-each) by transferring a sum of Rs 581.53 crore from general reserves to the Profit arid Loss Account. This along with lower interest rates will reduce the surplus cash available for financial income. Consequently, other income during FY 2011 will be lower than FY 2010.

Valuation

EIL's consolidated total income grew at a CAGR of 51.28% in the last three fiscals to Rs 2013.99 crore for the year ended March 2010. For the same period, its PAT increased at a CAGR of 47.31% to Rs 444.35 crore. The EPS for FY 2010 works out to Rs 13.2. The offer price of Rs 270-290 discounts the FY 2010 consolidated EPS at 20.5 times on the lower price band and 22 times on the upper price band.

The current share price is Rs 316.75 and its 50-day average and 100-day average stands at Rs 334.05 and Rs 365.23, respectively. However, these averages are high due to sharp rise in the scrip price post announcement of bonus (2 for 1), split (2 for 1) and a large special dividend (1000%), when liquidity in the scrip was poor.

The offer price band (of Rs 270-290) is at a discount to the current market price of Rs 316.75. Moreover, retail investors and employees will get a discount of 5% to the offer price determined at the end of the book building process.