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Engineers India's Q3FY19 results (Outperformer) - Execution momentum sustains, outlook strong

Q3FY19 result highlights

• Adj. PAT fell 16.3% yoy to Rs908m: led by high base (Rs650mn variation in PMC in 3Q18).
• Revenues +22% yoy: to Rs5.8bn led by +164% yoy in LSTK to Rs2.4bn. PMC revs fell 11% yoy to Rs3.4bn on high base (ex-variation +7% yoy). 
• Margins fell to 16.4%: on high base (-1200bps yoy). Moreover, higher share of LSTK revs (41% vs 19% in 3Q18) as also orders in initial phase of execution (typically margins are lower). PMC margins at 29.7% (ex-variation +500bps yoy). Hence, EBITDA fell 29.6% yoy to Rs949mn.
• Order intake muted at Rs908mn: due to lack of major order wins in the quarter. According 3Q19 order backlog +30% yoy at Rs108bn (PMC - 46.2bn, LSTK – 61.7bn; 4.4x FY19E revenues).
• Other income +32% yoy: to Rs519mn due to higher cash as well as higher interest rates. Cash balance is Rs23bn.
• Robust execution to continue: Mgmt expects 30%+ revenue growth in  FY19E led by robust growth in LSTK (strong backlog), while PMC revenue growth is likely to be muted in FY19 on high base. Margins are likely to be stable for PMC at 25-30% and for LSTK at 5-6%.

Order outlook remains strong for FY20-21E:

o  Expansion of IOCL’s Panipat refinery from 15mtpa to 25mtpa (1H20)

o  BPCL Mumbai order for revamp of additional units (1H20)

o  Mid-range orders (~Rs4-8bn) expected from overseas in 1QFY20

o  Expansion of BPCL’s Numaligarh refinery from 3 to 9mtpa (2HFY20)

o  9mtpa greenfield capacity of CPCL Nagapatnam in FY20E

o  Expansion of Bina & MRPL in initial evaluation stage

Impact on financials: FY19E EPS at Rs7.3; FY20E EPS cut by 3.8% to R7.3

Valuations & view

EIL has seen a strong uptick in order intake and backlog led by capacity expansions by PSU OMCs considering high utilisation levels. We expect the trend to continue over the next 2-3 years as companies continue to invest towards capacity expansion. The improved momentum in order inflows is driving higher revenue visibility for EIL. While near term earnings are impacted by delayed execution in PMC and higher LSTK revenues, we believe earnings will see sharp momentum in FY20E (22% growth). Accordingly, we believe valuations of 15.2x FY20E earnings are attractive given the uptick in order inflows and superior return ratios. Outperformer.