ambit_engineers india_the real indian engineers_9dec2011

8/3/2019 Ambit_Engineers India_The Real Indian Engineers_9Dec2011

http://slidepdf.com/reader/full/ambitengineers-indiathe-real-indian-engineers9dec2011 1/28

Engineering and Construction December 09, 2011

Engineers IndiaBloomberg: ENGR IN EQUITY Reuters: ENGI.NS

Accounting: AMBERPredictability: GREENEarnings Momentum: AMBER

Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit

Capital may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.

Please refer to the Disclaimers at the end of this Report.

BU

Exhibit 1: Key financials

Y/E March (` mn) FY09 FY10 FY11 FY12E FY13E

Operating Income 15,529 20,140 28,482 37,535 45,769

EBITDA 3,243 5,045 6,694 7,988 8,809

Net Profit (Adj) 3,497 4,444 5,339 6,581 7,426

Adjusted EPS ( ` ) 10.4 13.2 16.0 19.5 22.0

ROE (%) 27.0% 34.7% 40.8% 39.5% 37.2%

P/E (x) 20.4 16.1 13.2 10.9 9.6

Source: Company, Ambit Capital research Note: Financials pertain to standalone entity

INITIATING COVERAGE

Nitin BhasinTel: +91 22 3043 3241

[email protected]

Chhavi Agarwal

Tel: +91 22 3043 3203

[email protected]

Recommendation

CMP: `212

Target Price: ` 290

Upside (%) 37

EPS (FY12): `19.5

Variance from consensus (%): 8

Stock Information

Mkt cap: ` 71bn/US$1,381mn

52-wk H/L: ` 352/203

3M ADV: ` 52mn/US$1.0mn

Beta: 0.6x

BSE Sensex: 16,488

Nifty: 4,944

Stock Performance (%)

1M 3M 12M YTD

Absolute -13.9 -16.6 -37.2 -36.4

Rel. to Sensex -7.8 -12.6 -20.9 -16.8

Performance (%)

10,000

15,000

20,000

25,000

Dec-10 Apr-11 Aug-11 Nov-11

150

250

350

450

Sensex EIL LTD EIL trading at a 24%/ 15% discountto its 3-yr / 5-yr averages (x)

-

9

18

27

36

D

e c - 0

6

J u n - 0

7

D

e c - 0

7

J u n - 0

8

D

e c - 0

8

J u n - 0

9

D

e c - 0

9

J u n - 1

0

D

e c - 1

0

J u n - 1

1

D

e c - 1

1

1 yr fwd PE 5 yr avg.

3 yr avg.

(x)

Source: Bloomberg, Ambit Capital research

The real Indian engineers Amongst its Engineering & Construction (E&C) peers, EIL has anunmatched cash flow profile and RoEs (37%-40%). Specific, yetscalable, hydrocarbon engineering and project management skills, alarge talent pool and Government ownership drive its competitiveness.Rising investments in the hydrocarbons sector by Government relatedcompanies (XIIth 5-year plan suggests 2x XIth plan investments) willfuel EIL’s growth. Whilst there can be near-term growth deceleration,the present valuations (12x FY13 core eps) do not reflect the firm’scompetitiveness and its cash flow generating capability.

Competitive positioning: STRONG Change to this position: POSITIVE

The E&C sector’s overhang has led to EIL’s stock price declining 37% over the

past year despite revenue growth remaining strong (up 40% YoY in 1HFY12)and the firm’s business capabilities being robust. In an industry wherecompanies are shedding strength with rising debt, we recommend EIL due to:

Government sponsored enterprises to invest twice in the XII th plan v/sthe XIth plan: The cyclical nature of refinery and petchem investments canlead to a lack of orders for a brief period. But Government sponsored plans toincrease their refinery capacity [by 60% (74mmtpa) by investing US$18bn ingreenfield capacities and US$13bn in upgradations] will provide EIL withgrowth visibility over FY12-FY17. Further, greenfield petchem capex isexpected to be closer to US$8bn. Slippage risks are low owing to Governmentsupport for energy PSUs and fewer procedural problems in expansions.

Superlative capabilities with flexibility: EIL’s scalable hydrocarbon

engineering/project management skills, extensive experience and Governmentownership make its offerings flexible — not only E&C services across thecontracts spectrum (design to EPC) but also critical path projects, tweaking theusual EPC models (offering open book estimates, OBE) and entering into long-term relationships (MoUs, nominations) with energy PSUs. The cost-sensitivenature of large projects keeps the threat from the high-cost global majors low.

Unrivalled CFOs and RoEs: Over FY08-FY11 EIL leveraged its risinginvestments by capturing a bigger share of hydrocarbon spend by taking uplow EBITDA margin (10%-12%) high volume lumpsum turnkey (LSTK) jobs(144% CAGR) instead of high EBITDA margin (40%) low volume consultingjobs (22% revenue CAGR). Hence, op cashflows (CFO) rose and RoEs movedto 37%-40% from mid-teens earlier, overriding the declining EBITDA concerns.

Valuations projecting near-term concerns into long-term? Despite aradically better CFO/RoE profile, EIL’s stock trades in line with peers. Paltry orders in FY12 and a growth deceleration beyond FY13 have led to a gradualderating. We do expect lower revenue growth over FY13-FY15, but believeEIL’s multiple should retrace lost ground as the refinery opportunity getssupplemented with fertilizer capex, thus addressing growth concerns. A higher investible float than many peers addresses low free float concerns.



Engineers India

Ambit Capital Pvt Ltd 2

Company Financial Snapshot

Profit and Loss (consolidated)

Y/E March (` mn) FY11 FY12E FY13E

Net sales 28,482 37,535 45,769

Operating exp 21,847 29,547 36,960

EBITDA 6,635 7,988 8,809

Depreciation 148 167 190

Interest Expenses (1,225) (1,741) (2,153)

PBT ex EO 8,043 9,750 11,001

Tax 2,704 3,169 3,575

Consolidated Adj. PAT 5,339 6,581 7,426

Profit and Loss Ratios

EBITDA Margin (%) 23.3% 21.3% 19.2%

Adj Net Margin (%) 18.7% 17.5% 16.2%

P/E (x) 13.4 10.9 9.6

EV/EBITDA (x) 8.1 6.0 4.8

Dividend Yield (%) 2.4% 3.7% 5.2%

Company Background

Engineers India (EIL) is a public sector unit (PSU) providingdesign, engineering, procurement, construction and

integrated project management services mainly to thepetrochemical and oil and gas refining sectors. Presently, theGovernment holds 80.4% equity after EIL completed a follow on public offering in 2010 raising ` 12bn by offering a 10%stake.EIL was started in 1965 and has more than four decades of experience in providing project consultancy and engineeringservices across the entire value chain of the hydrocarbonindustry. Whilst the hydrocarbon segment accounts for ~90%of the order book, EIL also provides project management,third party inspection and quality assurance services in theinfrastructure and fertilizers sectors. EIL has internationaloperations in the MENA region. However, it presently formsless than 2% of the consolidated revenues.

Balance Sheet (consolidated)


Total Assets 14,899 18,400 21,481

Fixed Assets 852 931 1,066

Current Assets 27,224 34,921 43,398

Other Assets 6,889 6,889 6,889

Total Liabilities 14,899 18,400 21,481

Total networth 14,899 18,400 21,481Current Liabilities / Provisions 20,067 24,342 29,872

Balance Sheet Ratios

ROE (%) 40.8% 39.5% 37.2%

RoCE (%) 32.9% 31.7% 29.2%

Net Debt/Equity (x) (1.4) (1.6) (1.2)

P/BV (x) 4.8 3.9 3.3

Cash Flow (consolidated)


PBT 8,042 9,750 11,001

Depreciation 148 167 190

Tax (2,710) (3,169) (3,575)

Net Working Capital 333 893 1,307

CF from Operating Activities 4,530 5,659 6,476

Capital Expenditure (151) (250) (325)CF from Investing Activities (3,088) 1,733 2,121

Dividend paid (1,347) (1,566) (3,080)

CF from Financing Activities (1,347) (1,566) (3,080)

Net change in cash 37 5,825 5,518

Closing cash balance 17,981 23,806 29,324

Free Cash Flow 4,219 5,409 6,151

EIL’s growth has not led to any compromise on cashgeneration or its return profiles

Despite continuing earnings upgrades, EIL’s 1-yearforward multiple has witnessed a de-rating

-

2

4

6

8

FY07 FY08 FY09 FY10 FY11

R s bn

0%

30%

60%

90%

120%

CFO FCFF

Revenue growth (RHS) RoE (RHS)

0

7

14

21

28

35

D e c - 0

6

J u n - 0

7

D e c - 0

7

J u n - 0

8

D e c - 0

8

J u n - 0

9

D e c - 0

9

J u n - 1

0

D e c - 1

0

J u n - 1

1

D e c - 1

1

0

6

12

18

24

30

1-yr. fwd. P/E 1-yr fwd. Rolling EPS (RHS)

(x) (Rs)

Source: Ambit Capital Research, Company Source: Ambit Capital Research, Bloomberg



Engineers India


EIL’s BackgroundExhibit 12: Segmental overview of EIL

Segments Scope of work Revenue share (%) FY2011 (%)

FY2010 FY2011 Rev

growth EBIT

margin

Consultancy andEngineering segment

Project designing and engineering services, mainly in thepetrochemical and oil & gas sectors.

Preparation of feasibility reports, concept designs, processtechnologies and front-end engineering designing (FEED).

Also provides specialist services such as environmentalengineering, specialist materials, maintenance services etc.

53 40 7 44

Lumpsum turnkey (LSTK) contracts

Offers turnkey project management solutions, which includes allservices ranging from the product designing stage to the projectcommissioning stage.

In addition to the services provided in the consulting andengineering segment, EIL provides procurement, supply chainmanagement, cost engineering, planning and schedulingconstruction management, and project commissioning services

47 60 81 12

Total (%) 41 25 Source: Ambit Capital research, Company

Exhibit 3: Whilst EBITDA and PAT margins havedropped with the rising share of the LSTK segment …

-

6

12

18

24

30

FY06 FY07 FY08 FY09 FY10 FY11

R s bn

0%

6%

12%

18%

24%

30%

Consultancy revenues LSTK revenues

EBITDA margin (RHS) PAT margin (RHS)

Source: Ambit Capital research, Company, Note: We have takenconsolidated financials for our analysis

Exhibit 4: … CFO, FCF and RoCEs have remained high

-

2

4

6

8


Rs bn

0%

7%

14%

21%

28%

35%

CFO FCFF RoCE (RHS)

Source: Ambit Capital research, Company, Note: We have takenconsolidated financials for our analysis



Engineers India


Exhibit 5: EIL’s SWOT analysis

Strengths Weaknesses

Leading Indian hydrocarbon-focused E&C player providing projectconsultancy and project management services to Indian oil majors

The largest pool of experienced project engineers in India withextensive domain knowledge across the entire hydrocarbon valuechain

High revenue growth (56% CAGR over FY08-FY11), coupled withan asset-light business model has led to significant improvement inthe working capital and gross block turnover ratios over FY08-FY11(FY11: 7.4x and 14.9x, respectively from FY08: 1.1x and 4.9x,respectively)

Debt-free and cash-rich balance sheet (cash and investments of ` 22bn at end of 1HFY12) provides strength to capitalize on long-term opportunities by entering new markets or by acquiring nichecapabilities

The increasing revenue share of the low-margin LSTK segment islowering the overall EBITDA margin; EBITDA margin declined to20.9% in 1HFY12 (1HFY11: 24.3%)

Relatively weak player in the Middle Eastern countries (such asOman, Bahrain, Kuwait, Abu Dhabi etc) in comparison with other

large international players like Bechtel, Tecnimont, LindeEngineering, Uhde Engineering etc.

Highly dependent on PSUs for order flow growth, as more than 90%of the orders are from PSUs

Despite high revenue growth, CFO and FCF have declined from thepeak of FY09 due to marginal increase in working capital

Excessive dependence on the hydrocarbon sector for the order flow and revenue growth, as it accounts for ~90% of the current order book of ` 63bn

Opportunities Threats

In the XIIth 5-Year Plan, oil refineries plan to invest ` 1.5 trillion for capacity expansion and modernization of existing facilities. 90% of

such capex is expected to be incurred by the PSUs, where EIL hasstrong relationships

Replicate engineering expertise in the existing domains by diversifying into new and high growth verticals such as water treatment, city gas distribution and renewable energy

Expansion of the overseas operations (mainly in Middle East North Africa) with relatively cheaper manpower from India can boost EIL’sinternational order flow and revenue growth

Participate in the E&C opportunities in the international projects of Indian oil and gas majors such as ONGC’s investments in Latin

America

Increasing competition both from Indian players such as L&T, PunjLloyd and international players such as Tecnimont (Italian), Foster

Wheeler (US), Uhde GmbH (Germany) in the LSTK segment

Postponement of capex plans by the PSUs in the hydrocarbon sector can adversely impact EIL’s order flow growth. At the end of 1HFY12,order book declined to ` 63bn (FY11 end: ` 75bn) due to lack of any sizable Government orders in 1HFY12

Source: Ambit Capital research, Company

Exhibit 6: Porter’s analysis of the Indian Hydrocarbon EPC industry

Source: Ambit Capital research, Industry

Bargaining power of suppliers

MEDIUM

Raw material suppliers for the LSTK projectsare present in abundance; therefore, they have low bargaining power.

There is a shortage of skilled and experiencedproject engineers in the hydrocarbons space inIndia. Hence such engineers have higher bargaining power.

Competition

HIGH

Limited competition in theproject engineering andconsultancy segment

Competition is high in the LSTK segment as 10-11 players(domestic/international) bid for LSTK project

Whilst there are only twodomestic players (L&T and PunjLloyd) a large number of international players bid for theLSTK project. Internationalplayers further subcontract thepackaged LSTK contract tosmaller contractors

Barriers to entry

HIGH

Technical engineering capabilities andextensive domain knowledge in thehydrocarbon value chain are the biggest entry barriers for new entrants.

Trained project engineers with significantexperience in domain such as offshore ,refinery and petchem are another entry barriers.

Bargaining power of buyers

MEDIUM

Petrochemical and oil and gascompanies in the public/ privatesectors are the key clients.

Preferred bidder status of EIL for thecentre/state owned large oil and gascompanies keeps the bargainingpower of customers medium.

In India, there are few consultancy companies (such as EIL) which arepresent across the hydrocarbons

value chain.

Threat of substitution

LOW

Once the consultancy contract isawarded, there is no threat of substitution. However, the LSTK contracts could be sub-divided intosmaller contracts and subsequently awarded to various contractors.

Improving

Unchanged

Deteriorating



Engineers India


The hydrocarbon opportunity remains big

The cyclical nature of refinery and petchem investments can lead to a lack of orders for a brief period. However, Government sponsored plans to increaserefinery capacity by 33% (50mmtpa) by investing US$18bn in greenfield capacitiesand US$13bn in upgradations provide EIL with growth visibility over FY12-FY17.

Further, greenfield petchem capex XIIth

5-Year Plan is expected to be closer toUS$8bn. Slippage risks are low due to intensive Government support to energy PSUs and lower procedural problem in expansions. Strengthening and deepeningof capabilities in segments like infrastructure and fertilizer will provide additionalgrowth impetus.

Historical revenue growth was driven by investments in the refiningand petrochemical segments …

EIL is one of the few Indian project management companies, which is presentacross the entire value chain in the hydrocarbon space. Historically, thehydrocarbon sector has accounted for more than 95% of EIL’s order book, with therefining and petrochemical segments forming ~65%-70% of the entire order book.

Over FY07-FY11, increasing investments in the hydrocarbon industry, mainly inthe petrochemical and refining segments, drove the order flow and revenuegrowth for the company. Over FY07-FY11, whilst the refining and petchem capex grew at a CAGR of 31% and 7% respectively, EIL’s overall revenue grew at a CAGR of 45% driven by large contracts received in the LSTK segment. However, thecyclical nature of refinery and petchem investments can lead to lack of orders for abrief period of time, as seen in FY08 and FY10 and possibly in FY12.

Exhibit 7: EIL’s revenues are driven by PSUs’ capex inthe refining and petchem segments (` bn)

-

50

100

150

200

250

300


-

5

10

15

20

25

30

Refining cap ex (LHS) Petchem capex(LHS)

EIL revenues (RHS)

Source: Ambit Capital research, Company, Ministry of Petroleum and

Natural Gas; Notes: (a) We have included investments by IOCL, HPCL,BPCL, CPCL, MRPL and GAIL for our analysis (b) For FY10 and FY11, petrochemical and refinery capex are estimated figures and actual capexcan be higher than estimates

Exhibit 8: However, the cyclical nature of theseinvestments leads to cyclical order flow, mainly in theLSTK segment

-

10

20

30

40

50

FY07 FY08 FY09 FY10 FY11 1HFY12

LSTK order flow (Rs bn) Total order flow (Rs bn)


…. which continue to offer significant opportunities over FY12E-17E

In the XIIth 5-Year Plan (FY12-FY17), PSU refineries plan to invest ` 882bn(US$18bn) for refining capacity augmentation and another ` 662bn (US$13bn) for revamping their existing facilities, laying onshore pipelines, setting up storageterminals and other allied activity. Similarly, in the petrochemical segment, PSUsare indicating an investment of ~ ` 415bn (~US$8bn) over the next 4-5 years for the greenfield projects (capacity expansions).

LSTK refers to fixed lumpsumpayment for the EPC contract wherescope of work includes from thestart-up of the facility to a level of

operational status.



Engineers India


Exhibit 9: Huge capex plans of the oil and gas refiningPSUs for the next 10 years

573882

1,198

662

-

300

600

900

1,200

1,500

1,800

XIth five year plan

(FY07-12)

XIIth five year plan

(FY12-17)

XIIIth five year

plan (FY17-22)

Rs bn

Source: Ambit Capital research, Company Notes (a) XI th plan capex plans shows total opportunity (refining and others) (b) XIII th plan capex showsonly projected investments in Greenfield projects (b) XIIIth plan capex is

calculated as: projected capacity addition by PSUs*capex expected tobe incurred for 1MMTPA capacity addition in XIIth plan * inflation @5%

Exhibit 10: 90% of the order book is dependent on theinvestments in the hydrocarbon sector

Refineries,

12%

Petrochemical,

31%

Pipelines, 17%

O&G

processing,

3%

Storage/

terminals,

28%

Infra, 4%

Fertilizers, 4%


The LSTK opportunity over FY12-17 for EIL will emerge from (i) 100% of theinvestments in the petchem and refinery capacity augmentation; and (ii) 20% of the investments in the refinery revamping. The balance 80% of the spend onUpgradation/pipelines/storage will provide consultancy opportunity which istypically 7% of the total project/ capex spend. We do not have data for thepetchem capex apart from the Greenfield spend data shared by respectivecompanies. We believe that the combined investments imply a ~̀ 1.5tnopportunity for EIL over the next five years. However, we highlight that untilFY14, EIL’s revenue growth will be mainly driven by refining capex, as investmentsin the petchem segment are cyclical in nature and the major investments for greenfield projects are expected from CY13 onwards.

Exhibit 11: Refining and Petrochemical segments offer a huge opportunity in 12 th Five Year Plan (FY12E-17E)

ParticularsGreenfield/

Grassroots projectsUpgradation

/pipelines/storageTotal

(` bn)

Refinery

Planned investments ( ` bn) (FY12-17) 882 662 1,544

% of inv. as revenue potential for EIL’s LSTK segment 100% 20% 1,014

% of inv. as revenue potential for EIL’s Consultancy segment 7% 7% 108

Best-case revenue potential LSTK: 100%LSTK: 20% +Consultancy:7% on the bal. inv. (80%)

1,051

Petrochemical

Planned investments ( ` bn) (FY12-16) 415 - 415% of inv. revenue potential for EIL’s LSTK segment 100% 415

% of invst. as revenue potential for EIL’s Consultancy segment 7% 29

Best-case revenue potential LSTK: 100% 415

Best case potential from refineries and petchem for EIL 1,466

EIL's competitive strength

LSTK High Moderate

Consultancy High High

Competitive intensity

LSTK High Moderate

Consultancy Low High

Source: Ambit Capital research, Company, Industry, Ministry of Petroleum and Natural Gas Notes (a) For refinery segment, we have taken plannedinvestments by IOCL, HPCL, BPCL, CPCL, MRPL and GAIL (b) For petrochemical segment, we have taken planned expansion investments by OPaL,IOCL(Paradip), GAIL (Pata), Assam Cracker.(c) LSTK and Consultancy opportunities are mutually exclusive in nature.



Engineers India


Capex plans of refining PSUs have Government support

Despite their not so abundant cash flow generation, refineries have developed,financed and are implementing ambitious capital investment programmes. This isbecause the Government demonstrates a willingness to support refineries asinstruments of public policy. Refineries are considered as vehicles of theGovernment to provide affordable energy to serve the public purpose and developIndia into a major exporter of petroleum products. The explicit guarantee by the

Government that refineries will be kept solvent and profitable over time helpsthese refineries whilst raising capital. Therefore, despite their low cash flows,refineries continue to incur substantial capex.

Relatively smaller, but fast growing segments can provideadditional impetus to growth

Other than hydrocarbons EIL also provides consultancy and engineering services inthe infrastructure and fertilizer sectors, which together account for ~8% of the totalorder book:

1. In the infrastructure sector, EIL undertakes project consultancy jobs in theniche segments which require extensive designing and engineering solutions.

EIL is mainly foraying into:

Water/Waste water treatment segment: EIL is presently executing thesewer project for abatement of pollution in the river Yamuna for the Delhi JalBoard (order size: ` 1.5bn) and is considering to provide project consultingservices for large desalination projects. Further, it is also looking to enter intoPPP contracts for providing operations and maintenance services for theexisting water/waste water treatment projects.

City gas distribution (CGD): EIL also plans to undertake strategic city gasdistribution projects by operating the city gas pipeline networks on a PPP basis.In this regard, EIL has already signed a memorandum of understanding (MoU)

with Gujarat State Petroleum Corporation (GSPC) and is participating in the

new projects expected to be awarded by the Petroleum and Natural GasRegulatory Board (PNGRB).

Energy efficient buildings: EIL is also exploring project consultancy opportunities for modernization of Government buildings, educationalinstitutions and airports, in order to make them more energy efficient.

2. In the fertilizer sector, EIL is a relatively smaller player and is developingpre-qualification strengths (in terms of experience) by taking up selectconsultancy contracts. EIL is aggressively looking for opportunities in thissegment and is considering partnerships with companies such as NationalFertilizers Ltd for taking up LSTK projects in this sector. In the XII th Five Year Plan, large investments are planned for capacity augmentation for various

fertilizers such as urea, ammonia and phosphate. Whilst the concernsregarding the policy on gas pricing and the uncertainty over gas availability have limited large-scale investments in this sector, nutrient based subsidy mechanism introduced by the Government in CY10 is a positive step and willcreate investment opportunities in the fertilizer sector. Under this mechanism,market forces would determine the fertilizer prices and there will be greater incentive for fertilizer companies to invest in the sector.

Exhibit 12: CFO & debt havefunded refining/petchemcapex of PSU's

-

50

100

150

200

MRPL B P C L H P C L I O C L

(Rs bn)

CFO (F10, FY11) Capex ( FY10, FY11)

Source: Ambit Capital research, CompanyNote: We have added the consolidated datafor last two years for IOCL, HPCL and IOCL,and stand-alone data for MRPL.



Engineers India


EIL has superlative capabilities withflexibility

EIL’s scalable hydrocarbon engineering/project management skills, extensiveexperience pool and Government ownership make it flexible in terms of not only

offering E&C services across the contracts spectrum (design to EPCM to EPC/LSTK)but also enables it to take up critical path projects, tweak the usual EPC models(offering Open Book Estimates) and enter into long-term relationships (MoUs,nominations) with energy PSUs. Cost-dependent awarding of large projects keepsthe threat from the high-cost global majors at a low.

I. Presence across the entire hydrocarbon valuechain

Expertise in offering the entire spectrum of services, ranging from projectconceptualization to commissioning, in the hydrocarbon space, makes EIL thepreferred choice amongst PSU clients. EIL has a track record of executing largeand complex projects in the hydrocarbon space and has developed technicalexpertise to offer customized engineering solutions to clients. The company hasdeveloped 30 process technologies in the oil and gas sector and has securedpatents for 12 such process technologies (patent for 16 technologies awaited).

Exhibit 13: EIL is present across the entire hydrocarbon value chain

Oil and Gas

Segment EIL's scope of activities Offshoreplatforms

Offshore/onshore

processingRefinery Pipelines

Storageand

terminal

Petrochemical

Infraand

Fertilizer

Consultancy and Engineering

Process designservices

Conceptual designing, Front-end

engineering designing (FEED), preparationof detailed project feasibility report (DFR),preparing process technologies for application across sectors.

√ √ √ √ √ √ √

Procurementservices

Raw material management, contractmanagement, purchase, expediting,inspection and logistics

√ √ √ √ √ √ √

Engineeringservices

Services such as piping, mechanicalengineering, electrical and control systems,civil engineering, structural andarchitectural engineering.

√ √ √ √ √ √ √

Certificationservices

Safety audit of onshore/offshore oil andgas facilities, third party inspections mainly done through 100% subsidiary -Certification India Ltd.

√ √ √ √ √ √ √

Constructionmanagement

Warehouse management, quality control,health safety, undertakes totalresponsibility from soil survey tomechanical completion.

√ √ √ √ √ √ √

Lumpsum turnkey (LSTK)/project segment

EPC services

Developing project execution plans,detailed plans, progress tracking andreporting, integration of the engineering,procurement logistics, construction, logistic,construction and commissioning works.

√ √ √

Commissioningservices

Project testing, conducting performanceguarantees etc.

√ √ √


In the Engineering, Procurement,and Construction (EPC) contracts,the contractor executes the turnkey

project and provides servicesranging from the productdesigning stage to the projectcommissioning stage.

In the Engineering, Procurement,and Construction Management(EPCM) contracts, the contractor

manages the complete project onbehalf of the client and ensuresthat the whole project is completedas required and in time.



Engineers India


Competitive landscape of the Indian hydrocarbonindustry

Extensive domain knowledge, clear understanding of process technologies, track record of executing complex oil and gas projects and a team of experiencedproject engineers at the project site are the pre-requisites for winning hydrocarbon

EPC contracts in India. Therefore, only a few domestic players with specializedexpertise in the hydrocarbon sector and few large international companies (withdecades of EPC experience and a global presence) are present in the Indianhydrocarbon industry. International players have either acquired or formed JVs thesmall Indian hydrocarbon consultancy/EPC firms and their Indian offices areprimarily used as support offices for servicing their international arms. However,some international players such as Toyo Engineering, Linde Engineering, andUhde Engineering have operations in India as well. The table below highlights themain Indian and international players in the Indian hydrocarbon EPC industry.

Exhibit 14: Key players in the Indian hydrocarbon EPC industry

Services offered by the parentcompany globally

Consultancy andEngineering

LSTK/EPCPresence in India

CompaniesCountry ofincorpo-ration

Oil &Gas

Petchem

InfraOil &Gas

Petchem

InfraGlobalsupportoffice

India as asource ofbusiness

Key clients in India

Domestic players

EIL India √ √ √ √ √ √ NA NA IOCL, ONGC, HPCL etc

L&T India √ √ √ √ √ √ NA Yes GAIL, IOCL, Reliance etc

Punj Lloyd India √ √ √ √ √ √ NA Yes GAIL, IOCL, GSPL etc

Process System Eng. India √ √ X X X X NA Yes HPCL

International players

Toyo Engg. India Japan √ √ √ √ √ √ Yes Yes MRPL, Reliance, Petronet

Linde India Germany √ X X √ χ χ Yes Yes ISPRL

Tecnimont ICB Italy √ √ √ √ √ √ Yes Yes OPaL, NFL, IOCL

Uhde India Germany √ √ √ √ √ √ Yes Yes Reliance, IOCL, BPCL, Essar

Foster Wheeler India US √ √ √ √ √ √ Yes Yes ONGC, Petronet LNG,

Mott MacDonald US √ √ √ √ √ √ Yes Yes GSPC, Petronet, IOCL

Jacobs India US √ √ √ √ √ √ Yes Yes HPCL, IOCL

Bechtel India UK √ √ √ √ √ √ Yes Yes Reliance Industries

Samsung Eng India S. Korea √ √ √ √ √ √ Yes Yes OPaL, Nagarjuna Fertilizers

Pyramid consultancy Russia √ √ X √ √ X Yes Yes IOCL

Worley Parsons India Australia √ √ √ X X X Yes No NA

Saipem India projects Italy √ √ X √ √ X Yes No NA

Fluor India US √ √ √ √ √ √ Yes No NA

SNC Lavalin Canada X X √ X X √ Yes YesNHAI and other privatecompanies

Shaw Group US √ √ √ √ √ √ Yes Yes ONGC, GAIL

CB&I US √ √ √ √ √ √ Yes Yes Essar

Source: Ambit Capital research, Company, Company websites, press articles, industry



Engineers India


EIL is ahead of its peers in India

We assess the competitive positioning of EIL, both for project consultancy and LSTK segments. Hydrocarbon sector constitutes 92% of the order book and the other two sectors (infrastructure and fertilizers) together account for less than ~8% of thecurrent order book, thus we assess EIL’s competitive positioning in thehydrocarbon sector only. Our analysis and discussions with EIL’s clients,

competition and consultants suggest that, in hydrocarbon E&C industry, EIL is a very strong player both in project consultancy as well as in LSTK segments.Moreover, we highlight that due to competition with limited competitive offerings,it has a leadership position in hydrocarbon consultancy segment.

Leadership position in the hydrocarbon project consultancy segment

EIL has more than four decades of experience in providing project designing andengineering services in the hydrocarbon industry (mainly refinery andpetrochemical sectors) and has a technical staff of more than 3,000 engineers

which give the company an edge over others (both Indian and internationalplayers). Competition from other two large domestic players is limited as L&T-

Valdel execute mostly upstream projects only (EIL is present mainly in midstreamand downstream) and PL Engineering is a very small player which compared to EILand lacks the bandwidth to bid for complex jobs. On the other hand, whilst a largenumber of international players are present in India, the cost of operations for international players is more than twice that for domestic players, due to higher staff costs. Given that consultancy projects are small ticket-sized ( ` 0.5bn- ` 1.0bn)contracts, international players do not find it profitable to bid for standaloneproject consultancy jobs.

Strong position in the hydrocarbon LSTK segment

Competition is relatively higher in the LSTK segment, especially from internationalplayers such as Samsung Engineering, Saipem India, Linde Engineering, Toyo

Engineering etc. As the LSTK projects in hydrocarbon industry are large ticket-sizedcontracts ( ` 2.5bn- ` 20bn), international players are more interested in bidding for LSTK jobs. However, EIL’s experience of executing large grassroots projects (both inthe refinery and petrochemical segments) in India and the preferred contractor status (that the Government gives EIL in PSU contracts), places it ahead of peers inthe LSTK segment. Whilst some civil companies such as Simplex and PatelEngineering want to execute LSTK contracts in the hydrocarbon sector, thesecompanies are at most confined to sub-contractor works in storage or pipelines for mechanical/structural works.

Exhibit 15: EIL's competitive positioning across sectors

Key players in EIL's competitive positioningSegments

Hydrocarbon Infrastructure Fertilizers Hydro-carbon Infra-structure Fertilizers

Consultancy andEngineering

India: EIL, L&T Valdel (upstream),PL Engineering Subsidiaries ofinternational players like: Toyo Engineering (Japan),Tecnimont (Italy), Uhde GmbH(Germany), Foster Wheeler, MottMacdonald (US),

Construction companies either have their owndesigning teams or they partner with other international consultingcompanies

India: EIL, PatelEntreprises, HDOPromantec Consultantsetc. Internationalplayers: KBR (US),Uhde GmbH (Germany),Tecnimont (Italy) etc.

Very Strong

Moderate Low

LSTK/EPC

India: EIL, L&T, Punj LloydSubsidiaries of internationalplayers like: Saipem (Italy),Samsung Engineering (SouthKorea), Linde Engineering

Construction companies such as L&T, IVRCL, NCC,Gammon India, Punj Lloyd,Simplex etc. Internationalplayers like HOCHTIEF,Leighton, Vinci and other Malaysian players

India: HDO, L&T, etc.International players: KBR (US), UhdeGmBH(Germany),Tecnimont (Italy) etc.

Strong Low Low

% share of EIL's order book 92% 4% 4%

Source: Ambit Capital research, Company, industry participants



Engineers India


Materially stronger in the greenfield/grassroots projects

We highlight that EIL, with its competitive strengths particularly in thegreenfield/grassroots projects is well established to capitalize on the refining andpetchem opportunities. EIL has the experience of executing eight greenfieldrefinery projects, from the conceptual stage to the commissioning stage, and of establishing seven out of eight mega-petrochemical complexes in India. EIL hasalso worked on the modernization and revamping of 49 refinery projects in India.

Exhibit 16: EIL is a strong player for large-ticket sized, complex greenfield projects in the hydrocarbon industry

Project CompetitionParticulars

No. of jobs Size Intensity Key playersComplexity EIL's strengths

LSTK/EPC projects

Greenfield refineries Few Very large High Domestic/ International Very High Very High

Refinery modernization Large Medium Moderate Domestic/ International High High

Refinery shut down Few Small Low Mostly domestic Moderate High

Refinery storage and terminal Moderate Small High Domestic/ International Moderate Moderate

Greenfield petrochemical Very few Very large Moderate International Very High Very High

Petrochemical modernization Few Large Moderate Domestic/ International High High

Engineering and consultancy projects

Offshore platforms Large Small Moderate International Medium High

Onshore processing Large Medium Moderate International High High

Water/waste water treatment Few Medium High Domestic/International Medium Low

Fertilizers Very few Small Moderate Domestic Medium Low

Metals and metallurgy Few Small High Domestic Medium Medium

Government and institutional buildings Large Medium High Domestic Medium Medium

City gas distribution (CGD) Few Large Low Domestic High Low

Refinery storage and terminal Few Small Moderate International Moderate Moderate

Petrochemical modernization Large Small Moderate International Moderate High

Refinery modernization Large Small Moderate International Moderate High

Source: Ambit Capital research, Company, Industry

However, EIL is a small player in the international markets

Despite having international operations for more than three decades, theinternational business account for less than 2% of EIL’s consolidated revenues. EILentered the international market in 1975 and has operations in Middle Easterncountries like Kuwait, Abu Dhabi, Oman, etc. However, compared to internationalplayers like Bechtel, Technip, Foster Wheeler, etc., EIL is a smaller player as it doesnot have large offices in the international markets with requisite number of technical engineers, and this a requirement to bid for large projects in the

international markets.

However, EIL is now focusing on its international business and is exploringopportunities in existing geographies (Middle Eastern countries) and newer geographies (such as China and Singapore). As the scale of international contractsin the hydrocarbon space is more than twice that of contracts in India, even

winning a few large projects from the international markets can significantly driveEIL’s order flow and revenue growth. The company in the past has done designand EPC jobs in Abu Dhabi for National Petroleum Construction Company and

Abu Dhabi company for processing station and onshore oil operations,respectively. For participating in Middle Eastern opportunities, EIL may look atforming JVs with local construction companies who may be short of requiredhydrocarbon E&C skills. EIL has also taken up consulting jobs from ONGC inlatter’s recent foray in Latin America and EIL will continue to be part of projectsplanned by Indian national energy companies in their international forays.



Engineers India


II. Talented and experienced employee base

The pool of technically qualified and experienced engineers in India is EIL’s key competitive strength compared with the other domestic and international players.Our discussions with industry experts highlight that hydrocarbon projectmanagement jobs require specialized and intensive engineering skills which aredeveloped by an engineer with industry experience over a period of 8-10 years.EIL presently, has a large base of 3,417 employees, with ~82% of the employeesbeing technically qualified engineers with more than 10-15 years of industry experience. In comparison, international players have an employee base of only 800-1,000 engineers in India and depute engineers in India from the overseasoffices for specific projects; this can be very expensive. We note this provides anedge to EIL for wining large Greenfield/Grassroot projects.

Low attrition levels

EIL has successfully maintained a low attrition rate ~2.0%-2.5% over the last 10years, as the company has incorporated attractive policies for employeerecruitment, training and retention:

Civil and mechanical engineers are recruited annually from the top 5-6engineering colleges in India and are imparted extensive industry training for developing technical and cross-functional skills.

Incentive programs like performance-linked variable pay structure, profitsharing programs (5% of the net profit is distributed to employees) toemployees at specific levels and above, lucrative retirement benefit plans etc.are followed for retaining employees at the middle and senior managementlevels.

Moreover, external factors such as limited number of attractive jobopportunities within Indian hydrocarbon industry, lack of willingness fromemployees to move to Middle Eastern countries due to personal/ family issues

have also helped EIL to maintain low attrition levels.

Higher value addition per employee compared to peers

Over FY08-FY11, relatively higher revenues and EBITDA growth in comparison with employee growth have led to a significant improvement in EIL’s per employeemetrics. EIL’s revenue per employee has improved significantly over FY08-FY11and is, presently, comparable with international peers like Technip and Worley Parsons. EIL, in FY11, has the highest EBITDA per employee amongst all its peers.

Exhibit 17: EIL’s revenue per employee and EBITDA per employee have significantly improved over FY08-FY11 andis now comparable with international peers (US$’000)

Revenue per employee EBITDA per employee Costs per employee

Company CY07/FY08

CY08/FY09

CY09/FY10

CY10/FY11

CY07/FY08

CY08/FY09

CY09/FY10

CY10/FY11

CY09/FY10

CY10/FY11

Fluor ** 405 530 608 531 18 28 36 19 NA NA

Foster Wheeler ** 369 465 376 336 39 45 38 29 NA NA

L&T * 203 239 249 254 25 29 39 39 18 19

Jacobs *** 257 295 258 227 16 18 13 13 NA NA

Saipem ** 471 483 469 479 57 69 73 79 68 70

Worley Parsons**** 143 180 157 174 17 20 14 17 54 61

EIL Ltd * 60 111 136 185 14 24 34 43 33 34

Technip ** 566 475 425 389 31 51 55 49 NA NA

Source: Ambit Capital research, Company, Bloomberg Notes (a) We have taken consolidated data for our analysis(b)* Year ending March,** year

ending December,***year ending September,****year ending June. (b) We have taken 1US$=Rs45 average exchange rate for EIL and L&T,1EURO=1.65US$ for Technip and Saipem for our analysis



Engineers India


III. Multiple relationship modes with PSUs

Unlike other Engineering and Construction companies, which can only win acontract through competitive bidding, EIL has a significant advantage on accountof being a public sector enterprise. It receives orders from the PSUs through thefollowing three mechanisms:

1.

Nomination by the Ministry of Petroleum and Natural Gas, for PSUshydrocarbon projects;

2. Negotiated settlement basis where the company has signed a MoU with thePSUs for their

3. Competitive bidding basis where EIL is the lowest bidder and competes withboth national and international players,

Contracts won through nomination and negotiated settlements strengthen EIL’spre-qualification strengths (in terms of experience). EIL receives 25-30% on acompetitive bidding basis and the balance of the contracts on negotiatedsettlement basis or on account of nomination basis. The experience, capabilitiesand the flexibility offered by EIL to large PSUs is the prime reason PSUs do not go

for competitive bidding. Secondly, specialized jobs/critical path jobs require fastexecution and specific experience which may not be available with many other consultants.

IV. The OBE model helps EIL win large contracts

In FY2007, EIL introduced the ’open book estimate’ (OBE) contract model whichprovides a provision to convert a consultancy contract to an LSTK contract. Under such contracts, clients can work with EIL’s EPC partner early in thescoping/designing phase, and progressively firm up the lumpsum turnkey contract.This model is beneficial for both clients as well as EIL owing to there being nohidden costs and greater flexibility and a shorter execution cycle compared with

the earlier LSTK model. OBE contracts ensure control over the time and expensesof the project and increases the certainty of outcome. Moreover, lower capitalrequirements enable EIL to earn higher RoCEs under this model. In FY11, EIL had

won three large contracts worth ` 31.5bn (42% of the order book at the end of FY11) through the open book estimate (OBE) route.

V. Low cost of operations compared to globalpeers

In India, EPC projects are mainly awarded to the lowest bidder and Indian playershave an advantage over the global players, as their operational costs are lower than those of international peers. For the LSTK projects in the hydrocarbon sector,

whilst the difference between the bid submitted by EIL and L&T is ~5%-7%, thedifference between the bid submitted by EIL and international players (such asTechnimont, Uhde India etc.) is as high as 30%-100%. This is becauseinternational players do not have a large operational base in India and they haveto reallocate their international resources (manpower) to India for executing largeprojects. This result in higher operating costs for international players compared

with Indian players. Therefore, cost-dependent awarding of large projects gives anedge to Indian players like EIL and L&T versus the global players.



Engineers India


Business strengths visible in unrivalledCFOs and RoEsOver FY08-FY11, EIL leveraged India’s rising investments in refineries/petchem by capturing a bigger share of the spend by taking up low EBITDA margin (10%-12%)

high volume lumpsum turnkey (LSTK) jobs (144% CAGR) instead of high EBITDA margin (40%) low volume consulting jobs (22% revenue CAGR). Hence, EIL’s CFOshave grown quickly and RoEs moved to 37%-40% from mid-teens earlier,overriding the declining EBITDA concerns. High cash holdings ( ` 21bn) provide

working capital flexibility to ward off the competition threat in LSTK jobs.

Growth was driven by the LSTK segment over FY08-FY11

Exhibit 18: Over FY08-FY11, high revenue growth inLSTK segment drives over growth ….

-40%

0%

40%

80%

120%


-40%

0%

40%

80%

120%

LSTK rev.share Consultancy rev. share

LSTK revenue gr. (RHS) Overall revenue gr. (RHS)


Exhibit 19: … however EBIT margin for LSTK jobs issignificantly lower than consultancy projects …

0%

10%

20%

30%

40%

50%


LSTK EBIT margin Consultancy EBIT margin


However, the cash flows and returns have increased significantly

Exhibit 20: Over FY08-FY11, cash flows also got muchlarger

-

1,500

3,000

4,500

6,000

FY06 FY07 FY08 FY09 FY10 FY11

(2.0)

(1.5)

(1.0)

(0.5)

-

CFO (Rs mn) FCF (Rs mn)

Net debt/equity (x) (RHS)


Exhibit 21: … and return ratios moved to 37%-40% frommid-teens …

0%

9%

18%

27%

36%

45%


RoEs RoCEs




Engineers India


Superior financial performance compared to domestic andinternational peers

Whilst EIL is a relatively small player compared with other large domestic andinternational players (in terms of revenues), its financial performance issignificantly superior to peers on all financial parameters. Over FY09-FY11, whileall peers (domestic and international) posted either a revenue decline or a mutedrevenue growth rate (5%-15%), EIL has posted a revenue growth of 35%. EIL’smargins (EBITDA and PAT) and returns ratios (RoE and RoCE) are also far superior to that of other peers.

Exhibit 22: EIL’s performance is superior to domestic/international peers in the hydrocarbon space

Revenue CAGR EBITDA margin PAT margin RoE RoCE CFO/EBITDA Company (CY06-08)/

(FY07-09)CY08-10)/(FY09-11)

CY09/FY10

CY10/FY11

CY09/FY10

CY10/FY11

CY09/FY10

CY10/FY11

CY09/FY10

CY10/FY11

CY09/FY10

CY10/FY11

Engineers India * 63% 35% 25.1% 23.3% 21.9% 18.7% 34% 40% 39% 59% 149% 128%

Punj Lloyd* 53% -18% 3.9% 6.2% -1.0% -0.8% -4% -2% -26% -39% -406% 210%

L&T * 41% 13% 15.6% 15.4% 12.5% 8.6% 31% 19% 32% 19% 51% 4%

Toyo Engineering * 21% -31% 8.8% 6.0% 4.1% 2.4% 12% 6% 10% 5% 97% 166%

Foster Wheeler ** 40% -23% 10.1% 8.6% 6.9% 5.3% 57% 24% 43% 22% 74% 73%

Jacobs Engg.*** 16% -5% 4.9% 5.9% 2.5% 3.2% 9% 11% 14% 22% 80% 61%

Worley Parsons **** 29% -2% 9.2% 9.5% 5.8% 6.5% 17% 20% 53% 62% 93% 74%

Saipem ** 16% 5% 15.6% 16.4% 7.1% 7.6% 24% 23% 21% 17% 74% 84%

Fluor ** 26% -3% 5.9% 3.5% 3.1% 1.7% 23% 11% 30% 16% 101% 101%

Technip ** 4% -10% 12.9% 12.6% 2.6% 6.9% 7% 14% 20% 34% 105% 46%

Source: Ambit Capital research, Company, Bloomberg Notes (a) We have taken consolidated data for our analysis(b)* Year ending March,** yearending December,***year ending September,****year ending June. (b) We have considered CFO before taxed paid for our analysis

EIL has generated positive cash flows over the last five years

We compare EIL’s FCF with that of other Indian E&C companies and internationalproject management companies present in the hydrocarbon space. We find that

unlike most of its Indian peers, EIL has generated positive cash flows (CFO) over the last four years mainly on account of the low working capital requirement andincreasing profitability. However, comparing EIL with other international peers, wefind that all the EPC companies present in the hydrocarbon space have generatedpositive cash flows.

Exhibit 23: Unlike other Indian E&C players, CFO hasalways remained positive for EIL

(` mn) FY08 FY09 FY10 FY11

EIL + + + +

L&T - - + +

Punj- - - +IVRCL - - + +

NCC - - - -

HCC - - - -

Simplex - - + -

Gammon India - - - -

CCCL - - - -

Voltas + + + +

Blue Star + + + -

Source: Ambit Capital research, Company, Bloomberg, Note: We havetaken consolidated data for EIL, Voltas, Blue Star, Simplex, Punj Lloyd andCCCL and stand-alone for others

Exhibit 24: Like other international players, EIL alsogenerates positive CFO…

Company CY07/FY08

CY08/FY09/

CY09/FY10

CY10/FY11

EIL * + + + +

Toyo Engineering* + - + +

Foster Wheeler** + + + +

Jacobs Engineering *** + + + +

Worley Parsons **** + + + +

Saipem ** + + + +

Fluor ** + + + +

Technip ** + + + +

Source: Ambit Capital research, Company, Bloomberg Notes (a) We havetaken consolidated data for our analysis(b)* Year ending March,** yearending December,***year ending September,****year ending Jun



Engineers India


Superior financial performance v/s Indian E&C companies

Unlike other E&C companies which are presently being impacted by deterioratingfinancial performance (muted revenue growth, declining margins and returns,rising debt:equity and negative cash flow generation), EIL continues to post strongperformance on all financial parameters. Over FY08-FY11, increasing contributionof the LSTK segment in overall revenues has led to revenue and EBITDA growth of 56% and 55% respectively. Further, the turnover and the return ratios have also

improved significantly over FY08-FY11 and are far ahead of those of other E&Ccompanies in India.

Exhibit 25: EIL’s performance is ahead of Indian peers

Company Revenue growth(%) (FY08-FY11)

EBITDA margin(%) FY11

RoE (%) RoCE (%) WC turnover

(x)GB turnover

(x)Debt:equity

(x)

EIL 56 23.5 40.8 32.9 7.4 14.9 0

L&T 8 12.5 19.4 32.1 8.4 10.5 0.3

Punj (2) 5.2 (2.0) 1.3 1.5 2.4 0.9

IVRCL 14 9.5 8.2 10.2 2.7 6.5 1.1

NCC 13 9.6 12.0 8.2 2.3 6.0 0.9

HCC 10 13.5 4.7 7.1 1.7 2.2 1.0Simplex 19 9.8 12.1 9.7 3.1 3.5 2.3

Gammon India 33 4.8 (3.6) 3.5 3.3 3.4 1.1

CCCL 14 7.5 7.7 8.4 2.6 10.7 0.7

Voltas 17 8.5 29.2 21.5 5.0 12.5

Blue Star 8 8.5 32.1 20.3 5.6 8.2 0.7

Source: Ambit Capital research, Company, Bloomberg, Note: We have taken consolidated data for EIL, Voltas, Blue Star , Simplex, CCCL, and PunjLloyd and standalone for others.



Engineers India


Key assumptions and estimatesExhibit 26: Key assumptions and estimates (` mn, unless otherwise stated) (consolidated data)

Key assumptions FY11 FY12E FY13 E FY14 E Comments for key assumptions up to FY14

Order book 74,843 54,808 45,539 43,263

YoY growth (%) 20.0% -26.8% -16.9% -5.0%Consultancy segment 25,840 21,235 15,025 10,115

YoY growth (%) -11.4% -17.8% -29.2% -32.7%

LSTK segment 49,003 33,573 30,514 33,149

YoY growth (%) 47.6% -31.5% -9.1% 8.6%

Significant decline in the order flow coupled with high revenuegrowth in FY12 leads to a decline in the order book. However, weexpect order flow to pick up in the LSTK segment in FY13 andFY14 after a sharp decline in FY12 as refining orders pick-up.

Order flow 40,957 17,500 36,500 46,800

YoY growth (%) 337.2% -57.3% 108.6% 28.2%

Consultancy Segment 8,210 7,500 6,500 7,800

YoY growth (%) 74.6% -8.7% -13.3% 20.0%

LSTK segment 32,746 10,000 30,000 39,000

YoY growth (%) 602.0% -69.5% 200.0% 30.0%

Order flow in both the segments is highly dependent on the PSUs’investment plans in the oil and gas segment, which are inherently lumpy and cyclical in nature. Therefore, whilst we expect order flow to decline in FY12 (due to deferment in PSUs capex plans inlight of the high oil subsidy burden), we expect order flow to besignificantly high in FY13 and FY14 as expected in12th Five Year Plan.

Revenues 28,482 37,535 45,769 49,075

YoY growth (%) 41% 32% 22% 7%


YoY growth (%) 7% 5% 5% 0%

LSTK segment 16,953 25,430 33,059 36,365

YoY growth (%) 81% 50% 30% 10%

We expect high revenue growth in the LSTK segment (revenueCAGR of 26% over FY11-FY14) to continue to drive the overallrevenue growth (revenue CAGR of 18% over FY11-FY14).However, we expect muted growth in the project consultancy segment (revenue CAGR of 3% over FY11-FY14) as a delay in theoil & gas PSUs capex in FY12 will keep the revenue growthmoderate in FY12 and FY13.

EBITDA 6,635 7,988 8,809 8,940

EBITDA margin 23.3% 21.3% 19.2% 18.2%

Increasing share of the low margin LSTK business segment in therevenue mix is lowering the overall EBITDA margin

PBIT 6,982 8,009 8,848 8,966

PBIT margin(%) 24.5% 21.3% 19.3% 18.3%


YoY growth (%) 43.6% 42.0% 41.0% 40.5%

LSTK segment 1,956 2,924 3,637 3,818

YoY growth (%) 11.5% 11.5% 11.0% 10.5%

While we expect PBIT margins of the consultancy segment toremain high (north of 35%), a decline on a YoY basis expected on

account of increasing competition from international players. Weexpect margins to decline due to increasing raw material and sub-contractors costs in the LSTK contracts. However, an increasingshare of the high OBE contract model in LSTK jobs, will keepmargins ahead of the industry average (industry average ~8%)

PBT before EO 7,985 9,750 11,001 11,155

PBT margin 28.2% 26.0% 24.0% 22.7%

Adjusted PAT 5,339 6,581 7,426 7,530

Net margin 18.7% 17.5% 16.2% 15.3%

Declining share of high margin consultancy business andincreasing share of low margin LSTK business in the revenue mix is lowering net earnings on a YoY basis. However, PBT and PATmargins remain significantly ahead of that of other engineeringand construction companies.

Working capital turnover (incl. cash)

7.4 10.7 8.6 6.5Despite high revenue growth, increasing cash component islowering the working capital turnover in FY13 and FY14.

Gross block turnover 14.9 18.0 19.2 17.9High revenue growth and low capex needs is driving gross block

turnover Source: Ambit Capital research, Company



Engineers India


Ambit v/s consensus

Exhibit 27: Ambit v/s consensus

Particulars Consensus Ambit Divergence Comments

Revenue (` mn)

FY2012 36,018 37,535 4.2%

FY2013 41,968 45,769 9.1%

In 1HFY12, EIL has already achieved a revenue growth of 40% ona YoY basis. We expect YoY revenue growth of 25% for 2HFY12compared to consensus’ estimate of 18%. Hence our FY12

estimate is higher than consensus.

EBITDA (` mn)

FY2012 7,788 7,988 2.6%

FY2013 9,038 8,809 -2.5%

Due to an increasing share of the LSTK segment in revenue mix, we expect EBITDA margin to decline to 20.6% and 18.4% in FY12and FY13, respectively, However, consensus expects margin to be~21.5% for FY12 and FY13.

EPS (adjusted) (`)FY2012 18.0 19.5 8.5%

FY2013 22.1 22.0 -0.3%

Higher revenue growth estimates and higher interest incomeestimates compared to consensus, leads to a divergence of 8.5%from consensus in FY12.

Source: Ambit Capital research, Bloomberg

Forensic AccountingExhibit 28: Engineers India on our forensic accounting score

Field Score Comments

Accounting AMBER

In our forensic analysis of 360 companies, Engineers India is clubbed under the“miscellaneous” sector (as per the BSE500’s sector classification) and has a cumulativeaccounting score of 193 compared to a market average score of 196. EIL scores high onCFO/EBITDA and the other loans and advances as percentage to networth metric.However, the company scores poorly on the contingent liability as percentage tonetworth and average advances recoverable cash or kind as percentage of revenue.

Predictability GREENIn various interviews, EIL has made timely announcement regarding order flow and therevenue growth

Earnings momentum AMBERIn the last six months, there has not been any significant change to the consensus FY12and FY13 estimates

Source: Company, Ambit Capital research



Engineers India


Valuation - DCF based We believe that DCF is the best method to value project management companiesgiven that the key value drivers in a DCF based valuation are free cash flowsbased on revenue growth, operating profitability, working capital and gross block turnovers and a discount rate apt for the risks inherent to the industry.

DCF based value of `290/share

Our valuation of ` 290/share for the consolidated business uses the DCF based valuation. We use WACC of 15% and a terminal growth rate of 3% (applied fromFY2025 onwards). We expect revenues to grow at a CAGR of 18% over FY11-FY14E, mainly driven by the growth in the LSTK segment (revenue CAGR of 26%over FY11-FY14E). However, we expect muted revenue growth in the projectconsultancy segment (3% revenue CAGR over FY11-FY14E). Increasing share of the LSTK segment in the revenue mix will lower the overall margins; therefore weexpect EBITDA margin to gradually decline to 17.5% in FY14 (compared with23.5% in FY11). Post FY14, we model a moderated revenue growth rate in therange of 5%-18% and expect EBITDA margin to remain in the range 13.5%-15%.

We expect the high gross block turnover and low working capital requirement toresult in meaningful positive free cash flows from FY14 onwards. High revenuegrowth and low capex requirement will continue to keep gross block turnover high,and we expect, gross block turnover to increase to 19x in FY14E (from 15x inFY11). Whilst high revenue growth in the LSTK business will increase the overall

working capital requirement, we expect working capital cycle to remain negativeover FY11-FY14. Our DCF-based valuation for the consolidated business implies a

valuation of 15x and 13x for FY12E and FY13E earnings respectively.

Exhibit 29: DCF value for the consolidated business

0

2,000

4,000

6,000

8,000

F Y 1 3 E

F Y 1 4 E

F Y 1 5 E

F Y 1 6 E

F Y 1 7 E

F Y 1 8 E

F Y 1 9 E

F Y 2 0 E

F Y 2 1 E

F Y 2 2 E

F Y 2 3 E

F Y 2 4 E

F Y 2 5 E

(Rs mn)

0%

9%

18%

27%

36%

45%

PV of FCFF WACC (RHS)

RoIC (post tax) (RHS) RoE (RHS)


Exhibit 30: Terminal value - main component of total valuation

Particulars Implied valuation

%age shareof valuation

PV of the forecasting period up toFY25 ( ` mn)

54,410 56%

Terminal value ( ` mn) 19,605 20%

Enterprise value (` mn) 74,015 76%

Less: net debt at March-12 ( ` mn) (23,806) 24%

Implied equity value (` mn) 97,821

Implied equity value (`/share) 290




Engineers India


Relative valuation

In India, EIL is the only listed player which is present across the entire hydrocarbon value chain, therefore, it has no direct Indian peers for the company. In theabsence of such direct peers, we compare EIL with other project managementcompanies such as Voltas and VA Tech. We also include construction companies(such as L&T, Punj, CCCL and Simplex) in the peers list, which execute civil jobs in

the hydrocarbon space. Some of these construction companies such as L&T andPunj Lloyd also provide consultancy services in the hydrocarbon sector.

Based on FY13 P/E multiples, we observe that, whilst EIL is trading in line withother project management companies (Voltas and VA Tech) and at a premium tothe construction companies (Simplex and CCCL), but it is trading at a discount toL&T and Punj Lloyd. We believe that, given the superior margins and returns, EILdeserves to trade at a premium to both project management companies (Voltasand VA Tech) and mid-sized construction companies (Punj, Simplex and CCCL),and in line with large construction companies like L&T.

We also compare EIL with global E&C players, which are large projectmanagement companies and which also have a presence in the Indian

hydrocarbon market. Based on FY13 P/E multiple, we observe that EIL is trading ata significant discount to its international peers such as Worley Parsons, ToyoEngineering, Fluor and Technip. Whilst EIL is a small player in comparison tointernational companies, we highlight that given EIL’s technical capabilities,superior margin and return ratio profile, it deserves to trade at a premium/in line

with international peers.

Exhibit 31: EIL’s relative valuation

McapRevenue(US$mn)

RevenueCAGR (%)

EBITDA margin

(%)

PATmargin

(%)RoE RoCE P/E (x) EV/EBITDA (x)

Particulars

US$ mnCY10/FY11

(FY09-11)

CY10/FY11

CY10/FY11

CY10/FY11

CY10/FY11

CY11/FY12

CY12/FY13

CY11/FY12

CY12/FY13

Indian Engineering and Construction companies*L&T 14,900 11,456 13.3% 15.4% 8.6% 19.4 31.9 16.0 13.8 11.3 9.8

EIL 1,380 633 35.4% 23.3% 18.7% 40.2 38.8 11.7 9.6 6.9 5.9

Voltas 563 1,150 9.4% 8.7% 6.9% 29.2 42.3 11.7 9.9 8.7 7.1

Punj Lloyd 308 1,744 -18.2% 6.2% -0.8% (2.0) (26.2) 17.7 10.0 7.2 6.1

Simplex 211 1,012 -1.1% 11.7% 2.7% 12.1 13.8 8.9 6.9 4.9 4.2

VA Tech 179 274 4.3% 9.1% 4.3% 10.8 13.5 12.8 10.6 5.6 4.6

CCCL 66 439 15.7% 9.8% 2.4% 7.9 18.8 40.1 7.2 6.3 4.3

Average Construction companies 17.0 9.7 7.3

Construction companies - Median 12.8 9.9 6.9 5.9

Global E&C companies present in the hydrocarbon space

Saipem** 19,461 18,414 5.1% 16.4% 7.6% 22.5 20.6 16.0 13.9 8.6 7.7

Technip** 10,182 10,035 -9.8% 12.6% 6.9% 14.2 20.3 16.1 14.1 7.4 6.3

Fluor** 9,147 20,849 -3.4% 3.5% 1.7% 10.5 29.8 16.2 14.3 6.1 5.5

Worley Parsons**** 6,749 5,605 -1.6% 9.5% 6.5% 19.8 53.4 17.3 14.6 10.6 9.2

Jacobs Engineering*** 5,479 10,382 -4.9% 5.9% 3.2% 10.7 14.4 14.1 12.6 7.4 6.7

Foster Wheeler** 2,277 4,068 -23.0% 8.6% 5.3% 23.8 42.8 13.2 10.3 5.1 4.3

Toyo Engineering* 713 1,993 -30.9% 6.0% 2.4% 5.9 9.8 22.8 14.8 0.3 0.2

Average Global E&C companies present in hydrocarbon space 16.5 13.5 6.5 5.7

Global E&C companies - Median 16.1 14.1 7.4 6.3

Source: Ambit Capital research, Bloomberg, Company Notes (a) We have taken consolidated data for analysis (b)Mcap is as on 8th Dec-2011 (c) *

Year ending March,** year ending December,***year ending September,****year ending Jun



Engineers India


A comparison of EIL with L&T

Historically (over FY07-FY09), EIL had traded at a significant discount to L&T as thefinancial performance and returns ratio of EIL were significantly lower than L&T.However over FY09-FY11, EIL has not only generated superior returns (compared

with L&T), but has also bridged the gap on a P/E multiple basis. We believe thatthe continuous superior performance of EIL over L&T will bridge the gap further between the two companies.

Exhibit 32: Despite better RoEs, EIL trades at a discountto L&T. However, the gap has significantly narrowed

0

10

20

30

40

50

60

D e c - 0 6

J u n - 0 7

D e c - 0 7

J u n - 0 8

D e c - 0 8

J u n - 0 9

D e c - 0 9

J u n - 1 0

D e c - 1 0

J u n - 1 1

D e c - 1 1

L&T (x) EIL (x)

Source: Ambit Capital research, Bloomberg, Company Note (a) We havetaken consolidated data for EIL and stand-alone for L&T

Exhibit 33: EIL’s RoEs have improved over FY08-FY11and are significantly higher than L&T

10%

20%

30%

40%

50%

FY07 FY08 FY09 FY10 FY11 FY12E FY13E

L&T EIL

Source: Ambit Capital research, Bloomberg, Company (a) We have takenconsolidated data for EIL and stand-alone for L&T (b) For FY12 and FY13,we have taken consensus estimates for L&T and our estimates for EIL

Cross cycle valuation

EIL is currently trading at one-year forward consensus P/E of 11.7x which is a 24%and 15% discount to its 3-year average and 5-year average, respectively.However, EIL is trading at a significant discount to its peak 1-year forward PE of

31x. Whilst we do not expect EIL to trade near its peak PE multiple in the mediumterm, we believe that given strong financial performance and return ratios, EILshould trade close to its five-year historical PE of 14x. Whilst we do expect lower revenue growth over FY13-FY15, but believe EIL’s multiple should retrace lostground as the refinery opportunity gets supplemented with fertilizer capex, thusaddressing growth concerns.

Exhibit 34: EIL is trading at lower than its 5-yearhistorical average P/E of 14x

0

100

200

300

400

500

A p r -

0 6

O c t - 0 6

A p r -

0 7

O c t - 0 7

A p r -

0 8

O c t - 0 8

A p r -

0 9

O c t - 0 9

A p r -

1 0

O c t - 1 0

A p r -

1 1

O c t - 1 1

(Rs)24

18

12

6x

Source: Ambit Capital research, Bloomberg, Company

Exhibit 35: EIL is trading at lower than its 5-yearhistorical average P/B of 4.2x

0

100

200

300

400

500

A p r -

0 6

O c t - 0 6

A p r -

0 7

O c t - 0 7

A p r -

0 8

O c t - 0 8

A p r -

0 9

O c t - 0 9

A p r -

1 0

O c t - 1 0

A p r -

1 1

O c t - 1 1

(Rs)

6.5x

5x

3.5x

2x

Source: Ambit Capital research, Bloomberg, Company



Engineers India


We also highlight that the 1-year forward P/E multiple should take cognizance of the fact that quality of earnings are improving over the last 2 years. Whilst over FY07-09, other income (mainly interest income earned on cash in fixed deposits)contributed to 35%-40% of the PBT, over FY09-11, share of other income fell toonly ~20%-22% of the PBT. Therefore, core business now constitutes ~80% of PBTcompared to 60%-65% earlier. If we adjust the forward earnings for the other income, then EIL is presently trading at 13x 1-year forward core business eps. This

is at a discount of 40% and 33% to its 5-yr and 3-yr historical average of 22x and19x, respectively.

Exhibit 36: Other income as proportion of PBT hassignificantly declined over FY09-11

Particulars (` mn)


Other income 805 1,341 2,215 1,830 1,596

PBT 2,093 3,035 5,327 6,709 8,102

Other incomeas % of PBT

38% 44% 42% 27% 20%

Source: Ambit Capital research, Company Note : Other income is mainlyinterest income in the cash and liquid investments

Exhibit 37: Based on core earings, EIL’s is trading atdiscount of 40% to its 5-yr average P/E of 22x

0

10

20

30

40

50

D e c -

0 6

M a y - 0

7

O c t -

0 7

M a r -

0 8

A u g - 0

8

J a n - 0

9

J u n - 0

9

N o v - 0

9

A p r -

1 0

S e p - 1

0

F e

b - 1

1

J u l - 1 1

D e c -

1 1

(x)

Adj. 1-yr. fwd. P/E 1-yr. fwd. P/E

Source: Ambit Capital research, Company, Bloomberg

Can excessive cash be a drag on multiples and

returns? At the end of September 2011, EIL has a cash balance of ` 22bn (cash andinvestments) and given the negative working capital cycle and asset-light businessmodel, we expect the cash balance to further increase over FY12E-FY17E. Whilsttraditionally (over FY06-FY11) EIL had been a conservative player and had parkedthe excessive cash in fixed deposits, it is currently planning to utilize the cash for diversifying into new segments and geographies. This will help the company toachieve its long-term objective of becoming a global player with ` 100bn topline inthe next 10 years. Presently, EIL is exploring the following opportunities:

Increasing its international presence: EIL plans to bid for large contracts in theinternational markets which have a longer execution cycle, higher working capital

needs and which require larger number of project engineers at the project site. EILcan deploy its cash for setting up offices in the international markets (already opened a new office in China) for executing these large projects.

Undertake PPP projects in growing segments: EIL has plans to venture via thePPP route into the fast growing sectors such as water treatment and city gasdistribution. By taking up a minority equity stake (~10%) in the PPP project, EIL canundertake the EPC contracts for such PPP projects (large-ticket sizes) which candrive growth and margins in the new segments.



Engineers India


Key catalysts

Catalysts over the next 6-9 months

In 1HFY12, EIL has received orders worth only ` 5bn and the company will likely have a minuscule order flow growth in FY12. an increasing subsidy burden isdelaying the capex plans of the oil refining companies; hence, EIL has not receivedany large order in the LSTK segment over the last eight months. Any large order inthe LSTK segment over the next six months can significantly drive order flow growth and the share price of the company.

In 1HFY12, project consultancy segmental revenue grew by only 4% YoY, whichlowered the overall EBITDA margin (400bps decline on a YoY basis). Therefore,high growth in the consultancy segment revenues can drive EBITDA margin andthe cash flow generation.

Catalysts over the next 15-18 months

Our interaction with industry experts highlights that petrochemical capex is cyclicalin nature and the large investments for capacity expansions by the petrochemicalcompanies will occur FY13E onwards. As EIL is a market leader in the Indianpetrochemical industry for greenfield projects, any large investment in thissegment will drive order flow in the LSTK segment.

Whilst EIL is currently focusing on developing the pre-qualification strength in theinfrastructure and fertilizer segments, any large project consultancy orders in thesesegments will drive revenue growth and EBITDA margin.

Key risks to our BUY stance

Like other engineering and construction companies, EIL’s financials and stock priceperformance are exposed to the macro risks of delayed order inflows, inflationary

pressures and rising input costs. However, key specific risks to our BUY call are:Increase in the employee costs: Given that talented employee base is the key competitive strength and accounts for ~20%-23% of the consolidated revenues,any significant increase in the employee costs in proportion to increase in valueaddition per employee can lower the EBITDA margin. Increasing competition inIndia’s hydrocarbon sector from international players who offer attractiveremuneration can force EIL to increase employee salaries in order to retain talent,

which can adversely impact margins.

However, if we compare the growth in salaries per employee to the growth in value addition per employee (calculated as revenues less procurement and raw material costs), we find that whilst salaries per employee has grown at 9% CAGR

value addition per employee had grown at 20% CAGR over FY08-FY11. The risingshare of LSTK revenues provides EIL with an opportunity to improve the valueaddition on a per employee basis as is visible from exhibit 38, and absorb therising employee costs.



Engineers India


Exhibit 38: Value addition per employee is significantly higher than cost per employee

Particulars (` mn, unless specified) FY07 FY08 FY09 FY10 FY11

Consolidated revenues (A) 5,828 7,536 15,529 20,140 28,482

Revenue per employee (`.) 2.3 2.7 5.0 6.1 8.3

Procurement costs (B) 327 368 4,955 5,558 8,119

Subcontractors bills ( C) 411 562 1,912 3,021 6,485

Value addition by EIL (A-(B+C)) 5,090 6,606 8,662 11,560 13,878Number of employees 2551 2804 3102 3301 3417

Value addition per employee 2.0 2.4 2.8 3.5 4.1

Staff costs 2,494 3,349 3,903 4,911 5,240

Staff costs per employee 1.0 1.2 1.3 1.5 1.5

EBITDA per employee 0.55 0.65 1.05 1.53 1.96


Increasing subsidy burden on oil and gas refining companies can furtherdelay their investment plans: Over the last five years, capex plans of the oil andgas refining companies such as IOCL, HPCL, BPCL are dependent on the annualsubsidy burden (losses arising due to rising international crude prices). For FY12E,the subsidy burden is expected to be ` 999bn, (highest in the last five years) andthis has resulted in the postponement of oil refineries’ capex plans for the currentfiscal. Any significant increase in the subsidy burden over FY12E-FY14E can further lower expected capex, adversely impacting EIL’s order flow and revenue growth.

Intense competition from international players: Due to lack of significantopportunities outside India, international EPC players could start aggressively penetrating the Indian hydrocarbon market. As EIL bids for most of the projects ona competitive bidding basis, such increasing competition can reduce the growth inits order flow.



Engineers India


Balance sheet (consolidated)


Share capital 562 562 1,685 1,685 1,685

Reserves and surplus 13,543 10,981 13,214 16,715 19,797

Total net worth 14,105 11,542 14,899 18,400 21,481

Loans - - - - -

Sources of funds 14,105 11,542 14,899 18,400 21,481

Gross block 1,711 1,864 1,966 2,216 2,541

Net block 582 634 632 711 846

Capital work-in-progress 60 118 219 219 219

Investments 1,515 975 5,128 5,128 5,128

Cash and bank balances 19,215 17,945 17,981 23,806 29,324

Sundry debtors 3,090 3,259 3,278 4,422 5,517

Inventories 334 432 2,137 1,305 1,732

Loans and advances 2,231 1,854 2,575 3,037 3,942

Other current assets 2,057 2,137 1,252 2,351 2,882

Total current assets 26,927 25,626 27,224 34,921 43,398Current liabilities 12,961 14,037 15,452 18,214 22,480

Provisions 3,190 3,195 4,615 6,128 7,392

Current liabilities and provisions 16,151 17,231 20,067 24,342 29,872

Net current assets 10,776 8,395 7,157 10,579 13,526

Deferred tax assets 1,169 1,420 1,761 1,761 1,761

Application of funds 14,104 11,542 14,899 18,400 21,481


Income statement (consolidated)

Y/E March (` mn)FY09 FY10 FY11 FY12E FY13E

Operating income 15,529 20,140 28,482 37,535 45,769

YoY growth 106.1% 29.7% 41.4% 31.8% 21.9%

Total expenses 12,285 15,094 21,847 29,547 36,960

EBITDA 3,243 5,045 6,635 7,988 8,809

YoY growth 78.7% 55.6% 31.5% 20.4% 10.3%

Net depreciation/amortisation 110 132 148 167 190

EBIT reported 3,133 4,914 6,487 7,821 8,619

Net interest expense/(income) (1,439) (1,497) (1,225) (1,741) (2,153)

Other income 755 298 331 188 229

Adjusted PBT 5,327 6,709 8,043 9,750 11,00

Reported PBT 5,326 6,701 7,985 9,750 11,001

Provision for taxation 1,829 2,266 2,704 3,169 3,575

Adjusted consolidated PAT 3,497 4,444 5,339 6,581 7,426

YoY growth 75.1% 27.1% 20.1% 23.3% 12.8%

Reported consolidated PAT 3,512 4,405 5,314 6,581 7,426

YoY growth 77.3% 25.4% 20.6% 23.8% 12.8




Engineers India


Cash flow statement (consolidated)


PBT 5,327 6,709 8,042 9,750 11,001

Depreciation 110 131 149 167 190

Interest expense/ (income) (1,474) (1,531) (1,265) (1,795) (2,218)

Other income (30) (195) (20) (188) (229)

Direct taxes paid (2,159) (2,383) (2,710) (3,169) (3,575)

Change in working capital 4,176 867 333 893 1,307

CFO (before exceptional) 5,950 3,598 4,530 5,659 6,476

Exceptional items (1) (8) (58) - -

CFO (post -exceptions) 5,949 3,589 4,471 5,659 6,476

Purchase of fixed assets (220) (217) (253) (250) (325)

Investment (49) 540 (4,154) - -

Dividend received 19 28 18 188 229

Interest Income 1,554 1,549 1,294 1,795 2,218

CFI 1,320 2,070 (3,088) 1,733 2,121

Dividends paid (757) (6,930) (1,347) (1,566) (3,080)CFF (757) (6,930) (1,347) (1,566) (3,080)

Net Cash 6,512 (1,270) 37 5,825 5,518

Cash at the beginning 12,703 19,215 17,945 17,981 23,806

Cash at the end 19,215 17,945 17,981 23,806 29,324

Free cash flow 5,731 3,373 4,219 5,409 6,151


Ratio analysis (consolidated)

Year to March FY09 FY10 FY11 FY12E FY13E

EBITDA margin 20.9% 25.1% 23.3% 21.3% 19.2%EBIT margin 20.2% 24.4% 22.8% 20.8% 18.8%

Net margin (Adj) 22.5% 22.1% 18.7% 17.5% 16.2%

Dividend payout ratio 29.6% 135.1% 31.7% 40.0% 50.0%

Net debt/Equity (1.4) (1.6) (1.2) (1.3) (1.4)

Working capital turnover (x) 2.1 3.2 7.4 10.7 8.6

Gross block turnover (x) 9.3 11.3 14.9 18.0 19.2

RoCE 15.9% 25.4% 32.5% 31.7% 29.2%

RoE 27.0% 34.7% 40.4% 39.5% 37.2%


Valuation parameters (consolidated)

Year to March FY09 FY10 FY11 FY12E FY13E

EPS ( ` ) 10.4 13.2 15.8 19.5 22.0

Diluted EPS ( ` ) 10.4 13.2 15.8 19.5 22.0

Book value per share ( ` ) 42 34 44 55 64

Dividend per share ( ` ) 3.1 17.7 5.0 7.8 11.0

P/E (x) 20.4 16.1 13.4 10.9 9.6

P/BV (x) 5.1 6.2 4.8 3.9 3.3

EV/EBITDA (x) 16.1 10.6 8.1 6.0 4.8




Engineers India


Institutional Equities Team

Saurabh Mukherjea, CFA Head of Equities (022) 30433174 [email protected]

Research

Analysts Industry Sectors Desk-Phone E-mail

Aadesh Mehta Banking / NBFCs (022) 30433239 [email protected]

Anand Mour FMCG (022) 30433169 [email protected]

Ankur Rudra, CFA Technology / Education Services (022) 30433211 [email protected]

Ashvin Shetty Automobile (022) 30433285 [email protected]

Bhargav Buddhadev Power / Capital Goods (022) 30433252 [email protected]

Chandrani De, CFA Metals & Mining (022) 30433210 [email protected]

Chhavi Agarwal Construction / Infrastructure (022) 30433203 [email protected]

Dayanand Mittal Oil & Gas (022) 30433202 [email protected]

Gaurav Mehta Derivatives Research (022) 30433255 [email protected]

Hardik Shah Technology / Education Services (022) 30433291 [email protected]

Krishnan ASV Banking (022) 30433205 [email protected] Bhasin Construction / Infrastructure / Cement (022) 30433241 [email protected]

Pankaj Agarwal, CFA NBFCs (022) 30433206 [email protected]

Parita Ashar Metals & Mining / Media / Telecom (022) 30433223 [email protected]

Puneet Bambha Power / Capital Goods (022) 30433259 [email protected]

Rakshit Ranjan, CFA Mid-Cap (022) 30433201 [email protected]

Ritika Mankar Economy (022) 30433175 [email protected]

Ritu Modi Cement (022) 30433292 [email protected]

Shariq Merchant Consumer (022) 30433246 [email protected]

Sales

Name Regions Desk-Phone E-mail

Deepak Sawhney India / Asia (022) 30433295 [email protected]

Dharmen Shah India / Asia (022) 30433289 [email protected]

Dipti Mehta India / Europe (022) 30433053 [email protected]

Pramod Gubbi, CFA India / Asia (022) 30433228 [email protected]

Sarojini Ramachandran UK +44 (0) 20 7614 8374 [email protected]

Production

Sajid Merchant Production (022) 30433247 [email protected]

Kausalya Vijapurkar Editor (022) 30433284 [email protected]

Praveen Mascarenhas Database (022) 30433251 [email protected]



Engineers India

Explanation of Investment Rating

Investment Rating Expected return(over 12-month period from date of initial rating)

Buy >5%

Sell <5%

Disclaimer This report or any portion hereof may not be reprinted, sold or redistributed without the written consent ot Ambit Capital. AMBIT Capital Research is disseminated and available primarily

electronically, and, in some cases, in printed form.

Additional information on recommended securities is available on request.

DISCLAIMER 1. AMBIT Capital Private Limited (“AMBIT Capital”) and its affiliates are a full service, integrated investment banking, investment advisory and brokerage group. AMBIT

Capital is a Stock Broker, Por tfolio Manager and Depository Participant registered with Securities and Exchange Board of India Limited (SEBI) and is regulated by SEBI2. The recommendations, opinions and views contained in this Research Report reflect the views of the research analyst named on the Research Report and are based upon

publicly available information and rates of taxation at the time of publication, which are subject to change from time to time without any prior notice.3. AMBIT Capital makes best endeavours to ensure that the research analyst(s) use current, reliable, comprehensive information and obtain such information from sources

which the analyst(s) believes to be reliable. However, such information has not been independently verified by AMBIT Capital and/or the analyst(s) and no representationor warranty, express or implied, is made as to the accuracy or completeness of any information obtained from third parties. The information or opinions are provided as atthe date of this Research Report and are subject to change without notice.

4. If you are dissatisfied with the contents of this complimentary Research Report or with the terms of this Disclaimer, your sole and exclusive remedy is to stop using thisResearch Report and AMBIT Capital shall not be responsible and/ or liable in any manner.

5. If this Research Report is received by any client of AMBIT Capital or its affiliate, the relationship of AMBIT Capital/its affiliate with such client will continue to be governedby the terms and conditions in place between AMBIT Capital/ such affiliate and the client.

6. This Research Report is issued for information only and should not be construed as an investment advice to any recipient to acquire, subscribe, purchase, sell, dispose of,retain any securities. Recipients should consider this Research Report as only a single factor in making any investment decisions. This Research Report is not an offer to sellor the solicitation of an offer to purchase or subscribe for any investment or as an official endorsement of any investment.

7. If 'Buy', 'Sell', or 'Hold' recommendation is made in this Research Report such recommendation or view or opinion expressed on investments in this Research Report is notintended to constitute investment advice and should not be intended or treated as a substitute for necessary review or validation or any professional advice. The viewsexpressed in this Research Report are those of the research analyst which are subject to change and do not represent to be an authority on the subject. AMBIT Capital may or may not subscribe to any and/ or all the views expressed herein.

8. AMBIT Capital makes no guarantee, representation or warranty, express or implied; and accepts no responsibility or liability as to the accuracy or completeness or currentess of the information in this Research Report. AMBIT Capital or its affiliates do not accept any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of this Research Report.

9. Past performance is not necessarily a guide to evaluate future performance.10. AMBIT Capital and/or its affiliates (as principal or on behalf of its/their clients) and their respective officers directors and employees may hold positions in any securities

mentioned in this Research Report (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). Such positions insecurities may be contrary to or inconsistent with this Research Report.

11. This Research Report should be read and relied upon at the sole discretion and risk of the recipient.12. The value of any investment made at your discretion based on this Research Report or income therefrom may be affected by changes in economic, financial and/ or

political factors and may go down as well as up and you may not get back the full or the expected amount invested. Some securities and/ or investments involvesubstantial risk and are not suitable for all investors.

13. This Research Report is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other personor published, copied in whole or in part, for any purpose. Neither this Research Report nor any copy of it may be taken or transmitted or distributed, directly or indirectly

within India or into any other country including United States (to US Persons), Canada or Japan or to any resident thereof. The distribution of this Research Report in other jurisdictions may be strictly restricted and/ or prohibited by law or contract, and persons into whose possession this Research Report comes should inform themselvesabout such restriction and/ or prohibition, and observe any such restrictions and/ or prohibition.

14. Neither AMBIT Capital nor its affiliates or their respective directors, employees, agents or representatives, shall be responsible or liable in any manner, directly or indirectly, for views or opinions expressed in this Report or the contents or any errors or discrepancies herein or for any decisions or actions taken in reliance on the Reportor inability to use or access our service or this Research Report or for any loss or damages whether direct or indirect, incidental, special or consequential including withoutlimitation loss of revenue or profits that may arise from or in connection with the use of or reliance on this Research Report or inability to use or access our service or thisResearch Report.

Conflict of Interests15. In the normal course of AMBIT Capital’s business circumstances may arise that could result in the interests of AMBIT Capital conflicting with the interests of clients or one

client’s interests conflicting with the interest of another client. AMBIT Capital makes best efforts to ensure that conflicts are identified and managed and that clients’interests are protected. AMBIT Capital has policies and procedures in place to control the flow and use of non-public, price sensitive information and employees’ personalaccount trading. Where appropriate and reasonably achievable, AMBIT Capital segregates the activities of staff working in areas where conflicts of interest may arise.

However, clients/potential clients of AMBIT Capital should be aware of these possible conflicts of interests and should make informed decisions in relation to AMBITCapital’s services.16. AMBIT Capital and/or its affiliates may from time to time have investment banking, investment advisory and other business relationships with companies covered in this

Research Report and may receive compensation for the same. Research analysts provide important inputs into AMBIT Capital’s investment banking and other businessselection processes.

17. AMBIT Capital and/or its affiliates may seek investment banking or other businesses from the companies covered in this Research Report and research analysts involved inpreparing this Research Report may participate in the solicitation of such business.

18. In addition to the foregoing, the companies covered in this Research Report may be clients of AMBIT Capital where AMBIT Capital may be required, inter alia, to prepareand publish research reports covering such companies and AMBIT Capital may receive compensation from such companies in relation to such services. However, the viewsreflected in this Research Report are objective views, independent of AMBIT Capital’s relationship with such company.

19. In addition, AMBIT Capital may also act as a market maker or risk arbitrator or liquidity provider or may have assumed an underwriting commitment in the securities of companies covered in this Research Report (or in related investments) and may also be represented in the supervisory board or on any other committee of thosecompanies.

Additional Disclaimer for U.S. Persons20. The research report is solely a product of AMBIT Capital21. AMBIT Capital is the employer of the research analyst(s) who has prepared the research report22. Any subsequent transactions in securities discussed in the research reports should be effected through THINKEQUITY LLC. or another U.S. broker-dealer.23. The research analyst(s) preparing the research report is resident outside the United States and is/are not associated persons of any U.S. regulated broker-dealer and that

therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or

required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and tradingsecurities held by a research analyst account.

© Copyright 2011 AMBIT Capital Private Limited. All rights reserved. Ambit Capital Pvt. Ltd. Ambit House, 3rd Floor

ambit_engineers india_the real indian engineers_9dec2011

Documents