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  • Aug 3, 2012 - Engineers India Ltd.: Turnkey revenues hit top line

Engineers India Ltd.: Turnkey revenues hit top line
Aug 3, 2012

Engineers India Ltd (EIL) declared the results for first quarter results for the financial year 2012-2013 (1QFY13). The company has reported a 15.7% YoY decline in total revenues but a 4.2% YoY growth in net profits during the quarter. Here is our analysis of the results.

Performance summary
  • Net sales declined by 15.7% YoY during 1QFY13. This was due to the decline in sales from turnkey projects during the quarter.
  • Operating margins declined marginally by 0.1% YoY to 21% during the quarter from 21.1% seen during the same period last year.
  • Net profit increased by 4.2% YoY during the quarter. This was on account of huge jump in the other income during the quarter.

Financial performance snapshot
(Rs m) 1QFY12 1QFY13 Change
Net sales 8,536 7,200 -15.7%
Expenditure 6,739 5,691 -15.5%
Operating profit (EBDITA) 1,797 1,509 -16.0%
Operating profit margin (%) 21.1% 21.0% -0.1%
Other income 418 733 75.4%
Interest expense/(income) - 0  
Depreciation 30 25 -17.0%
Exchange gains/(losses)      
Profit before tax 2,185 2,217 1.4%
Tax 705 674 -4.4%
Extraordinary items/prior period items - -  
Profit after tax/(loss) 1,481 1,543 4.2%
Net profit margin (%) 17.3% 21.4%  
No. of shares 336.9 336.9  
Diluted earnings per share (Rs)*   19.1  
P/E ratio (x)*   12.5  
*On a trailing 12-months basis, adjusted for extraordinary items

What has driven performance in 1QFY13?
  • EIL reported a 15.7% YoY decline in its revenues during 1QFY13. The decline was due to the 25.2% YoY decrease in revenues from the turnkey projects' segment. This offset the 4% YoY increase in revenues from the consultancy & projects segment. 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.

    Segment Breakdown
      1QFY12 1QFY13 Change
    Consultancy & engineering projects 2,780 2,892 4.0%
    Turnkey Projects 5,756 4,308 -25.2%
    *Excludes inter-segment revenue

  • EIL's operating margins stood at 21% during 1QFY13, as compared to 21.1% in 1QFY12. This was mainly due to higher sub contract payments as well as higher staff costs during the quarter. This offset the decrease in cost of construction materials during the quarter (all as percentage of sales).

  • Despite the fall in top line, EIL saw a 4.2% YoY growth in net profits during the quarter. This was due to the 75.4% YoY surge in other income. Net profits were also aided by lower depreciation costs as well as lower tax outgo during the quarter. Effective tax rate declined to 30.4% from 32.2% seen during the same period last year.

What to expect?
At the current price of Rs 238, the stock is trading at a multiple of 12.5 times its trailing twelve month earnings and 7.7 times our estimated FY15 earnings.

The moderation in the current quarter earnings is more due to the lumpy nature of turnkey contracts which forms nearly 60% of the company's total revenues. As such the company's management has stated that there would be a faster growth in the turnkey segment as compared to the consultancy segment. As a result, such lumpiness may become frequent. Nevertheless, the company continues to bag orders thereby expanding its order book. It has recently received some big ticket orders from Bharat Petroleum Corporation Ltd (BPCL) as well as from Petronet LNG.

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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