Management Speak: Engineers India (Outperformer) - Order momentum to sustain

Key highlights of our meeting with Engineers India (EIL) management:

Robust order backlog provides earnings visibility: EIL has an order backlog of Rs115bn or 4.6x FY19E revenues (PMC at Rs49bn, 3.6x; LSTK at Rs66bn, 6x). Key projects like Rs55bn from HPCL-Barmer, Rs10bn for HMEL and Rs27bn for HPCL Vizag have led to order wins over last 3 years. Execution of these orders is likely to see strong pick up and drive strong revenue and earnings momentum FY20E onwards.

Traction in order inflows to sustain: given the strong pipeline of orders across domestic & international markets, in our view. Accordingly, we estimate annual order inflows of ~Rs20bn in FY20E, which will sustain visibility. Key domestic orders expected are:

• Expansion of IOCL’s Panipat refinery from 15mtpa to 25mtpa (currently in the competitive bidding stage)
• Expansion of BPCL’s Numaligarh refinery from 3mtpa to 9mtpa, which is in advanced stages with approvals in place
• Likely closure of Kochi Petchem project in FY20E
• Expected 9mtpa greenfield capacity of CPCL Nagapatnam in FY20E
• Expansion of MRPL from 15mtpa to 25mtpa in FY21E

Enquiry uptick in international markets: EIL is witnessing an uptick in enquiries and traction in expansion of refining capacity, particularly from the Middle East and South East Asia. 5-6 projects (potential order size of ~Rs5bn+) are in various stages and are expected to be awarded in FY21E. EIL’s increased capabilities and cost effectiveness has helped the company overcome entry barriers in international markets. Moreover, there has been a consolidation in the international PMC market with number of players reducing from 10-12 to 5-6. Management is confident of winning few international orders over next 2-3 years.

Valuation and view

EIL has seen strong uptick in order intake and thereby, backlog, fuelled by capacity expansions by PSU OMCs on high utilisation levels. We expect the trend to continue over the next 2-3 years, as companies continue to invest in capacity expansion in the domestic and international arena. We see revenue visibility for EIL, driven by improved momentum in order inflows. While delayed execution in PMC and higher LSTK revenues could have a bearing on near-term earnings, we expect sharp earnings momentum in FY20E (27% growth). At 16x FY20E earnings, the stock looks attractive, given the uptick in order inflows and superior return ratios. We reiterate our Outperformer rating.