Engineers India: improved profitability and fair valuation

Engineers India: improved profitability and fair valuation

Analysts have been forecasting lower profit margins for Engineers India Ltd (EIL) going forward, as the share of lump sum turnkey projects (LSTK) in its business mix has been rising and that of the high-margin engineering consulting (EC) falling in the last few quarters. But the September quarter saw operating profit jump 53% year-on-year (y-o-y) to around 146.8 crore, though flat on a quarter-on-quarter (q-o-q) basis.

This was primarily due to two reasons—27% higher y-o-y revenue at 593.6 crore and lower employee costs. Of course, EIL’s management clarified that lower employee cost this quarter was due to the one-time salary-related provisions last year. Operating profit margin (OPM) at 24.7%, therefore, expanded y-o-y by 410 basis points and q-o-q by 80 basis points.

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Noteworthy is EIL’s improved profitability from the EC business. While revenue from this segment grew marginally to 267.5 crore, its profit margin (before interest and tax) jumped y-o-y from 35.6% to 47.3%.

According to Ram Singh, director (finance) at EIL, “This accrued due to a reduction in time-cycle of its consulting assignments and consequent cost-rationalization."

This was a positive surprise, given that the reducing share of this business -44% of total revenues compared with 58% a year ago, was expected to drag future profitability.

Meanwhile, revenue from the LSTK projects segment, which now constitutes more than half the firm’s revenue, grew by 10% on y-o-y. Profit margins, however, contracted, by 300 basis points to 9.7%. This could be the result of higher construction expenses incurred during the quarter.

EIL’s net profit grew 13.8% over the year-ago period and 4.6% over the previous sequential quarter, to 119.9 crore. Its order book of 8,000 crore is nearly three times its estimated FY11 revenue, which the management said should provide revenue visibility until the end of FY12. However, the OPM could fall by a couple of percentage points going forward as a result of increased exposure to large LSTK projects, where OPM ranges from 8-10%.

EIL shares, however, did not react to the results even though the Bombay Stock Exchange’s benchmark Sensex index closed 2% higher on Thursday, at 20,893.57 points. Analysts say that interest in the stock at its current price of 345 would be subdued given that it discounts estimated FY12 earnings around 17 times, which implies fair valuation.

Graphic by Yogesh Kumar/Mint

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