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Engineers India: Share price reflects tough environment

Source : BUSINESS_STANDARD
Last Updated: Thu, Jan 17, 2013 20:16 hrs
Engineers of ONGC work inside the Kalol oil field in Gujarat

Following the government's nod to disinvestment in Engineers India Ltd (EIL), the stock tanked by over five per cent in the last few days. Under the disinvestment initiative, the government will be diluting 10 per cent of its current holdings of 80.4 per cent in EIL. At the current market price of Rs 228 the government could raise about Rs 770 crore through the sale. The stock could remain under pressure till the follow-on public offering is concluded. "Typically, news of disinvestment causes some selling pressure because market believes that the supply will increase post the sale of stake. Also, in these cases, upside is capped for the time being, which indicates liquidation of some positions taking place.

Lastly, investors in the hope of lower floor price at the time of offer, compared to the ruling shares prices, tend to sell the stock in advance," says Arun Kejriwal of Kejriwal Research and Investment. Apart from disinvestment, the stock could continue to remain under pressure given the subdued business outlook due to lower revenue visibility led by downturn in hydrocarbon capex cycle.

Downside capped
However, analysts do not see a major correction in the share price as the stock is trading at attractive valuations. "Lower order book should not worry because these are cyclical businesses and orders are lumpy. One should have a longer term horizon; you are buying a company which is a leader in its sector. There is no one in India that undertakes the kind of projects Engineers India can execute, whether it is in the private sector or in the public sector," says Daljeet Kohli, head of research, IndiaNivesh Securities.

EIL, which primarily caters to oil PSUs offering consultancy and EPC services, is currently trading at 11 times its FY14 earnings, which is reasonable considering stable growth, high return on equity of 38 per cent, cash in the books, zero debt and a long history of consistent dividend payment. The company is sitting on cash and cash equivalent of about Rs 2,300 crore, which is almost 30 per cent of its current market capitalisation. Besides, its asset light business model, ability to execute complex projects and huge client base of PSU oil companies are worth considering.

STRONG MARGINS (in Rs cr)

FY12 FY13E FY14E
Revenue 3,698.8 3,046.9 2,992.4
Ebitda (%) 19.1 22.8 22.5
PAT 636.3 619.5 658.5
EPS (Rs) 18.9 18.4 19.5
PE (x) 12.1 12.4 11.7
RoE (%) 38.7 30.1 26.3
Source: Indsec Securities and Finance

The company has however, underperformed the markets given the slowdown in hydrocarbon capex in the country. Its dependence on oil PSUs has led to a fall in the business as most of the capex in the public sector has been delayed since companies in the sector are cash-starved. This is also reflected in the current order book of the company, which has dropped from Rs 7,484.3 crore in FY11 to Rs 4,353 crore by the second quarter of 2012. As a result, order book to sales stood at just 1.2 times compared to 2.65 times in FY11.

In the first half of the current financial year, revenues have dropped by 17.4 per cent. Even for the full financial years 2013 and 2014, revenue estimates suggest a marginal decline. However, margins could improve as a result of higher revenue from international business, private clients and contribution from project management consultancy business, which is a relatively high-margin business.


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