Engineers India Ltd.: Turnkey sluggish - Views on News from Equitymaster

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Engineers India Ltd.: Turnkey sluggish

Oct 31, 2012

Engineers India Ltd (EIL) declared the results for second quarter of the financial year 2012-2013 (2QFY13). The company has reported a 19.3% YoY decline in total revenues but a 10% YoY growth in net profits during the quarter. Here is our analysis of the results.

Performance summary
  • Net sales declined by 19.3% YoY during 2QFY13. This was due to the decline in sales from turnkey projects during the quarter. For the six months ended September 2012 (1HFY13), net sales declined by 17.4% YoY.
  • Operating margins improved by 5.6% YoY to 25.3% during the quarter from 19.7% seen during the same period last year. For 1HFY13, operating margins improved to 23% from 20.4% seen in 1HFY12.
  • Net profit increased by 10% YoY during the quarter. This was on account of better operating margins as well as higher other income during the quarter. For 1HFY13, net profits increased by 7.1% YoY.

Financial performance snapshot
(Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Net sales 8,274 6,677 -19.3% 16,810 13,877 -17.4%
Expenditure 6,646 4,990 -24.9% 13,385 10,681 -20.2%
Operating profit (EBDITA) 1,628 1,688 3.7% 3,425 3,197 -6.7%
Operating profit margin (%) 19.7% 25.3%   20.4% 23.0%  
Other income 540 710 31.6% 957 1,442 50.7%
Interest expense/(income) - 1   - 1  
Depreciation 29 35 20.8% 59 59 1.5%
Exchange gains/(losses)            
Profit before tax 2,139 2,362 10.4% 4,324 4,578 5.9%
Tax 672 749 11.4% 1,377 1,423 3.4%
Extraordinary items/prior period items - -   - -  
Profit after tax/(loss) 1,466 1,612 10.0% 2,947 3,155 7.1%
Net profit margin (%) 17.7% 24.1%   17.5% 22.7%  
No. of shares       336.9 336.9  
Diluted earnings per share (Rs)*         19.5  
P/E ratio (x)*         12.0  
*On a trailing 12-months basis, adjusted for extraordinary items

What has driven performance in 2QFY13?
  • EIL reported a 19.3% YoY decline in its revenues during 2QFY13. The decline was due to the 41.9% YoY decrease in revenues from the turnkey projects' segment. This offset the 25.7% 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. Nevertheless the company has stated that the decline in turnkey revenues was on account of sluggish order inflows. However the management expects this segment to pick up given the new project announcements under the 12th 5-year plan.

    Segment Breakdown
      2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
    Consultancy & engineering projects 2,850 3,582 25.7% 5,629 6,420 14.0%
    Turnkey Projects 5,424 3,149 -41.9% 11,181 7,457 -33.3%

  • EIL's operating margins stood at 25.3% during 2QFY13, as compared to 19.7% in 2QFY12. This was mainly due to lower sub contract payments as well as lower cost of construction materials. This offset the increase in staff costs during the quarter (all as percentage of sales).

    Cost Breakdown
      2QFY12 % of Sales 2QFY13 % of Sales
    Sub contract payment 1,574 19.0% 1,152 17.3%
    Construction material 3,131 37.8% 1,641 24.6%
    Staff cost 1,354 16.4% 1,549 23.2%
    Other 587 7.1% 647 9.7%
      6,646   4,990  

  • The fall in top line was more than compensated by the increase in operating profits as well as higher other income during the quarter. As a result, EIL saw a 10% YoY growth in net profits during the quarter.

  • The company's total order book stood at Rs 43,534 m at the end of the quarter. Of this Rs 19,011 m was for the turnkey segment while Rs 24,523 m was for the consultancy segment.

What to expect?
At the current price of Rs 234, the stock is trading at a multiple of 12.0 times its trailing twelve month earnings and 7.5 times our estimated FY15 earnings.

The moderation in the current quarter earnings is due to the sluggishness in the order inflows for the turnkey contracts. But the company's management has stated that they expect this to revive given the new project announcements under the 12th 5-year plan.

Overall, the company continues to bag orders thereby expanding its order book. It has recently received some big ticket orders from Bharat Petroleum Corporation Ltd as well as from Petronet LNG. At the end of the quarter, nearly 92.5% of the consultancy order book was attributable to hydrocarbons. On the other hand 100% of the order book for the turnkey segment was on account of chemicals and fertilizers sector.

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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