A finely tuned company which should be a beacon for all companies operating in the sphere of turnkey engineering corporations
Annual report bigger than the company
It is a voluminous annual report alright -making do with 200 pages of verbose claptrap. Just the directors' report runs into 27 pages of incongruent matter. Phew! Then there is the report on 'sustainable development' which thankfully is limited to a mere nine pages. Not to mention the report on the 'Management discussion & analysis' and the report on 'Corporate governance'. That makes for a grand total of 53 pages. It also makes do with 19 directors of various hue-whole time directors, non official independent directors and government nominee directors. One wonders how the board even gets to function cohesively with so many busybodies around.
Engineers India was set up way back in 1965 by the GoI to provide technical and related engineering services for petroleum refineries and other industrial projects. The company functions under the administrative control of the Ministry of Petroleum and Natural Gas. It has since moved on to mining and metallurgy, terminals and storages, and infrastructure projects and provides turnkey solutions with a complete range of services from conceptualisation to start up activities.
The Central government thru the President of India controls a slice over 80% of the voting capital of Rs 1.68 bn. (Some two thirds of the capital is made up of bonus shares). This capital is however backed up by humungous reserves of Rs 20.7bn. The vast bulk of the reserves are made up of general reserves. Capital Market magazine has bracketed this entity under a sub-head called 'Engineering-Turnkey Services' and this grouping features 20 listed companies. In revenue terms Engineers India is ranked in at No: 4 in this list, in the latest year after Larsen and Toubro, IL&FS Transport, and BGR Energy Systems.
In fine fettle
For a turnkey services company it is truly in fine fettle. This is the one message that comes across very clearly and very early at that. The company registered revenues from operations of Rs 25 bn during the latest year against a much larger Rs 37 bn previously and also ponied up other income of Rs 3.16 bn against Rs 2.32 bn previously. The revenues are realised in two formats. Consultancy and engineering services, and turnkey projects, the latter being the less exalted of the two. There does not appear to be any fixed pattern in the manner in which the revenues accrue under the two heads. In the current year the former accounted for 50% of all revenues from operations while in the previous year it accounted for only a slice over 30%. On the revenue expenditure side of the equation the largest expense item was the cost of construction materials and technical assistance etc. The cost of such inputs amounted to 44.5% of revenues against 59.2% previously-showing a wide variance in theprocess. This was followed by employee costs at Rs 5.7 bn against Rs 5.4 bn previously.
The pre-tax profit for the year amounted to Rs 8.95 bn against a marginally higher Rs 9.16 bn previously. The post tax profits amounted to Rs 6.3 bn against a similar quantum previously. Here the role played by the two revenue streams is very stark. The former brings in over 80% of the profits in the latest year against a smaller 68% previously with the latter hoofing the balance. One may add here that the 'other income' amounted to 35% of pre-tax profit against a lower 25% previously. But either ways it still amounts to a substantial contribution in either year. The latter is made up of a plethora of entries ranging from interest on its mountainous bank deposits etc, dividends, capital gains on redemption of investments in mutual funds, miscellaneous income, and the very ubiquitous 'provisions no longer required written back'. The contribution of this element is quite substantial in the latest year. It makes for a hotch potch of income streams which on paper cannot necessarily be counted upon for an encore-given the funding uncertainties of the succeeding year.
The reason for stating that the company is in fine fettle is that it makes do with zero debt on the one hand and funds its operations from the cash flows that it realises from its operations, and on the moneys advanced by its clientele on the other. (This is completely contrary to the trend that I have seen in other 'infrastructure development' companies - if one may refer to this company by such a nomenclature - that I have analysed so far. The difference here is that it appears to have a stranglehold in the business that it is in - or some such). At year end the company made do with such advances in the form of security deposits, advances received from clients, income received in advance etc to the tune of Rs 6.7 bn against Rs 6.4 bn previously to fund its operations. The net result of its ability to manage funds in this manner is that the company does not appear to pay any interest on borrowings in either year. Not only does it not have any debt, it also makes do with a surfeit of cash riches which is either held as cash or has been deployed in debt securities. At year end the book value of the current investment portfolio stood at Rs 5.45 bn. This is marginally lower than the figure of Rs 5.58 bn previously. The cash lode in turn weighed in at a humungous Rs 18.5 bn against Rs 16.4 bn previously. In the context of this surplus capital, the company would do well to deploy such funds in a more profitable manner.
No permanence in revenue streams
And like all companies of its ilk, there is no gainsaying that the business will grow from year to year. It depends on a multitude of factors chief of which being the capital expenditure schedules of its target audience on the one hand and the timing of the booking of revenues and expenses in its books on the other. In this particular industry the latter factor is a key ingredient. Engineers India for example registered sharply lower revenues during the year as compared to that of the preceding year merely from the timing of booking of project revenues and expenses. This is the inherent variable of being in the turnkey business.
But the cash flow statement reveals that regardless - the company is on song. It generated cash of Rs 3.4bn from operations and given the business that it is in the deployment into fixed assets is of a relatively minor level of Rs 798 m. (The biggest constituent in the list of tangible fixed assets at year end is computer hardware with a gross value of Rs 581 m. The second biggest fixed asset is buildings valued at Rs 417. Among intangibles it is computer software valued at Rs 374 m. And, that is the extent of its gross block). The excess cash on hand went into such tricks as buying and selling of debt securities cumulatively worth Rs 10.9 bn (it does not appear to have made much dosh here in the bargain) and with the interest and dividend lode also piling up the company was forced to plonk down Rs 19.4 bn into bank deposits. The only other outflow was on dividend account (including dividend tax) and it amounted to Rs 2.7 bn. Juxtapose this figure with the paid up capital of Rs 1.68 bn.
The company is also a very tightly run ship judging from its year end financials. The trade receivables amount to an average holding of 48 days revenues, and if one factors in the advances that it received on this account then it amounts to money for jam. More importantly, the trade payables at Rs 3.46 bn is a larger quantum than the trade receivables which implies even further savings on working capital costs. And leaving out the cash balances at year end-which is the inevitable end product of any successful business - the current liabilities at year end also exceeded the current assets. This is hallmark of a finely tuned company. I must add here however that it is also the hallmark of a company which is on its last legs-but the negative appellation does not apply to Engineers India.
The other favourable point to note is that it boasts of only two siblings, and two joint ventures for added colour. The investment in all the four companies at the gross level amounts to a meagre Rs 112 m. The two joint ventures in which the bulk of the capital has been invested are apparently not in ship shape judging from the provisioning that the company has done on its investment in them. More importantly, Engineers India does not appear to have advanced any loans to them. The company has separately provided the full working details of its two siblings. Certification Engineers International, one of the two siblings, derives its revenues through income from services rendered. And it is making good money thank you. On revenues of Rs 284 m, and other income of Rs 40 m, the company registered a pre-tax profit of Rs 114 m. Like the parent it appears to be financially well heeled. On a miniscule paid up capital of Rs 10 m it boasts reserves of Rs 536 m as well as surplus cash and bank balances of Rs 363 m, besides bank balances that it holds separately. It has no debt in its books. This company is also on song.
The other sibling is a foreign entity operating out of Malaysia and going by the name EIL ASIA PACIFIC SDN.BHD. Its principal activity is the provision of technical services to the oil, gas and other industrial projects. This entity besides being a very small player is not up to much good either. The financial details have been provided in Malaysian ringgits. On miniscule revenues it has posted operating expenses twice that of the revenues, and if that is not enough it has also provided for taxes on the loss that it registered.
Engineers India does not appear to have provided any financials of its joint ventures but they are unlikely to muck up the picture either. In any case and as I had stated earlier, the investment of the parent in them is also provided for.
Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.