Engineers India: Buy

Even as the market has been spiralling upwards, the Engineers India stock has dropped by 36 per cent since it touched its one-year high of ₹331 last July.

With falling revenue and deteriorating profit margins in the last few quarters, the company has borne the brunt of the current economic slowdown.

But at a time when a turnaround in growth is expected, this beaten down stock stands out as a good long-term buy due to its solid track record, superior technological capabilities and debt-free status. At ₹212, the stock trades at about 23 times its trailing 12-month earnings.

This is much lower than its five-year average of about 42 times. It trades at 16 times its estimated earnings for 2015-16. Investors with an appetite for risk and a perspective of at least two years can buy the stock.

Engineers India provides engineering consultancy, design, EPC (engineering, procurement, construction) and project management services.

It has presence across the hydrocarbon value chain, be it petroleum refining, offshore platforms, onshore processing centres or oil and gas transportation and storage. It also caters to sectors such as chemicals and fertilisers, mining and metallurgy, power, road and airport infrastructure, and water and waste management.

The company’s established rapport with public sector oil and gas companies in India has helped it expand internationally into South and West Asia as well as African nations.

The company has a large pool of non-Government clientele too, both in India and abroad, giving it a diversified base.

For the nine months ended December 2014, net sales dropped 8 per cent to ₹1,225 crore and net profit fell 47 per cent to ₹199 crore, over the same period in 2013. Blended operating margins came in at 7.5 per cent, compared to 23 per cent a year ago. Both segments accounted for the shrinkage.

The consulting division took up less lucrative projects during the slowdown in the last two years. This is perhaps why margins in that division fell to 21 per cent from 36 per cent in the nine months ended December 2013.

The lump sum turnkey division on the other hand recorded a loss for the nine-month period; it had a 6.5 per cent margin in the year-ago period. An anticipated loss of about ₹20 crore due to cost overruns in the delayed coker project of Chennai Petroleum (CPCL) was booked in this segment in the second quarter.

For the nine months ended December 2014, the outstanding order book stands at ₹3,879 crore, a 33 per cent growth over the number for the year-ended March 2014. About 67 per cent of the outstanding orders are in the consultancy division.

This is much higher than the 35-55 per cent share for this division in the last few years and bodes well for the company, given the higher margins that consulting brings.

The company is also increasingly focusing on international consulting orders. About 78 per cent of the total order inflows into the consulting division in the April-December 2014 period are from outside India.

Major international consulting orders received during this period include orders worth ₹853 crore for a refinery and polypropelene plant for the Dangote group in Nigeria and a ₹271-crore project for Oman Oil Refineries and Petroleum Industries. A tilt towards international orders can help diversify from a domestic slowdown.

Besides, the lump sum turnkey division may also see better times as capex spends make a comeback.

Given the improving economic outlook, the likely pick-up in investments in the power and infrastructure sectors, will benefit the company. Engineers India is also focusing on building its presence in the alternative energy space.

Given the Government’s thrust on areas such as solar energy, order flows can be expected on this front too over the next few years.