Engineers India's Q4FY18 results (Outperformer) - Steady execution continues; Strong intake outlook

Q4FY18 result highlights

• PAT +46% yoy to Rs962bn: led by margin expansion.
• Revenues +15% yoy: to Rs5.1bn led by 87% yoy growth in LSTK to Rs1.72bn. PMC revenues fell 3.9% yoy to Rs3.4bn due to a high base.  
• Margins +330bps yoy to 15.6%: on a low base (Rs960mn gratuity provision in 4Q17). PMC margins contracted 1061bps yoy to 26.6% on high base (Rs180mn write back in 4Q17). LSTK margins fell 2831bps yoy to 7% due to high base (Rs390mn write back in 4Q17). We have treated Rs220mn write off on oil exploration block as exceptional item as it pertains to earlier years. Hence, EBITDA +47% yoy to Rs795mn.
• Execution picks up in FY18: Order intake fell 62.5% yoy in FY18 due to few large orders and delay in award of HPCL Barmer order. Hence, order backlog was up 1% yoy to Rs79bn (4.4x FY18 revs; Rs42bn in PMC). Revenues +24% yoy and EBITDA +47% yoy to Rs4.3bn on strong order book & positive operating leverage. However, PAT growth was restricted to 27% yoy to Rs4.1bn yoy on lower other inc.
• Conf call highlights: (1) Mgmt expects intake of Rs40bn in FY19 (~Rs20bn LSTK, Rs20bn PMC) (2) HPCL Barmer likely to be finalized in 1-2 months (3) Inflow momentum to sustain orders for brownfield expansions at IOCL (Gujarat, Panipat), BPCL Numaligarh (6mmtpa), petchem projects, strategic reserves, etc (4) Expect international orders to pick up largely driven by medium sized orders (US$25-50mn) in MENA (5) FY19 revenue growth likely at 15-20% (6) FY19 PMC margins likely at 25-30%, LSTK at 5-6% (7) Employee utilisation at >90%; will outsource further employees to limit fixed costs

Key positives: Robust execution in LSTK

Key negatives: Weak order intake

Impact on financials: FY19E/ 20E EPS cut by 10% each to Rs6.8/8.6

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 sharp uptick in order inflows, earnings (15% CAGR over FY18-20E) and superior return ratios. Maintain Outperformer.