Engineers India

Engineers India Ltd – Deep Value

Engineers India Ltd (EIL) is engaged in the business of providing engineering and related technical services for petroleum refineries and other industrial projects. The company is into other areas such as pipelines, petrochemicals, oil and gas processing, offshore structures and platforms, fertilizers, metallurgy and power. The company is providing services from concept to commissioning and their association with clients extends beyond the commissioning of their plants through monitoring the operation of each plant and accumulating feedback on its performance.

Consultancy services revenues constitutes 43% of sales (3/4th domestic, 1/4th overseas execution); while Turnkey revenues constitute 57% of sales. Consultancy margins are around 25-30% while Turnkey segment margins are around 3-5%.

The Company is working on reducing the intensity of manpower costs. At the end of FY20, EIL had 2806 employees, including 2409 professionally qualified employees (mainly engineers). The employee head count has been on a decline from 3192 employees in FY15. As a result, employee productivity has been consistently rising. The Company is also going for temporary hiring of professionals depending upon the volume of EPC work to be executed.

EIL’s balance sheet is healthy with zero debt and cash balance of ~Rs.2700 cr. Its book to-bill is at a healthy ~3x (order book at Rs.8297 cr).  Consultancy and LSTK order book stand at Rs.4236 cr (51% of total order book) and Rs.4062 cr, respectively.  Order inflows in Q3FY21 subdued at Rs.183 cr. All of the orders won in Q3FY21 have been won in the PMC segment. The management expects to secure orders worth ~ Rs.1500 cr in FY21.

Management expects Rs.1500-2000 cr orders in FY22. Rs.600 IOCL-Panipat, Rs.200 cr Rasayani, Rs.600 cr HMEL Bhatinda and MRPL Expansion (Rs.250 cr) are prospects for FY22. The management expects one of the packages for CPCL Nagapattinam (Rs.300-500 cr) to be awarded in 4QFY21. With crude prices going up & focus on infrastructure in the latest budget, we should see renewed interest.

The vision of Gas Grid is steadily turning into a reality. Natural Gas is seen to increase its share to 20% by 2030 which could mean creation of more energy consumers driving the regional growth.

EIL is optimistic that with planned capex expenditure of all the Oil & Gas majors in the hydrocarbon sector, the coming years would offer a number of opportunities across the value chain especially in the midstream and downstream segment with integrated refinery and petrochemical complexes as well as standalone petrochemical plants. As per the management, the Company has already two committed orders 1) IOCL – Panipat Refinery expansion around Rs. 600 cr 2) BPCL refinery order around Rs. 200 cr. Both of these projects are in phase 1 & 2 albeit due to Covid-19 challenges it has been delayed and targeted to middle of the next year.

Recently IOCL announced a new Greenfield refinery at Nagapattinum in Tamil Nadu with a capex of around Rs. 31,500 cr. A joint venture between Indian Oil and its subsidiary Chennai Petroleum Corporation. The Company expects the orders to come through by this year or beginning of next year.

The company expects 1-2 small projects from Numaligarh refinery for revamp & quality improvement which could materialize by end of this quarter. The company also expecting orders from HPCL-Mittal Energy Ltd. (HMEL) cracker expansion in next year

Despite being a government entity, the company has the ability to compete with private sector/MNC peers on the basis of its experience and technology.

At current price cash holding is in excess of 50% (~Rs.40/sh) of market cap of the company. We believe EIL offers deep value at current prices and trades at a significant discount to its historical PE ratio. In addition, with its high payout ratio (75%) it offers a 7-9% dividend yield. At current price the stock is an excellent value play with attractive dividend income.

EIL is a debt free, asset light Company with net cash holdings and ROCE in excess of 25%. We recommend a BUY on the stock.

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Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 12 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.

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