Engineers India's Q2FY18 results (Outperformer) - Another strong quarter; intake momentum to sustain

Q2FY18 result highlights

• PAT at Rs1.19m (+27% yoy): led by strong operational performance, partly offset by lower other income (17% decline on lower yield & cash).
• Revenue growth momentum strong at 27% yoy: to Rs4.3bn. LSTK revenues grew 50% yoy to Rs961mn helped by a low base and pick up in execution. PMC revenues grew 21% yoy to Rs3.3bn led by pick up in execution of domestic orders.
• Margin expansion on track (+470bps yoy to 32.4%): PMC margins expanded +37bps yoy to 31.8% led by positive operating leverage. LSTK margins +610bps yoy to 50.6% on Rs370m provision write back. Excl. write backs, margins were at 23.8% (+790bps yoy).  We note that margin expansion is despite higher employee costs (+22% yoy due to 7PC).
• Order intake at Rs16.1bn (+11x yoy): led by a large order of Rs10.2bn related to HMEL refinery (polymer addition project). Accordingly, order backlog increased 74% yoy to Rs89bn (+15% qoq).

Conf call highlights: (1) Mgmt expects intake of Rs23-25bn in FY18 (YTD Rs19.5bn) (2) Order inflow momentum to sustain from HPCL Barmer (4QFY18/1QFY19), and orders from ~18mmtpa brownfield expansions at IOCL (Gujarat, Panipat, Mathura), BPCL Numaligarh, petchem projects, strategic reserves, etc. (3) FY18 revenue growth likely at 15%, LSTK revenues to grow significantly in FY19 (4) FY18 PMC margins likely at 25-30%.

Key positives: strong operational performance, robust order intake

Key negatives: Low other income

Impact on financials: FY18/19E EPS upgraded by 3%/2% to Rs5.8/7.6

Valuations & view

High capacity utilisations coupled with improved profitability and reduction in subsidy have boosted free cash flow for PSU OMCs, which is likely to drive capacity expansions. We expect EIL to be an early beneficiary of a pick-up in the investment cycle of the hydrocarbon space over the next 2-3 years. The improved momentum in order inflows is driving improved revenue visibility and margins (execution of large orders and positive operating leverage). We believe valuations of 22x FY19E earnings are attractive given the sharp uptick in order inflows, earnings (25% CAGR over FY17-19E) and superior return ratios. Re-iterate Outperformer.