Engineers India Ltd – Visit Note

Engineers India Ltd (EIL) is a state owned leader in hydrocarbon & petrochemical projects consulting and lump sum turnkey contract (LSTK) with presence in wide range of industries viz Oil & Gas (Upstream, Mainstream and Downstream), Petrochemicals, Pipel ine, Mining & Metallurgy, Infrastructures and Fertilizers etc. The company presently has Rs~5500 crore of order which is 1.5x of its FY12 sales providing short term revenue visibility of one year. We recently interacted with management of EIL and followings are the key takeaways of the meeting.

Key Takeaways of the meet:

Virtual monopoly in hydrocarbon project consulting:

EIL provides end to end consulting and turnkey solution right from project conceptualization till commissioning and meeting specific requirements of its clients. The company enjoys virtual monopoly in project consulting due to its large pool of technical man power and patented process technology used hydrocarbon and petrochemical industries. The company currently has 13 live and 16 pending patent applications relating to various processes.

The bidding of such projects requires wide experience and long standing relationship with existing clients as significant chunk of hydrocarbon space is dominated by state owned entities. The company has vast experience in various industries and has completed 59 refinery projects including 10Greenfieldprojects, 7 petrochemical complexes, 17 turnkey projects, 28 mining projects etc to its credential.

Consulting- ‘a high margin business’:

The company though enjoys blended EBITDA margin of close to 25-26 percent, its consulting business fetches 37-40 percent EBITDA margin. Within consulting space, theGreenfieldhydrocarbon, petrochemical projects commands better margin than Brownfield due to higher scope of activities. The company will strive to maintain this margin going forward. The Lump sum turnkey contract (LSTK) segment however contributes 8-9 percent of EBITDA margin. The company would continue to focus on consulting segment of most of newer verticals going forward.

Foraying into newer segments:

The company has plans to expand its consultancy wings in other segments like power (Hydro, Thermal, Nuclear), Road, Water & waste management, gas based fertilizers plants other energy sectors like CBM, Shale gas, Oil & gas exploration etc. EIL would mainly focus on consultancy and engineering space of these new areas going forward.

Strong balance sheet with healthy cash and cash equivalent:

The company has strong balance sheet with zero debt on book and healthy cash and cash equivalent of Rs2278 crore as on March 2012 which is pegged at Rs67 per share. The company in addition to above also has negative cash conversion period of more than 6 months resulting into saving on working capital front and boosting the free cash flow.

Favorable business opportunities

The consulting plays major role in overall profitability of the EIL. Typically consulting accounts for 4-5 percent of total project cost in hydrocarbon industries whereas it requires Rs~2000 crore worth of investments to set up 1 million MT of hydrocarbon project. The company presently has Rs5500 crore worth of orders which nearly 1.5x of its FY12 sales. The company during the quarter has added Rs900 crore orders including Rs720 crore worth of order forKochirefinery project and further plans add another Rs3000-3500 crore worth of orders during the rest of the years.

12th Plan envisages USD 1 trillion investments in infrastructure and management expect to total business opportunities USD 60-70 billion in hydrocarbon space. The refining capacity of PSU companies set to grow from current ~151 million MT to ~198 million MT by 2017 whereas for private, it is expected to reach 113 million MT from current 81 million MT for the same period (a net addition of ~80 million MT).

The strategic storage reserve for energy security to reach 12.5 million MT from current 5 million MT in next 5-7 years. Capacity augmentation in Urea, Ammonia and Phosphates’ Fertilizers of about 11.4 million MT and 9 million MT of Alumina capacity additions on card by 2017. According to HPEC report on urban infrastructure, an investment of ~40 lakh crore envisages between 2012 to 2031 on road, water, redevelopments, drainages, sewage, mass transit etc.

Financials & Valuations:

The company is steadily growing at 32 percent CAGR since last two years in terms of sales to Rs2678 crore in FY11 whereas EBITDA and PAT has grown at 43 and 23 percent CAGR to Rs660 and Rs531 crore respectively. The company has maintained its EBITDA margin of 25 percent level whereas the net margin is also maintained at 20 percent level. EIL has Rs5500 crore orders which is nearly 1.5x of its FY12 sales having an execution period of 18 months excluding newKochiproject with execution time of 4 years.

The company going forward expects consolidated order inflows of Rs3000-3500 crore during rest of the year 2013. In addition we expect the exploration and petrochemical activities to pick up in FY13 onwards. With entry into newer segment, the scope of business activities to further expand in consultancy space going forward. We have positive view on the stock.