Engineers India's Q1FY19 results (Outperformer) - Strong execution; order intake to be key

Q1FY19 result highlights

• PAT +6.4% yoy to Rs866m: led by pick up in execution.
• Revenues +52.7% yoy: to Rs5.7bn led by 5x yoy growth in LSTK to Rs2.51bn. PMC revenues fell 0.7% yoy to Rs3.2bn on a high base. 
• Margins fell 670bps yoy to 15.1%: due to higher share of LSTK revenues (44% vs 14% in Q1FY18) which has lower margins, as also decline in LSTK margins (fell 173bps yoy to 5.9%) as projects in initial phase of execution, wherein margins are lower. PMC margins were flat yoy at 27.9%. Hence, EBITDA +5.6% yoy to Rs864mn.
• Order intake muted: at Rs832mn (-75.8% yoy; PMC orders) due to absence of large orders. Order backlog declined 6.1% yoy to Rs72.3bn.
• Other income +14.4% yoy: to Rs522mn due to higher cash as well as higher interest rates. Cash balance increased Rs3bn qoq to Rs22bn.
• Order outlook remains strong: Order pipeline for FY19 is from the greenfield refinery project of HPCL Barmer and brownfield expansion of BPCL’s Numaligarh refinery (6mmtpa). Further, pipeline remains strong for next 2-3 years led by brownfield projects from CPCL (likely to win in FY20), IOCL (Barauni, Panipat, etc), BPCL Bina phase 2 expansion, MRPL expansion and orders related to petchem projects. In addition, other projects like strategic reserves, Namami Gange, fertilizer projects, among others will drive order wins.
• Robust execution to continue: Mgmt expects revenue growth of 25-30% for FY19E led by robust growth in LSTK (strong backlog), while PMC revenue growth is likely to be muted in FY19 on the back of delay in order win of HPCL Barmer & high base. Margins are likely to be stable for PMC at 25-30% and for LSTK at 5-6%.

Key positives: Robust execution in LSTK

Key negatives: Muted order intake; weak execution in PMC

Impact on financials: FY19E/ 20E EPS cut by 7% each to Rs6.3/8

Valuations & view

PSU OMCs have announced strong expansion plans (both brownfield and greenfield) led by high utilisations. 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 16x FY20E earnings are attractive given the uptick in order inflows, earnings (15% CAGR over FY18-20E) and superior return ratios. Maintain Outperformer.