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EIL: Prime target

Jul 14, 2003

Since the last time we covered the issue of disinvestment of Engineers India (EIL) not much has changed. As usual, the whole process has been delayed with a few bidders qualifying at the end of the whole process. Currently there are four contenders that have conducted the due diligence process. So what makes disinvestment of EIL so crucial for the companies that have bid for it? EIL is engaged in engineering, procurement, construction, supervision and project management services in different areas such as petroleum refineries, pipelines, petrochemicals, oil & gas processing, fertilizers, metallurgy, offshore structures & platforms, ports & terminals, chemicals and power. The company has a large focus on R&D with state of the art facilities and a technically skilled manpower. The government holds over 90% stake in the company. EIL is a profit making company with a lean workforce of close to 3,300 employees.

EIL has nearly three decades of experience in project execution in the energy sector. The company is also looking to diversify to almost all areas of engineering. This makes it an ideal acquisition target for engineering companies like L&T and BHEL (who are bidders). The company is also attractive from the point of view of energy majors ONGC and GAIL (also bidders), who can leverage on EILís expertise in the refinery and energy sector. Thus, the bidders currently in the fray stand to gain a lot from acquiring EIL.

As far as the companyís financials are concerned, earnings have not exactly been stable. However, the company after reporting dismal FY02 numbers has recovered ground in FY03. EILís USP however lies in its vast talent pool of skilled engineers, its R&D capabilities and its long experience in the field of engineering. In our earlier article, we had analysed a case where L&T was in the fray for EIL. While L&T is still in the fray for EILís disinvestment, it has partnered with GAIL for the same at this current juncture. In light of EILís competencies, we believe that L&T-GAIL stands to gain the most from acquiring the governmentís stake in EIL.

Both L&T and EIL have been competitors in the past. EIL has always got government preference for PSU projects, which sometimes has come at L&Tís cost. An EIL acquisition will give L&T a highly skilled manpower base and a state of the art R&D facility. This is significant considering the fact that EIL is more of a consultant and the acquirer will not have to bear the burden of any manufacturing or fabricating capacities. EIL is also a zero debt company this makes it an even more attractive proposition.

While it may be a while before the actual disinvestment of EIL takes place, the stock has witnessed a fair amount of volatility in the last one year due to the uncertainty over disinvestment. Due to the low floating stock (4% public holding) the retail investors may not stand to gain much from the disinvestment. However, the sell off is likely to benefit engineering companies (especially L&T) significantly, which are in the fray for the same. But then again, it is the bid price that matters both for EIL as well as L&T shareholders.


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