Shares of government-owned Engineers India Ltd (EIL) rose by 14% last week to close at Rs1,460 each. A combination of various factors—a rumoured bonus issue, a strong infrastructure order book and divestment hopes—all seem to be pushing up valuations. EIL stands out among public sector units as a consistently profitable firm. It has two main revenue streams, with a 53:47 mix of large engineering consultancy services and lump sum turnkey (LSTK) projects in the infrastructure segment. It’s presence in a growing business segment has translated into a strong order book of around Rs8,000 crore. The next five-seven years will see high government spends with a thrust on infrastructure, energy and power projects.
EIL has various projects under execution, which will come into operation in fiscal 2010, fiscal 2011 and fiscal 2012, thereby assuring revenue growth of 25-30%.
EIL’s revenue for the September quarter grew 19% sequentially and 36% over the year-ago period, to Rs468.2 crore. While operating profit margins grew from 19% to 21% on a year-on-year basis, it dropped 4% sequentially. This could be on account of a larger contribution of the relatively lower-margin LSTK business. Profit after tax jumped by 59% over the year-ago period to Rs105.4 crore.
EIL’s operating profit margin is around 35% in the consulting segment, where it is known for its technological prowess and design expertise, and it competes with multinationals such as Foster Wheeler Corp. and Toyo Engineering Corp. Its LSTK business, however, is seeing a proliferation of players. Here, EIL’s strategy is to protect its margins of around 5-6% through open orders, where cost increases are directly passed on to the customer. Besides, diversification into areas such as water management, railway freight corridors and intelligent buildings, where competition is lower, will help sustain profit margins.
EIL is a cash-rich firm. Its cash balance has tripled from Rs629 crore in March 2005 to Rs1,894 crore in March 2009. This has allowed it to remain a zero-debt company and also pay out healthy dividends to shareholders. During fiscal 2009, EIL’s earning per share (EPS) was around Rs60 and its EPS for fiscal 2010 works out to Rs72, after annualizing its first-half earnings. Historically, the second-half is better for EIL and for other engineering companies, too, and its EPS could be higher as a result.
At present, the government holds 90% of EIL’s equity. Analysts view it as a potential divestment candidate. If the government sells part of its stake, liquidity will improve, as will valuations.
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