Engineers India FPO

Engineers India (EIL) is one of India's leading engineering consultancy and EPC companies focused primarily on hydrocarbon sector. Of late the company has also extended its consultancy and turnkey services to other sectors including fertilizers, non-ferrous mining and metallurgy, power, water, and wastewater treatment projects as well as other infrastructure projects.

EIL, a Mini Ratna company established in 1965 as a public sector undertaking under the ministry of petroleum and natural gas commenced by undertaking works in refineries sector and now covers the entire oil & gas value chain. It offers complete range of project services including design, engineering, procurement, construction, and project management. The company as of Sep 2013, has offered range of consultancy and EPC services for several refinery projects including 10 green field refinery projects, 39 oil & gas processing plants, 40 offshore process platforms, 42 pipelines, 13 port storage terminal projects and seven petrochemical complexes. In addition it has also provided various engineering services for 8 fertilizer projects, 29 mining & metallurgy projects as well as infrastructure projects such as airports, flyover, bridges, water and sewer management and buildings.

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.

It currently has two wholly owned subsidiaries, CEIL and EILAP incorporated in India and Malaysia, respectively, and two strategic joint-venture companies, TEIL Projects and JabalEILIOT, incorporated in India and Saudi Arabia, respectively.

The company's business is divided into two principal operating segments: consultancy & engineering project segment (C&EP) and lump sum turnkey project (LSTK). In Consultancy and Engineering Services segment, it provides a range of engineering consultancy and project implementation services including project feasibility reports, project management, process design, basic and detailed engineering, procurement and inspection; cost engineering, planning and scheduling; construction management; and commissioning of operations. It also provides specialist services such as heat and mass transfer equipment design, environmental engineering services, specialist materials and maintenance services, energy conservation services and plant operation and safety services. In the turnkey projects segment, it undertakes EPC (engineering, procurement and construction) turnkey projects on an open-book estimate basis or on a lump-sum turnkey contract basis.

In the current follow-on public offer, the sale all the issue proceeds going to the selling shareholder, i.e., government of India.

Strengths

The company is an established player in refinery, petrochemicals, oil & gas processing offshore & onshore, pipelines, strategic storage and terminals as well as mining and metallurgy with over five decades of experience on landmark projects with global energy majors. The company's strong client relationship coupled with its track record helps it to capture repeat orders across all sectors especially in hydrocarbon and petrochemicals. Moreover, having worked on or offered service for 19 of 22 refineries in India the company has natural advantage when it comes for revamp/de-bottlenecking /expansion/modernization going-forward.

EIL is a zero-debt and cash-rich company with strong operating cash flow. Cash and bank balance at end of Sep 2013 was Rs 1868.92 crore.

EIL has dominant market share in investment projects in hydrocarbon and fertilizer sectors. As and when the investment cycle picks up in these sectors, the company will be a major beneficiary.

Weaknesses

The order booking has come down from the levels of about Rs 4054.6 crore in FY2011 to about Rs 758.6 crore and Rs 1438.4 crore respectively in FY 2012 and FY 2013. This is due to severe slowdown in order finalization especially in sectors such as refinery, petrochemicals and Fertilizers in India as well as strong competition in overseas market. Overall order backlog end of September 30 2013 stood at Rs 3232.39 crore, which is flat to slightly negative on a year on year basis due to lower LSTK orders. Of the current order backlog about Rs 1749.45 crore are C&EP orders, which are more or less flat year on year. Balance Rs 1482.94-crore orders comprise LSTK orders, which are down by about 20% year on year. The fall in order book is largely due to the fact that the ordering cycle is delayed due to lack of confidence and near term general elections.

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

Valuation

EIL's consolidated revenue grew at a CAGR of 13% to Rs 2526.77 crore in the year ended March 2013 from Rs 1552.06 crore in FY 2009. For the same period, PAT increased at a CAGR of 16% to Rs 575.93 crore.

For the nine months ended December 2013, standalone sales were lower by 33% to Rs 1328.76 crore. After a 40-basis-point contraction in OPM, the operating profit was lower by 33% to Rs 303.92 crore. But spurred by higher other income, de-growth at the net profit level moderated to 16% to Rs 376.21 crore. Trailing 12-month (TTM) standalone EPS works out to Rs 16.5.

The offer price of Rs 145-150 discounts the standalone TTM EPS by 8.8- 9.1 times. Retail investors will get discount of Rs 6 on the offer price.

There is no listed player comparable to EIL as the company's business model becomes unique due to its soft skills in consultancy & engineering services.

In the last three months, the high, low and average price of EIL was Rs 183.66, Rs 144.55 and Rs 162.26, respectively. The stock beta was low at around 0.83, indicating low volatility in share price.

Though EIL's near-term prospects remain lackluster, the offer price adequately discounts the near-term pain. Once the investment cycle picks up in India, EIL can offer good upside.