Recommendation From Infrastructure Sector

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.




Here Is Why
Strong financial performance in H1FY17
Robust order book
Recommendation for 1:1 bonus issue 

The Indian engineering sector has witnessed remarkable growth over the last few years, driven by increased investments in infrastructure and industrial production. The capital goods and engineering turnover in India is expected to reach USD 125.4 billion (Rs 853,879 crore) by FY17.

Engineers India (EIL) is an engineering consultancy firm engaged in engineering, procurement and construction (EPC) services. The company's segments are consultancy and engineering projects and turnkey projects. It focuses on various sectors, including fertilizer and liquefied natural gas (LNG), non-ferrous metallurgy, infrastructure, strategic crude oil storage, nuclear and solar energy and exploration and production. EIL offers various technologies for petroleum refining, oil and gas processing and aromatics. 

On the financial front, EIL’s revenues declined 19.07 per cent to Rs 681 crore in H1FY17 as compared to the same period in the previous financial year. However, the company’s EBITDA more than doubled to Rs 167 crore in H1FY17 on a yearly basis on the back of 55.59 per cent reduction in operating and manufacturing expenses during the quarter. Its net profit also rose 37.81 per cent to Rs 174 crore in H1FY17 on a yearly basis. EIL’s net profit margin expanded 893 basis point to 25.57 per cent in H1FY17 as compared to the same period in the previous fiscal.

On the segmental revenue front, EIL earned 46.19 per cent from consultancy, with domestic revenue at 22.49 per cent from consultancy, while overseas revenue at 17.33 per cent from turnkey projects and 13.99 per cent from other income in H1FY17.

Order-wise, EIL earned Rs 843.3 crore from consultancy, out of which domestic income was Rs 144.1 crore and overseas income was Rs 1,266 crore from turnkey projects in H1FY17. On a cumulative basis, EIL has order book of Rs 3,250 crore from consultancy and Rs 1,846 crore from turnkey. Meanwhile, the company’s order book for H1FY17 comprised of 85 per cent domestic and 15 per cent overseas business. Its ROE and ROCE stood at 9.75 per cent and 14.99 per cent in FY16. 

According to EIL management, the company has been focussing on controlling costs and is expecting reduction therein. The company is expected to improve margin up to 30 per cent in the near term. EIL is a debt-free company. EILs’ consultancy segment is expected to grow 13-15 per cent, while turnkey segment is expected to remain subdued in the second half of current financial year. The company is expecting PAT to remain robust.

EIL’s Board of Directors has recommended issue of bonus shares in the proportion of 1 new equity share of FV of Rs 5 each for every 1 fully paid equity share of FV of Rs 5, subject to the approval of shareholders.

On the valuation front, EIL’s share price is trading at a PE multiple of 33.45x as against peers such as L&T Technology Services (18.48x), JBM Auto (15.73x). The industry PE multiple is 21.28x. The company’s EPS stands at Rs 7.76. EIL’s PB is trading at 3.2x. The company has given dividend yield of 1.54 per cent in FY16.

Considering EIL’s strong financials and robust order book position, we recommend a buy on the stock.