Engineers India

Strong order flow over the last two years ensures fast growth for this cash- and skill-rich PSU

The energy sector in India is at a take-off stage. Huge investments are planned in almost all areas of energy. With a history of being involved in consultancy and engineering services for almost all key projects in the oil and gas sector, Engineers India (EIL) is now well-poised to take advantage of the considerable investments in the hydrocarbon and energy sectors, particularly in refining, transportation, storage and marketing.

EIL, a government undertaking (90.40% stake owned by the Union government), renders project consultancy and engineering services and also undertakes lumpsum turnkey (LSTK) projects.

An all-time high business totaling Rs 3202 crore was secured by EIL in the year ending March 2008 (FY 2008) as against Rs 1916 crore booked in FY 2007. This is a growth of 67%, and is on top of a 140% rise in orders in FY 2007. The broad breakup of new orders is: Domestic consultancy Rs 1827 crore (Rs 930 crore in FY 2007), domestic LSTK Rs 1111 crore (Rs 918 crore), and overseas Rs 264 crore (Rs 68 crore).

The new business includes a Rs 1111-crore LSTK contract, which was secured from Chennai Petroleum for turnkey execution of the diesel hydrotreater (DHT) and related units as part of the Euro IV quality upgradation project under implementation.

In the domestic consultancy business, EIL bagged the largest-ever single consultancy assignment from HPCL-Mittal Energy for engineering, procurement and construction management (EPCM) services for the nine-million-tonne grassroots Guru Gobind Singh Refinery at Bothinda in Punjab against stiff competition from major international companies.

In the petrochemicals sector, EIL bagged an EPCM contract for setting up from the grassroots a dual-feed (gas/naphtha) petrochemicals complex of Brahmaputra Cracker and Polymers (BCPL) at Lepetkata in Assam. A petrochemicals assignment of this magnitude has come after a long gap of about nine years, when the company was involved in the setting up of a gas cracker for IPCL at Gandhar in Gujarat.

Another major breakthrough has been in the infrastructure sector, where a major assignment was awarded by the Delhi Jal Board for development of interceptor sewers. This is being implemented for the first time in India. The project will help in the reduction of pollution of the Yamuna river.

In the metallurgical sector, EIL secured a major alumina refinery project in Viziangaram, Andhra Pradesh, from JSW Aluminium.

EIL sustained the growth momentum of FY 2008 well into the first quarter of FY 2009. Sales rose a strong 68% to Rs 252.44 crore in the quarter ended June 2008. The strong topline growth was powered by the resurgence of LSTK segment, which posted a revenue expansion of 596% to Rs 89.45 crore and a 272% spurt to Rs 4.39 crore in profit before interest and tax (PBIT). The consultancy & engineering projects (C&EP) division spurted 18% to Rs 162.99 crore on a higher base, with its PBIT jumping 37% to Rs 44.16 crore. Due to lower margin in LSTK, the net profit growth was 32% to Rs 50.31 crore.

The Union cabinet has approved the proposed joint venture (JV) between EIL and Tecnimont of Italy. The JV will undertake execution of engineering, procurement and construction (EPC) jobs, mostly in the Middle East, in the first week of June 2008. EIL would employ its expertise in engineering and project management, while Tecnimont would be responsible for construction and day-to-day management. Earlier to this, EIL had received the nod of the Union government for formation of a JV company with Tata Projects to take up EPC projects in the oil and gas, fertilser, power and infrastructure sectors in India as well as abroad.

We expect EIL to register net sales and net profit of Rs 1276.80 crore and Rs 253.37 crore in FY 2009. This gives an EPS of 48.7. At the current market price of Rs 568, the scrip is available at a P/E of 11.7 times its expected FY 2009 earning. With around Rs 1250 crore of liquid funds (Rs 223 per share), the company is cash-rich.