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Engineers India Ltd – Review

July 30, 2007

Central government of India owns a 90.40% stake in Engineers India (EIL). EIL renders project consultancy and engineering services and also undertakes lumpsum turnkey (LSTK) projects. The company derives nearly 90% of its revenue from the oil and gas sector.

Of the two segment in which it operates – consultancy and engineering and turnkey projects – the consultancy segment earns high margin, while the turnkey project division’s margin is low.

There has been a consistent improvement in the growth of the consultancy business. The business grew 5% in FY 2005, and 15% in FY 2006 and FY 2007. Also, margin continued to show improvement. The profit before interest and tax (PBIT) margin of this division improved from 28% in FY 2005 to 36% in FY 2007. EIL’s consultancy revenue is expected to grow 20% and at least maintain the margin, going forward. This is in spite of the sharp rise in salaries effected in early 2007.

New order inflow to the domestic consultancy and engineering division stood at Rs 900 crore in FY 2007 (Rs 485 crore in FY 2006). Export consultancy & engineering orders stood at Rs 68 crore in FY 2007 (Rs 325 crore in FY 2006). New-order flow from the international markets was exceptionally large in FY 2006 due to receipt of two big orders in that year. A Rs 250-crore backlog will be executed in FY 2008 and beyond. The company expects two big export orders to come by December 2007.

Recently, EIL received a Rs 900-crore contract from IOC for another refinery in Panipat. This will contribute Rs 250 crore to topline and the same margin earned in its previous contract in FY 2008.

EIL is expected to register net sales and net profit of Rs 835.60 crore and Rs 198.50 crore in FY 2008. The turnkey-project revenue is expected to be Rs 250 crore (up from Rs 82 crore in FY 2007) and consultancy business to grow 20% in FY 2008. This gives an EPS of Rs 35.3. At the current market price of Rs 478 (52-week high/low: Rs 610/ Rs 405), the scrip is available at a P/E of only 13.6 times its FY 2008 earning. With more than Rs 1000-crore liquid funds (Rs 178 per share) and strong order book, both for consultancy as well as turnkey projects.

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