Dolat Capital - Eil

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DOLAT CAPITAL

I n d i a

R e s e a r c h

August 8, 2014

C a p i t a l G o o d s / A n n u

a l R e p o r t A n a l y s i s

Engineers India

CMP: ` ` ` ` ` 274 Target Price: ` ` ` ` ` 380 Buy

BSE Sensex 25320

NSE Nifty 75,67

Scrip Details

Equity ` 1685mn

Face Value ` 5/-

Market Cap ` 92bn

USD 1.5bn

52 week High/Low ` 331 / 121

Avg. Volume (no) 381,183

BSE Code 532178

NSE Symbol ENGINERSIN

Bloomberg Code ENGR IN

Reuters Code ENGI.BO

Shareholding Pattern as on June’14(%)

Promoter 69.37

MF/Banks/FIs 12.98

FIIs 8.55

Public / Others 9.10

Engineers India (EIL) annual report for FY14 highl ights the company’s efforts and successes in the international

markets. During the year, the company added new geographies/ clients in the international markets. Increasing

presence in the international markets insulates the company from the vagaries of capex cyc le in India, in our view. The company also highlights its initiatives and plans in the non-hydrocarbon segments. Key updates of

FY14 and the road ahead for the company is stated in our annual report analysis below. We maintain our

posit ive view on the company as we believe it to benefit from order flows both in domestic and international

markets. Recommend BUY on the stock with a target price of ` ` ` ` ` 380 per share.

Excerpts of MD&A

Step jump in the international business

During FY14, EIL’s intense focus on expanding its international business

met with considerable success. EIL was successful in expanding its footprints

in new geographies like Indonesia, Turkey, Angola and Nigeria. Upcoming

business opportunities for large scale projects are also envisaged in Algeria,

Oman and Bahrain.

Importantly, EIL’s efforts met considerable success as it was appointed as

Project Management Consultant for a 20 MMTPA Refinery and 600,000 TPA

Polypropylene plant in Nigeria. This order is to the tune of USD 139 mn and

would be booked in the order inflow for FY15E.

In Oman, EIL has been awarded PMC contract of USD 43 mn, for Liwa

Plastics Project of M/s ORPIC. The same will also be booked in FY15E. In

Bahrain, EIL has been pre qualified by M/s BAPCO for providing PMC services

for its refinery expansion project. EIL has bid for the project which is currently

under evaluation.

The Company strengthened its credentials in the fertilizer sector by securing

another prestigious PMC assignment this year for setting up a 1,900 TPD

Ammonia Plant for M/s PAU (Indonesia).

EIL has been successful in expanding its client base further with addition of

new clients in existing and diversified business segments. New overseas

clients added in the year were M/s PAU (Indonesia); M/s Gulf Petrochem

(Sharjah), M/s Sonangol (Angola), M/s PIC Kuwait and TPAO (Turkey).

EIL was successful in signing long term general engineering services

agreement with the M/s GASCO (UAE). Additionally, general engineering

services agreements with Equate (Kuwait) and BAPCO (Bahrain) wereextended for 2 years in FY14.

The recent bidding performance in large scale projects (viz. Dangote

Refinery, ORPIC Petrochemicals and ensuing BAPCO Project) has

increased EIL’s acceptability in the MENA region significantly. The

management is hopeful to receive further inquiries for large scale

expansion projects f rom MENA region.

Financials

Year Net Sales % Growth EBIDTA OPM % PAT % Growth EPS( ` ` ` ` ` ) % Growth PER (x) ROANW(%) ROACE (%)

FY14 18,844 (23.2) 3,793 20.1 4,825 (23.8) 14.3 (23.8) 19.1 20.5 33.1FY15E 20,242 7.4 4,453 22.0 5,280 9.4 15.7 9.4 17.5 20.6 33.3

FY16E 24,843 22.7 5,945 23.9 6,446 22.1 19.1 22.1 14.3 22.8 37.6

FY17E 28,733 15.7 6,953 24.2 7,271 12.8 21.6 12.8 12.7 23.2 37.6

Figures in ` mn

Sr. Analyst: Pawan Parakh Associate: Avinash Kumar Tel : +9122 4096 9712 Tel: +9122 40969764E-mail: [email protected] E-mail: [email protected]



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DOLAT CAPITALIndia Research

August 8, 2014 EIL

R&D focus continues

As at FY14, EIL’s patent portfolio has grown to 16 live patents and 13 pending

patent applications relating to various process technologies.

Despite decline in revenues in FY14, EIL’s focus on R&D continued. In FY14,

the company spent `

209.3 mn on R&D which is an increase of 30% on a YoYbasis.

Financial Performance

Revenue and order book declines

EIL saw a consecutive year of decline in revenues for FY14. Revenue for the

year declined by 23% YoY to ` 18.8 bn. The decline in revenues was on expected

lines as weak investment cycle over last 2-3 years meant a steady decline in

EIL’s order book.

After witnessing a peak order book of ` 76 bn (as at FY11 end), EIL has witnessed

a consistent decline to ` 28 bn (as at FY14 end). Order inflow for FY14 declined20% YoY to ` 11.5 bn.

The decline in revenues was visible in both segments (viz.PMC and LSTK).

While the PMC revenues declined marginally by 1% YoY to ` 11.7 bn, the LSTK

segment revenues declined sharply by 44% YoY to ` 7.1 bn.

Margins compressed but still healthy

EBITDA margins for FY14, though declined by ~400bps YoY, still stands healthy

at 20.1%.

Lower revenues and thereby negative operating leverage were the key reasons

for decline in EBITDA margins. While contract expenses as % of LSTK sales increased ~1200bps to 95.9%;

employee expense as % of PMC sales increased 230bps YoY to 51.1%.

Exhibit 1: Operating cost components for EIL over the years

Source: Company, Dolat Research



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August 8, 2014 EIL

Higher other income aided by wri te backs

Other income for the year increased 6.2% YoY to ` 3.4 bn. It constituted ~48%

of the PBT for FY14.

During FY14, EIL had provision write backs of ` 1 bn (as against ` 699 mn for

FY13). Interest income (on the back of C&CE of ~Rs24.8 bn) continued to be largest

component of other income at ` 1.8 bn.

Dupont analysis

RoE for FY14 stood at 19.6% (as against 25.8% in FY13). As can be seen in the

Dupont analysis in the table below, the dip was primarily due to lower asset turns.

While EBITDA margins declined, higher other income led to only 20bps YoY

compression in net margins. Revenue for FY14 declined 23% YoY leading to 870

bps decline in RoE.

Exhibit 2: Dupont Analysis

Dupont FY10 FY11 FY12 FY13 FY14

PAT margin 22.1% 19.8% 16.4% 25.8% 25.6%

Asset turns 1.78 1.84 2.11 1.10 0.77

Financial leverage 1.00 1.00 1.00 1.00 1.00

RoE 39.4% 36.4% 34.6% 28.3% 19.6%


Consistent history of posi tive cash flow from operations

EIL generated cash flow from operations to the tune of ` 830 mn in FY14. On a

YoY basis, cash flow from operation has declined substantially by 2.6 bn, primarily

on account of fall in operating profits and higher contribution of other income. Despitedecline in revenues and margin contraction, the company has been able to generate

positive cash flows from operation, which we believe is highly commendable.



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August 8, 2014 EIL

Balance Sheet analysis

Sources of funds:

Government s take reduced to 69.4 % - This year the government divested its

stake in the EIL by 10% by a Follow-on Public offer (FPO). In addition, 1.03% of equity capital of EIL was transferred to CPSE ETF. Consequently, the government

stake now stands reduced by 11.03% to 69.4%.

Dividend – The company declared dividend of ` 6. 5 per share for FY14 ( ` 6.0 for

FY13). Historically EIL has maintained a dividend payout ratio of ~37%, but the

same has increased to ~53% for FY14.

Debt – EIL continues to be a debt free company.

Capex – For FY14, EIL did a capex of ~Rs780 mn primarily for its new office

buildings in Gurgaon, Navi Mumbai & Chennai.

Working capital – EIL’s net working capital (ex-cash) as % of sales remained

stable at -28%. EIL continues to operate on negative working capital primarily on

account of substantial contribution of PMC business in the order book and execution.

Exhibit 3: PMC segment revenue and margin profil e


Exhibit 4: LSTK segment revenue and margin profile




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August 8, 2014 EIL

Exhibit 5: Order book and order inflows


Exhibit 6: Working capital as % of sales




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August 8, 2014 EIL

INCOME STATEMENT ` ` ` ` ` mn

Particulars Mar14 Mar15E Mar16E Mar17E

Net Sales 18,844 20,242 24,843 28,733

Total Income 18,844 20,242 24,843 28,733

Total Expenditure 15,051 15,789 18,898 21,780

Raw Material 6,855 6,485 6,683 7,594

Employee Expenses 5,978 6,729 9,126 10,647Other Expenses 2,218 2,574 3,090 3,539

Other Income 3,360 3,276 3,514 3,739

EBIDTA (Excl. Other Income) 3,793 4,453 5,945 6,953

EBIDTA (Incl. Other Income) 7,153 7,729 9,459 10,692

Gross Profit 7,153 7,729 9,459 10,692

Depreciation 145 186 250 305

Profit Before Tax & EO Items 7,008 7,543 9,209 10,387

Extra Ordinary Exps/(Income) (28) 0 0 0

Profit Before Tax 7,036 7,543 9,209 10,387

Tax 2,183 2,263 2,763 3,116

Net Profit 4,853 5,280 6,446 7,271

BALANCE SHEET


Sources of Funds

Equity Capital 1,685 1,685 1,685 1,685

Other Reserves 22,933 25,073 27,986 31,332

Net Worth 24,618 26,757 29,671 33,016

Deferred Tax Liability (2,309) (3,754) (3,754) (3,754)

Total Capital Employed 22,309 23,003 25,917 29,262

App lications of Funds

Gross Block 2,724 4,042 5,042 6,042

Less: Accumulated Depreciation 1,545 1,731 1,981 2,286

Net Block 1,179 2,311 3,061 3,756

Capital Work in Progress 1,318 1,000 1,000 1,200

Investments 7,366 7,366 7,366 7,366

Current Assets, Loans & Advances

Inventories 10 0 0 0Sundry Debtors 3,431 2,496 3,063 3,542

Cash and Bank Balance 17,680 17,318 20,616 24,026

Loans and Advances 1,001 1,109 1,361 1,574

Other Current Assets 3,211 3,882 4,764 5,511

sub total 25,333 24,805 29,804 34,653

Less : Current Liabilities & Provisions

Current Liabilities 8,271 8,318 10,209 11,808

Provisions 4,615 4,159 5,105 5,904

sub total 12,887 12,478 15,314 17,712

Net Current Assets 12,446 12,327 14,490 16,941

Total Assets 22,309 23,003 25,917 29,262

E-estimates

IMPORTANT RATIOS


(A) Measures of Performance (%)

Contribution Margin

EBIDTA Margin (excl. O.I.) 20.1 22.0 23.9 24.2

EBIDTA Margin (incl. O.I.) 38.0 38.2 38.1 37.2

Gross Profit Margin 38.0 38.2 38.1 37.2

Tax/PBT 31.0 30.0 30.0 30.0

Net Profit Margin 25.8 26.1 25.9 25.3

(B) As Percentage of Net Sales

Raw Material 36.4 32.0 26.9 26.4

Employee Expenses 31.7 33.2 36.7 37.1

Other Expenses 11.8 12.7 12.4 12.3

(C) Measures of Financial Status

Inventory Turnover Ratio (x) 1,875.4 0 0 0Fixed Assets Turnover (x) 6.9 5.0 4.9 4.8

Working Capital Turnover (x) 1.5 1.6 1.7 1.7

Non Cash Working Capital ( ` Mn) (5,234) (4,991) (6,126) (7,085)

(D) Measures of Investment

EPS ( ` ) (excl EO) 14.3 15.7 19.1 21.6

EPS ( ` ) 14.2 15.7 19.1 21.6

CEPS ( ` ) 14.8 16.2 19.9 22.5

DPS ( ` ) 6.5 8.0 9.0 10.0

Dividend Payout (%) 45.6 51.1 47.0 46.3

Profit Ploughback (%) 54.4 48.9 53.0 53.7

Book Value ( ` ) 73.1 79.4 88.1 98.0

RoANW (%) 20.5 20.6 22.8 23.2

RoACE (%) 33.1 33.3 37.6 37.6

RoAIC (%) (Excl Cash & Invest.) 228 146 168 197

(E) Valuation Ratios

CMP ( ` ) 274 274 274 274

P/E (x) 19.1 17.5 14.3 12.7

Market Cap. ( ` Mn.) 92,321 92,321 92,321 92,321

MCap/ Sales (x) 4.9 4.6 3.7 3.2

EV ( ` Mn.) 74,640 75,003 71,705 68,295

EV/Sales (x) 4.0 3.7 2.9 2.4

EV/EBDITA (x) 19.7 16.8 12.1 9.8

P/BV (x) 3.8 3.5 3.1 2.8

Dividend Yield (%) 2.4 2.9 3.3 3.6

E-estimates

CASH FLOW


Profit before tax 7,008 7,543 9,209 10,387

Depreciation & w.o. 145 186 250 305

Direct taxes paid (2,183) (2,263) (2,763) (3,116)

Chg. in Working Capital (1,629) (243) 1,135 959

Other 51 (1,445) (0) 0(A) CF from Opt. Activities 3,392 3,778 7,830 8,535

Capex (751) (1,000) (1,000) (1,200)

Free Cash Flow 2,641 2,778 6,830 7,335

Inc./ (Dec.) in Investments (831) 0 0 0

(B) CF from Invt. Activities (1,582) (1,000) (1,000) (1,200)

Dividend Paid (Incl. Tax) (2,555) (3,140) (3,533) (3,925)

(C) CF from Financing (2,555) (3,140) (3,533) (3,925)

Net Change in Cash (745) (362) 3,298 3,410

Opening Cash balances 18,480 17,680 17,318 20,616

Closing Cash balances 17,680 17,318 20,616 24,026

E-estimates



DOLAT CAPITAL

This report contains a compilation of publicly available information, internally developed data and other sources believed to be reliable. While

all reasonable care has been taken to ensure that the facts stated are accurate and the opinion given are fair and reasonable, we do not take

any responsibility for inaccuracy or omission of any information and will not be liable for any loss or damage of any kind suffered by use of

or reliance placed upon this information. For Pvt. Circulation & Research Purpose only.

Dolat Dolat Dolat Dolat Dolat Capital Market Pvt. Ltd.

20, Rajabahadur Mansion, 1st Floor, Ambalal Doshi Marg, Fort, Mumbai - 400 001

Our Research reports are also available on Reuters Thomson Publishers and Bloomberg (DCML <GO>)

BUY Upside above 20%

ACCUMULATE Upside above 5% and up to 20%

REDUCE Upside of upto 5% or downside of upto 15%

SELL Downside of more than 15%

Analyst Sector/Industry/Coverage E-mail Tel.+91-22-4096 9700

Amit Khurana, CFA Co-Head Equities and Head of Research [email protected] +91-22-40969745

Amit Purohit Consumer [email protected] +91-22-40969724

Kunal Dalal Auto & Auto Ancillaries [email protected] +91-22-40969749

Milind Bhangale Pharma [email protected] +91-22-40969731

Pawan Parakh Capital Good [email protected] +91-22-40969712

Priyank Chandra Oil & Gas [email protected] +91-22-40969737Rahul Jain IT Services [email protected] +91-22-40969754

Rajiv Pathak Financials [email protected] +91-22-40969750

Prachi Save Derivatives [email protected] +91-22-40969733

Associates Sector/Industry/Coverage E-mail Tel.+91-22-4096 9700

Afshan Sayyad Agrochemicals [email protected] +91-22-40969726

Abhishek Lodhiya Real Estate [email protected] +91-22-40969753

Avinash Kumar Capital Goods [email protected] +91-22-40969764

Devanshi Dhruva Economy [email protected] +91-22-40969756

Manish Raj Cement [email protected] +91-22-40969725

Pranav Joshi Financials [email protected] +91-22-40969706

Equity Sales/Trading Designation E-mail Tel.+91-22-4096 9797

Purvag Shah Principal [email protected] +91-22-40969747

Vikram Babulkar Co-Head Equities and Head of Sales [email protected] +91-22-40969746

Kapil Yadav AVP - Institutional Sales [email protected] +91-22-40969735

Parthiv Dalal AVP - Institutional Sales [email protected] +91-22-40969705

P. Sridhar Head Sales Trading [email protected] +91-22-40969728

Chandrakant Ware Senior Sales Trader [email protected] +91-22-40969707

Jatin Padharia Head of Sales Trading - Derivatives [email protected] +91-22-40969703

Shirish Thakkar Sales Trader - Derivatives [email protected] +91-22-40969702

Dolat Capital - Eil

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