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Engineers India Ltd.: Turnkey a problem - Views on News from Equitymaster
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Engineers India Ltd.: Turnkey a problem
Jan 30, 2013

Engineers India Ltd (EIL) declared the results for third quarter of the financial year 2012-2013 (3QFY13). The company has reported a 23.7% YoY decline in total revenues and a 12.5% YoY decline in net profits during the quarter. Here is our analysis of the results.

Performance summary
  • Net sales declined by 23.7% YoY during 3QFY13. This was due to the decline in sales from turnkey projects during the quarter. For the nine months ended December 2012 (9MFY13), net sales declined by 19.4% YoY.
  • Operating margins declined by 1.3% YoY to 21.7% during the quarter from 23% seen during the same period last year. For 9MFY13, operating margins improved to 22.6% from 21.2% seen in 9MFY12.
  • Net profit declined by 12.5% YoY during the quarter. Higher other income as well as lower depreciation charges arrested the fall at the bottom line level. For 9MFY13, net profits increased by a mere 0.4% YoY.
  • Order book at the end of the quarter stood at Rs 38,743 m.

Financial performance snapshot
(Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
Net sales 7,925 6,048 -23.7% 24,735 19,925 -19.4%
Expenditure 6,103 4,737 -22.4% 19,488 15,417 -20.9%
Operating profit (EBDITA) 1,822 1,311 -28.1% 5,248 4,508 -14.1%
Operating profit margin (%) 23.0% 21.7%   21.2% 22.6%  
Other income 444 669 50.6% 1,402 2,112 50.7%
Interest expense/(income) - -   - 1  
Depreciation 28 24 -14.0% 87 84 -3.5%
Exchange gains/(losses)            
Profit before tax 2,239 1,956 -12.6% 6,563 6,535 -0.4%
Tax 726 633 -12.8% 2,103 2,056 -2.2%
Extraordinary items/prior period items - -   - -  
Profit after tax/(loss) 1,513 1,323 -12.5% 4,460 4,479 0.4%
Net profit margin (%) 19.1% 21.9%   18.0% 22.5%  
No. of shares       336.9 336.9  
Diluted earnings per share (Rs)*         18.9  
P/E ratio (x)*         11.7  
*On a trailing 12-months basis, adjusted for extraordinary items

What has driven the performance in 3QFY13?
  • EIL reported a 23.7% YoY decline in its revenues during 3QFY13. The decline was due to the 32.8% YoY decrease in revenues from the turnkey projects' segment. The consultancy & projects segment did not fare too well either and registered a decline of 10.4% YoY. It should be noted that in case of turnkey projects, the revenues are recognized only once the entire contract is completed. As a result revenues tend to be lumpy in nature which leads to pronounced variations on a quarterly basis. Nevertheless the company has stated that the decline in turnkey revenues was on account of sluggish order inflows. However the management expects this segment to pick up given the new project announcements under the 12th 5-year plan.

      3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
    Consultancy & engineering projects 3,233 2,896 -10.4% 8,862 9,316 5.1%
    Turnkey Projects 4,692 3,152 -32.8% 15,873 10,609 -33.2%

  • EIL's operating margins stood at 21.7% during 3QFY13, as compared to 23% in 3QFY12. This was mainly due to higher staff costs which offset the savings in the sub contract payments as well as the cost of construction materials (all as percentage of sales).

      3QFY12 % of Sales 3QFY13 % of Sales
    Sub contract payment 1,558 19.7% 872 14.4%
    Construction material 2,575 32.5% 1,924 31.8%
    Staff cost 1,369 17.3% 1,444 23.9%
    Other 600 7.6% 497 8.2%
      6,103   4,737  

  • EIL saw a 12.5% YoY decline in net profits during the quarter. This was lower than the decline seen at the top line level. The decline in revenues was compensated to some extent by the increase in other income as well as lower depreciation charges during the quarter.

  • The company's total order book stood at Rs 38,743 m at the end of the quarter. Of this Rs 15,862 m was for the turnkey segment while Rs 22,881 m was for the consultancy segment.

What to expect?
At the current price of Rs 221, the stock is trading at a multiple of 11.7 times its trailing twelve month earnings and 7.3 times our estimated FY15 earnings.

The moderation in the current quarter earnings is due to the sluggishness in the order inflows for the turnkey contracts. But the company's management has stated that they expect this to revive given the new project announcements under the 12th 5-year plan.

Overall, the company continues to bag orders thereby expanding its order book. It has recently received some big ticket orders from Bharat Petroleum Corporation Ltd and Indian Oil Corporation. It also secured an overseas order of Rs 249 m for 5 pipelines for GASCO, UAE. At the end of the quarter, nearly 92.2% of the consultancy order book was attributable to hydrocarbons. On the other hand 100% of the order book for the turnkey segment was on account of chemicals and fertilizers sector.

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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