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Engineers India: A weak quarter - Views on News from Equitymaster

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Engineers India: A weak quarter

Jun 12, 2014 | Updated on Jun 13, 2014

Engineers India Ltd (EIL) declared the results for the fourth quarter of the financial year 2013-2014 (4QFY14). The company has reported 3.6%YoY decline in total revenues and a 42.7% YoY decline in net profits during the quarter. Here is our analysis of the results.

Performance summary
  • Net sales declined by 3.6% YoY during 4QFY14.
  • The operating profit during the quarter declined by 46% YoY. There was a sharp increase in sub-contract payments and other expenses.
  • Other income decreased sharply by 27% YoY.
  • Net profit too declined by 42.7% YoY on account of disappointing operating profit and a sharp increase in depreciation.

Financial performance snapshot
(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Net sales 5,135 4,948 -3.6% 25,060 18,236 -27.2%
Expenditure 3,789 4,221 11.4% 19,206 14,470 -24.7%
Operating profit (EBDITA) 1,346 727 -46.0% 5,854 3,766 -35.7%
Operating profit margin (%) 26.2% 14.7%   23.4% 20.7%  
Other income 1,053 768 -27.1% 3,164 3,360 6.2%
Interest expense/(income) -1  1 - 0  1  
Depreciation 25   71 184.8% 109 145 33.5%
Profit before tax 2,375 1,423 -40.1% 8,909 6,980 -21.6%
Tax 568 388 -31.7% 2,624 2,183 -16.8%
Extraordinary items/prior period items - -   - -  
Profit after tax/(loss) 1,807 1,036 -42.7% 6,285 4,798 -23.7%
Net profit margin (%) 35.2% 20.9%   25.1% 26.3%  
No. of shares         336.9  
Diluted earnings per share (Rs)*         14.2  
P/E ratio (x)*         22.0  
*On a trailing 12-months basis, adjusted for extraordinary items

What has driven performance in 4QFY14 and FY14?
  • EIL reported a 3.6% YoY decline in its revenues during 4QFY14. The decline was due to the 12.9% YoY decrease in revenues from the Consultancy & engineering projects segment. The Turnkey Projects segment delivered a YoY growth of 9.6% during the quarter.

    Segment Breakdown
      4QFY13 4QFY14 Change FY13 FY14 Change
    Consultancy & engineering projects 3,027 2,638 -12.9% 12,342 11,091 -10.1%
    Turnkey Projects 2,108 2,311 9.6% 12,717 7,145 -43.8%
  • EIL's operating margins declined sharply to 14.7% during 4QFY14, as compared to 26.2% in 4QFY13. The decline in operating margins was attributable to higher contribution from low margin Turnkey Projects segment. At the same time the delay in approval of variation and claims (particularly in an order for GAIL) in case of some projects also impacted the operating margins.

    Operating Cost Breakdown
      4QFY13 % of Sales 4QFY14 % of Sales FY13 % of Sales FY14 % of Sales
    Sub contract payment 1,012 19.7%  1,833 37.0% 5,026 20.1% 4,322 23.7%
    Construction material  831 16.2% 256 5.2% 6,137 24.5% 1,924 10.6%
    Staff cost 1,388 27.0%  1,525 30.8% 5,766 23.0%   5,978 32.8%
    Other  558 10.9% 608 12.3% 2,277 9.1% 2,245 12.3%
    Total 3,789   4,221   19,206   14,470  

  • Other income rose by meager 6% YoY during the quarter.

  • Sharp decline in operating profit, subdued other income and higher depreciation led to 42.7% YoY decline in net profit.

  • For FY14 as a whole, results were disappointing with 27% decline in sales. Operating profit declined by 36% YoY; while operating margins shrank by 2.7% to 20.7% YoY. Consequently, net profit too de-grew by 23.7% YoY.

  • The company's order book at the end of FY14 stands at Rs 29 bn (down 12% YoY). Similarly, order inflows too declined in FY14 by 16% YoY to come in at Rs 11.5 bn.
What to expect?
At the current price of Rs 313, the stock is trading at a multiple of 22 times its trailing twelve month earnings. The order book growth has been muted since 2-3 years for Engineers India; thereby impacting the sales growth. The company has been a victim of poor macroeconomic conditions that have dented the growth of the entire infrastructure sector. However, a stable and reform friendly government is expected to work towards getting rid of the policy bottlenecks; thereby reviving the infrastructure sector. Also, improving economic scenario as a whole shall boost industrial capex and consequently help the order book growth of the company.

Therefore, we believe that the performance of EIL should pick up in the long term. Since FY14 is over, we shall revisit our estimates and view on EIL. We shall soon update investors with a revised view and target price based on FY17 earnings. Hence, we recommend investors to hold on to the stock for time being and avoid increasing exposure to the stock.

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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