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Engineers India Ltd.: A year to forget - Views on News from Equitymaster

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Engineers India Ltd.: A year to forget
Jun 5, 2013

Engineers India Ltd (EIL) declared the results for fourth quarter of the financial year 2012-2013 (4QFY13). The company has reported a 58.1% YoY decline in total revenues and a 5.1% YoY decline in net profits during the quarter. Here is our analysis of the results.

Performance summary
  • Net sales declined by 58.1% YoY during 4QFY13. This was due to the decline in sales from turnkey projects during the quarter. The full year ended March 2013 (FY13) was not much better as net sales declined by 32.2% YoY.
  • Operating margins improved by 11.7% YoY to 26.2% during the quarter from 14.6% seen during the same period last year. For FY13, operating margins improved to 23.4% from 19% seen in FY12.
  • Net profit declined by 5.1% YoY during the quarter. Higher other income as well as lower depreciation charges arrested the fall at the bottom line level. For FY13, net profits declined by 1.2% YoY.
  • Order book at the end of the year stood at Rs 32,175 m.
  • The company has recommended a dividend of Rs 3 per share (dividend yield of 1.9%)

Financial performance snapshot
(Rs m) 4QFY12 4QFY13 Change FY12 FY13 Change
Net sales 12,253 5,135 -58.1% 36,988 25,060 -32.2%
Expenditure 10,469 3,789 -63.8% 29,956 19,206 -35.9%
Operating profit (EBDITA) 1,784 1,346 -24.6% 7,032 5,854 -16.8%
Operating profit margin (%) 14.6% 26.2%   19.0% 23.4%  
Other income 920 1,053 14.4% 2,322 3,164 36.3%
Interest expense/(income) 12 (1)   12 0  
Depreciation 108 25 -76.7% 194 109 -44.1%
Profit before tax 2,585 2,375 -8.1% 9,148 8,909 -2.6%
Tax 682 568 -16.7% 2,785 2,624 -5.8%
Extraordinary items/prior period items - -   - -  
Profit after tax/(loss) 1,903 1,807 -5.1% 6,363 6,286 -1.2%
Net profit margin (%) 15.5% 35.2%   17.2% 25.1%  
No. of shares       336.9 336.9  
Diluted earnings per share (Rs)*         18.7  
P/E ratio (x)*         8.7  
*On a trailing 12-months basis, adjusted for extraordinary items
What has driven performance in 4QFY13?
  • EIL reported a 58.1% YoY decline in its revenues during 4QFY13. The decline was due to the 76.7% YoY decrease in revenues from the turnkey projects' segment. The consultancy & projects segment did not fare too well either and registered a decline of 5.4% YoY. The company has stated that the decline in turnkey revenues was on account of sluggish order inflows. This sluggishness has clouded the performance for the entire year. However the management expects this segment to pick up given the new project announcements under the 12th 5-year plan.

    Segment Breakdown
      4QFY12 4QFY13 Change FY12 FY13 Change
    Consultancy & engineering projects 3,211 3,027 -5.7% 12,073 12,342 2.2%
    Turnkey Projects 9,042 2,108 -76.7% 24,915 12,717 -49.0%

  • EIL's operating margins stood at 26.2% during 4QFY13, as compared to 14.6% in 4QFY12. The sharp improvement in operating margins was attributable to the savings in the construction costs during the quarter. This offset the impact of higher staff costs as well as higher sub contract payments and other expenses during the quarter (all as percentage of sales).

    Cost Breakdown
      4QFY12 % of Sales 4QFY13 % of Sales
    Sub contract payment 2,331 19.0% 1,012 19.7%
    Construction material 5,859 47.8% 831 16.2%
    Staff cost 1,324 10.8% 1,388 27.0%
    Other 954 7.8% 558 10.9%
      10,469   3,788  

  • EIL saw a 5.1% 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 32,175 m at the end of the quarter. Of this Rs 12,163 m was for the turnkey segment while Rs 21,012 m was for the consultancy segment.

What to expect?
At the current price of Rs 161.5, the stock is trading at a multiple of 8.7 times its trailing twelve month earnings and 7.6 times our estimated FY15 earnings.

The moderation in the current quarter and the annual earnings is due to the sluggishness in the order inflows for the turnkey contracts. At the same time the order book for the consulting segment has remained more or less flat. 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, Indian Oil Corporation and Cairn. It also secured an overseas order of Rs 287 m for a facility to produce fertilizers at Nigeria. It has bagged another overseas order of Rs 271 m from GASCO, Abu Dhabi for a Techinical Support Service Agreement. At the end of the year, nearly 78.9% of the total order book was attributable to hydrocarbons.

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.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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