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Engineers India Ltd.: Another slow quarter - Views on News from Equitymaster
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Engineers India Ltd.: Another slow quarter
Aug 6, 2013

Engineers India Ltd (EIL) declared the results for first quarter of the financial year 2013-2014 (1QFY14). The company has reported a 38.4% YoY decline in total revenues and a 16.2% YoY decline in net profits during the quarter. Here is our analysis of the results.

Performance summary
  • Net sales declined by 38.4% YoY during 1QFY14. This was due to the decline in sales in the turnkey projects segment during the quarter.
  • As operating expenses declined at a faster pace as compared to the sales, the decline in operating profits (on an absolute basis) was lower at 22.8% YoY during the quarter. Operating margins improved by 5.3% YoY to 26.3% during the quarter from 21% seen during the same period last year.
  • Net profit declined by 16.2% YoY during the quarter.

Financial performance snapshot
(Rs m) 1QFY13 1QFY14 Change
Net sales 7,200 4,432 -38.4%
Expenditure 5,691 3,267 -42.6%
Operating profit (EBDITA) 1,509 1,165 -22.8%
Operating profit margin (%) 21.0% 26.3%  
Other income 733 680 -7.1%
Interest expense/(income) 0 0  
Depreciation 25 25 -0.8%
Profit before tax 2,217 1,821 -17.9%
Tax 674 527 -21.8%
Extraordinary items/prior period items - -  
Profit after tax/(loss) 1,543 1,293 -16.2%
Net profit margin (%) 21.4% 29.2%  
No. of shares 336.9 336.9  
Diluted earnings per share (Rs)*   17.9  
P/E ratio (x)*   7.0  
*On a trailing 12-months basis, adjusted for extraordinary items

What has driven performance in 1QFY14?
  • EIL reported a 38.4% YoY decline in its revenues during 1QFY14. The decline was due to the 66.6% YoY decrease in revenues from the turnkey projects' segment. The consultancy & projects segment delivered a muted growth of 3.4% YoY.

    Segment Breakdown
      1QFY13 1QFY14 Change
    Consultancy & engineering projects 2,892 2,991 3.4%
    Turnkey Projects 4,308 1,440 -66.6%
    *Excludes inter-segment revenue

  • EIL's operating margins stood at 26.3% during 1QFY14, as compared to 21% in 1QFY13. The improvement in operating margins was attributable to the savings in the construction costs as well as sub-contract payments during the quarter. This offset the impact of higher staff costs as well as higher other expenses during the quarter (all as percentage of sales).

    Cost Breakdown
      1QFY13 % of Sales 1QFY14 % of Sales
    Sub contract payment 1,990 27.6% 965 21.8%
    Construction material 1,741 24.2% 239 5.4%
    Staff cost 1,385 19.2% 1,470 33.2%
    Other 575 8.0% 592 13.4%
      5,691   3,267  

  • EIL saw a 16.2% 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 higher operating margins, flattish depreciation expenses as well as lower tax outgo during the quarter.

What to expect?

At the current price of Rs 125, the stock is trading at a multiple of 7 times its trailing twelve month earnings.

The moderation in the current quarter 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.

Overall, the company continues to bag orders thereby expanding its order book. It has recently received some big ticket orders from Chennai Petroleum Corporation Ltd (CPCL) for Rs 6,700 m. The company has also received an approval from the Ministry of Petroleum & Natural Gas for an FPO of 33.69 m shares. The FPO is expected sometime in September this year. It must also be noted that as the company is currently in the FPO (Follow on Public Offering) mode, therefore it can only share its financials at the moment. Hence, it has not disclosed its overall order book position for the quarter.

We believe that the current problems and negativity surrounding EIL are short to medium term in nature. They are mostly related to the overall slowdown in the economy in general and the infrastructure space in particular. However, the long term outlook for the company remains positive. 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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