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Engineers India FPO: Our view

Jul 27, 2010

Engineers India Ltd. (EIL) has come out with its follow-on public offer (FPO) starting today. The issue is by way of an offer for sale of equity shares by the Government of India (which is selling 10% of its stake in the company). Thus the proceeds from the offer will be remitted to the selling shareholder and EIL will not receive any of the proceeds.

Here is our brief analysis of the FPO. We will soon be uploading a detailed note.

Reasons to apply

Well entrenched position in the industry: Since its inception in 1965, EIL has played an active role in the development of the hydrocarbon sector in India. It has developed indigenous technology and expertise for offshore platforms, oil and gas processing, oil refining, petrochemicals and pipeline projects. Due to these competencies, it has an extensive track record of working on key projects with various Indian and international energy majors. This holds true even for some of the other industries that the company has a presence in like mining and metallurgy. Marquee customers it has worked with in the past include ONGC, HPCL, IOC, BPCL, Essar, GAIL, Hindalco, NALCO, Sterlite etc. Its key position across the entire value chain in the hydrocarbon industry in India and long-term relationships with its clients will continue to hold it in good stead in the years to come.

Reason not to apply

Vulnerability to cyclical nature and economic downturns: The demand for EIL's services and products is dependent upon the existence of projects with engineering, procurement, construction and management needs. If the global economy remains relatively weak or if client spending continues to decline, then the company’s overall revenue and profitability could be harmed. Moreover, given the nature of the markets the company serves, the recovery in its business has traditionally lagged behind recoveries in the overall economy and therefore may not recover as quickly as other businesses.


EIL is an asset light company which is also quite well entrenched in its business. Further, it has a strong balance sheet, making it well positioned to face any adverse changes in the business cycle. The fact that the company does not have any listed peers with a similar business profile makes it difficult to draw comparisons in terms of valuations.

At the FPO price band of Rs 270-290 per share, the issue is priced at 22x at the higher end and 20.5x at the lower end based on FY10 earnings. The stock is thus richly valued and hence does not make for a particularly attractive investment proposition. The Hence, we recommend you to "AVOID" the FPO.

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