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Engineers India: Topline falls, margins improve
Jan 25, 2014 | Updated on Jan 27, 2014

Engineers India Ltd (EIL) declared the results for the third quarter of the financial year 2013-2014 (3QFY14). The company has reported a 30.5% YoY decline in total revenues and a 2% YoY increase in net profits during the quarter. Here is our analysis of the results.

Performance summary
  • Net sales declined by 30.5% YoY during 3QFY14. For the nine months ended December 2013 (9MFY14), net sales fell by 33.3% YoY.
  • The 24.6% YoY decline in operating profit during the quarter was at a comparatively slower pace since the company witnessed margin improvement during the quarter. Operating margins came in at 23.5% during the quarter as compared to 21.7% seen during the same period last year. During 9MFY14, operating margins increased by 0.3% YoY to 22.9%.
  • Other income increased sharply by 61.9% YoY.
  • Owing to the significant jump in other income, net profit witnessed a marginal rise of 2% YoY during the quarter. During 9MFY14, net profits saw a fall of 16% YoY.

Financial performance snapshot
(Rs m) 3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
Net sales 6,048 4,204 -30.5% 19,925 13,288 -33.3%
Expenditure 4,737 3,215 -32.1% 15,417 10,248 -33.5%
Operating profit (EBDITA) 1,311 989 -24.6% 4,508 3,039 -32.6%
Operating profit margin (%) 21.7% 23.5%   22.6% 22.9%  
Other income 669 1,084 61.9% 2,112 2,592 22.8%
Interest expense/(income) - -   1 0  
Depreciation 24 27 13.3% 84 74 -11.2%
Profit before tax 1,956 2,045 4.6% 6,535 5,557 -15.0%
Tax 633 695 9.9% 2,056 1,795 -12.7%
Extraordinary items/prior period items - -   - -  
Profit after tax/(loss) 1,323 1,350 2.0% 4,479 3,762 -16.0%
Net profit margin (%) 21.9% 32.1%   22.5% 28.3%  
No. of shares       336.9 336.9  
Diluted earnings per share (Rs)*          16.5  
P/E ratio (x)*         9.4  
*On a trailing 12-months basis, adjusted for extraordinary items

What has driven performance in 3QFY14?
  • EIL reported a 30.5% YoY decline in its revenues during 3QFY14. The decline was due to the 56.8% YoY decrease in revenues from the turnkey projects' segment. The consultancy & projects segment delivered a muted performance during the quarter with its revenues declining marginally by 1.8% YoY.

    Segment Breakdown
      3QFY13 3QFY14 Change
    Consultancy & engineering projects 2,896 2,843 -1.8%
    Turnkey Projects 3,152 1,361 -56.8%
    *Excludes inter-segment revenue

  • EIL's operating margins stood at 23.5% during 3QFY14, as compared to 21.7% in 3QFY13. The expansion in operating margins was attributable to the significant decrease construction material costs (as percentage of sales).

    Operating Cost Breakdown
      3QFY13 % of Sales 3QFY14 % of Sales
    Sub contract payment 872 14.4% 899 21.4%
    Construction material 1,924 31.8% 262 6.2%
    Staff cost 1,444 23.9% 1,529 36.4%
    Other 497 8.2% 525 12.5%
    Total 4,737   3,215  

  • Other income rose sharply by 61.9% YoY during the quarter.

  • Expansion in operating margins coupled with higher other income helped the company report a marginal 2% YoY rise in net profits during the quarter. Net profit margins expanded from 21.9% in 3QFY13 to 32.1% in 3QFY14.
What to expect?
At the current price of Rs 156, the stock is trading at a multiple of 9.4 times its trailing twelve month earnings. The slowdown in order inflows has adversely impacted the company's growth in the current fiscal year. This in turn has been a function of the overall macroeconomic conditions that have hurt the infrastructure sector as a whole.

It must be noted that the company has proposed a follow-on public offer (FPO) through an offer for sale by Government of India through the Ministry of Petroleum and Natural Gas. The draft red herring prospectus is available on website of Securities and Exchange Board of India (SEBI).

We believe that the current problems and negativity surrounding EIL are short to medium term in nature. They are mostly related to the overall slowdown in the economy in general and the infrastructure space in particular. However, the long term outlook for the company remains positive. At the current valuations we believe EIL's stock is an attractive investment and therefore maintain our 'Buy' view on the same from a 2-3 years perspective.

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