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Engineers India Ltd.: Slowdown bites - Views on News from Equitymaster
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Engineers India Ltd.: Slowdown bites
Nov 13, 2013

Engineers India Ltd (EIL) declared the results for second quarter of the financial year 2013-2014 (2QFY14). The company has reported a 30.3% YoY decline in total revenues and a 30.6% YoY decline in net profits during the quarter. Here is our analysis of the results.

Performance summary
  • Net sales declined by 30.3% YoY during 2QFY14. For the six months ended September 2013 (1HFY14), net sales fell by 34.5% YoY.
  • The decline in operating expenses was at a comparatively slower pace. As such operating profits (on an absolute basis) were lower by 47.5% YoY. As a result, operating margins came in
  • at 19% during the quarter as compared to 25.3% seen during the same period last year. For 1HFY14, operating margins declined by 0.5% YoY to 22.6%.
  • Net profit declined by 30.6% YoY during the quarter. During 1HFY14, net profits saw a fall of 23.6% YoY.

Financial performance snapshot
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Net sales 6,677  4,652 -30.3% 13,877 9,084 -34.5%
Expenditure 4,990 3,766 -24.5% 10,681 7,034 -34.1%
Operating profit (EBDITA) 1,688 885 -47.5% 3,197 2,050 -35.9%
Operating profit margin (%) 25.3% 19.0%   23.0% 22.6%  
Other income 710 828 16.7% 1,442 1,508 4.6%
Interest expense/(income)   1 -     1 0  
Depreciation    35    22 -35.6%   59    47 -21.1%
Profit before tax 2,362  1,691 -28.4% 4,578  3,512 -23.3%
Tax 749 573 -23.6% 1,423 1,100 -22.7%
Extraordinary items/prior period items -   -     -   -    
Profit after tax/(loss)  1,612   1,119 -30.6% 3,155  2,412 -23.6%
Net profit margin (%) 24.1% 24.0%   22.7% 26.6%  
No. of shares       336.9 336.9  
Diluted earnings per share (Rs)*         16.4  
P/E ratio (x)*         10.4  
*On a trailing 12-months basis, adjusted for extraordinary items

What has driven performance in 2QFY14?
  • EIL reported a 30.3% YoY decline in its revenues during 2QFY14. The decline was due to the 35.4% YoY decrease in revenues from the turnkey projects' segment. The consultancy & projects segment also delivered a poor performance during the quarter with its revenues declining by 25.8% YoY.

    Segment Breakdown
      2QFY13 2QFY14 Change
    Consultancy & engineering projects 3,528 2,619 -25.8%
    Turnkey Projects 3,149 2,033 -35.4%
    *Excludes inter-segment revenue

  • EIL's operating margins stood at 19% during 2QFY14, as compared to 25.3% in 2QFY13. The decline in operating margins was attributable to the increase in all cost heads that offset the savings in sub-contract expenses during the quarter (all as percentage of sales).

    Cost Breakdown
      2QFY13 % of Sales 2QFY14 % of Sales
    Sub contract payment  1,152 17.3% 626 13.5%
    Construction material 1,641 24.6% 1,167 25.1%
    Staff cost 1,549 23.2% 1,453 31.2%
    Other 647 9.7% 520 11.2%
       4,990   3,766  

  • EIL saw a 30.6% YoY decline in net profits during the quarter. This was similar to the decline seen at the top line level. The decline would have been sharper if not for the lower depreciation charges seen during the quarters.
What to expect?
At the current price of Rs 171, the stock is trading at a multiple of 10.4 times its trailing twelve month earnings.

The moderation seen in current times is due to the sluggishness in the order inflows. This in turn has been a function of the overall macroeconomic conditions that have hurt the infrastructure sector as a whole.

It must be recalled that the company has also received an approval from the Ministry of Petroleum & Natural Gas for an FPO of 33.69 m shares. The FPO was expected in September but has been deferred for the time being. The company and the government have not clarified as to when the FPO would take place. 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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