Engineers India's Q3FY20 results (Outperformer) - Strong execution but margins fall

Q3FY20 result highlights

• Adj. PAT +19.7% yoy to Rs1.1bn: led by higher revenues.
• Revenues grew 54.4% yoy: to Rs8.91bn led by growth in both consultancy (PMC; +6.6% yoy to Rs3.65bn) and LSTK (+124% yoy to Rs5.26bn) revenues on uptick in execution of orders in hand.
• Margins contracted 683bps yoy to 9.6%: led by adverse mix towards low margin LSTK segment. Further, margins contracted across LSTK (-304bps yoy to 3%) and PMC (-504bps yoy to 24.7%). Margin erosion was led by provisioning for contractual obligations and doubtful debts (typically reversed at end of project). Hence, overall EBITDA fell 10% yoy to Rs1.07bn. Going forward margins of LSTK segment are expected at ~4% as execution of HPCL Barmer project picks up and execution of BS VI orders subsides, while the PMC margins are expected to sustain at 25-30% levels.
• 3QFY20 order intake at Rs3.61bn: up 297% yoy (low base) largely led by base orders. Accordingly, 3QFY20 backlog saw decline of 5.8% yoy to Rs101.6bn (PMC: 46.03bn, LSTK: Rs55.61bn; 3.2x FY20E revenues).
• Other income +27% yoy: to Rs657m on cash of ~Rs25bn.
• Order pipeline strong, finalisation delays: Intake guidance of ~Rs16-18bn for FY20E (9MFY20: Rs15bn) is on track. The pipeline of projects is strong with BPCL Numaligarh expansion, GAIL fertiliser project, IOCL Panipat and Paradip expansions and petchem projects, CPCL Nagapatnam expansion, etc. However, finalisation is likely to be delayed till the ownership of NRL is decided and IOCL mgmt. decides which projects to prioritise. In international markets, it expects mid-range orders from ADNOC and other Middle East markets.

Impact on financials: No change to FY20E EPS of Rs7.8; cut FY21E EPS by 5% to Rs8.3 on delayed order finalisation. 

Valuations & view

EIL has a strong revenue visibility led by its robust order backlog (Rs102bn, 3.2x FY20E revenues). While, near term ordering is muted, we believe the pipeline is strong led by several capacity expansions by PSU OMCs. Further, diversification into international markets is likely to bode well for sustained inflows over the medium term. Accordingly, we believe earnings are likely to see 20% earnings CAGR over FY19-21E. Considering the sustained inflows and superior return ratios, we believe valuations of 11x FY21E earnings are attractive. Outperformer.