engineers india: 30% upside potential, buy - spa securities

1

Infrastructure

Engineers India LtdSensex: 26745 CMP: INR 244 Target : INR 319

September 25, 2014 INTIATING COVERAGE

Shareholding (%) Jun-14

Promoters 69.37

FIIs 8.85

DIIs 12.97

Others 8.81

Relative Price Performance

Key Data

BSE Code 532178

NSE Code ENGINERSIN

Bloomberg Code ENGR IN

Reuters Code ENGI.BO

Shares O/S (mn) 336.94

Face Value 5

Mcap (INR bn) 82.84

52 Week H/L 331.00/142.10

2W Avg. Qty, NSE 626421

Free Float (INR bn) 24.47

Beta 0.79

Y/E March (INR mn) FY13 FY14 FY15E FY16E

Net Sales 25060 18236 17465 18986

Growth (%) -32.25% -27.23% -4.23% 8.71%

EBIDTA Margin (%) 23.41% 20.72% 17.04% 30.49%

APAT 6013 4541 3900 5977

Growth (%) -0.88% -24.48% -14.11% 53.23%

EPS 17.85 13.48 11.58 17.74

P / E 8.66 16.70 21.24 13.86

P / BV 2.33 3.08 3.14 2.84

EV/EBIDTA 3.72 8.14 10.42 6.75

Net Debt-Equity Ratio (1.12) (1.02) (1.00) (1.04)

RoACE (%) 43.72 29.76 23.78 33.06

RoAE (%) 29.46 19.33 15.30 21.51

EIL is one of India's leading engineering consultancy and EPC companies focused primarily on hydrocarbon sector. Forayinto international hydrocarbon market has started bearing fruit following recent big ticket orders worth INR 11.7 bn fromMENA region. Diversification into other sectors including fertilizers, non-ferrous mining and metallurgy, power, strategiccrude oil storage, water, and wastewater treatment projects as well as other infrastructure projects will aid growth. Beinga direct play on oil and gas capex globally, we recommend a BUY on the stock with a target of INR 319.

Rohit [email protected]. No. 91 33 40114800/ 839

Prime beneficiary of capex revival in domestic hydrocarbon spaceEIL will benefit from expected revival in domestic hydrocarboncapex (MS + 90%). Government's 12th Plan capex target of INR1252 bn (+57% than 11th Plan) in hydrocarbon space will drivethe growth of company. With long term relationships/ MOU/nomination clause in place with major clients, EIL is expected tocapture most of the consultancy & EPC pie from the planned capexin the domestic hydrocarbon space.2.1x incremental earnings from upgrading fuel emission normsUpgradation from Euro 4 to Euro 5 fuel emission norms in Indiawould also result in an additional opportunity of over INR 400 bnin the refinery space, resulting in consulting opportunities of INR20 bn. This would lead to incremental EBDITA of ~INR 8 bn (2.1xFY14) over the next 3-5 years.International foray started bearing fruitEIL's expansion into overseas markets to tap surging investmentin hydrocarbon space has started bearing fruit. It has baggedorders worth INR 11.7 bn from overseas markets in Q1FY15including single largest ever intake of INR 8.5 bn from Nigeria.This has prequalified it to bid for several large scale projectsfrom MENA region (~INR 4500 bn of investment over 2011-35).Well placed to compete with global majors internationallyWinning orders in overseas market like Africa, Middle East andSouth East Asia has become extremely competitive and challenging,given host of international majors looking to tap this hugeopportunity. EIL is well placed to compete with internationalmajors without compromising on margins, given its significantcost advantage (+20%) over them owing to low cost employeebase (a/cs for majority of exp. in consultancy). Hence, margins(FY16 EBIDTAM 30.5% vs 7.5% average) and return ratios (FY16RoE 20.5% vs 15.3% average) enjoyed by EIL are significantly higherthan that of international peers.

Order book recovery aided by consultancy segmentEIL's order backlog recovered to INR 39.3 bn (2.2x revenues)following INR 12.9 bn of inflows in Q1FY15 (FY14 INR 11.5 bn)entirely from Consultancy segment. With revival of investmentclimate in domestic energy sector and 66.7% rise in spending byoil majors in Africa, Asia Pacific and the Middle East over 2013-2017, we expect the momentum in order inflows to continue.Overall we expect EIL to bag orders worth INR 20 bn in FY15 andINR 25 bn in FY16.Increasing contribution of consulting segment to aid marginsIncreasing thrust on high margin consultancy segment will increaseits share in order backlog to ~80% (from ~50% over FY12-14,Q1FY15 - 69%) in FY16, resulting in margin improvement, asturnkey segment has relatively lower margin of ~6% as againstmargin of ~40% enjoyed by the PMC business. Overall we expectthe share of revenues from PMC segment to stand at 74% in FY16resulting in ~978 bps improvement in operating margins.Outlook & ValuationWith dominant position in domestic hydrocarbon sector andincreasing foothold in international market, EIL remains thebest play on surging oil & gas capex globally. Robust orderbacklog of INR 39.3 bn in addition to expected inflows of ~INR22 bn over the next two years will drive growth for thecompany. Superlative operating margins and low capitalrequirements ensures high free cash flows (average 3 yrs freecash flows ~INR 3.1 bn) and strong return ratios (ROCE of +25%).Currently the stock is trading at a P/E multiple of 13.9x & EV/EBITDA of 6.8x FY16E earnings and P/BV of 2.8x FY16E BV. Werecommend a "BUY" on the stock with a price target of INR319, assuming a P/E multiple of 18x FY16E earnings (FY10-14average 17.6x), an upside of 30% from the current levels, overa period of 15 months.

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EIL Sensex

2

Infrastructure

Investment ArgumentMonopolistic position in domestic hydrocarbon spaceEIL holds a dominant position in Indian Hydrocarbon (Refinery

& Petrochemicals) space with a market share of ~90% built

over nearly five decades. The company offers complete

solutions for the hydrocarbon sector with expertise in design,

engineering, and project implementation. It has played a

significant role in the growth of hydrocarbon sector in India

by providing range of engineering consultancy and project

implementation services for several refineries (Greenfield and

brownfield), Oil & gas platforms (onshore and offshore),

petrochemical complexes and pipeline projects. EIL has its

footprints in 19 of the 22 operating refineries in the country

with combined refining capacity of more than 150 MMTPA and

also involved in the establishment of 7 of the 8 mega

petrochemical complexes in India. In the turnkey segment also,

the company has made major headway having executed 17 EPC

projects across the oil and gas spectrum. With presence across

the entire value chain, EIL is well versed with the ASME

(American Standard of Mechanical Engineering) codes used in

designing hydrocarbon refineries and has developed deep

relationship with all the major Hydrocarbon players.

The company is expected to maintain this leadership status on the

back of its proven track record of providing consultancy & project

management services to PSUs, long-term relationships with clients,

cost advantage over its international peers (low-cost technical staff

of more than 3,000 engineers) and MOU/nomination clause with

many of the PSUs.

Extensive Track Record and Strong Client Relationships

Refinery Projects including10 Green-field Projects

7 PetrochemicalComplexes

40 OffshoreProcess Platforms

8 Fertiliser Projects

InfrastructureProjects

17 Turnkey Projects

37 Oil & GasProcessing Projects

42 Pipeline Projects

13 Ports & StorageTerminals

29 Mining & MetalProjects

Power / CaptivePower Projects

Best levered to increasing Oil & Gas investmentsEIL being the preferred partner for all the major oil and gas players

is best placed to benefit from increasing investments in Oil & Gas

sector in India. In view of the long term demand for hydrocarbon

and related products, most players are likely to increase their

capacities to cater to increasing demand.

India offers significant E&P growth opportunities

0.0

2.0

4.0

6.0

8.0

10.0

2006 2007 2008 2009 2015 2020 2025 2030 2035M

illio

n ba

rrel

s pe

r da

yLiquids Production Liquids Consumption

Source: International Energy Outlook 2011, SPA Research

The 12th Plan targets brown-field refinery expansion of ~50.6

mtpa and green-field refinery expansion of ~30 mtpa. Further LNG

regasification capacity addition of 50 mtpa (currently 13.6 mtpa)

is expected by 2017, given subdued domestic gas availability.

Also increasing refining capacity and the natural gas infrastructure

would require necessary additions in the oil and gas pipeline

network in the country. On the petrochemical side, capacity of

Ethylene and propylene is expected to surge by 3220 mt (3867 mt

in 2012) and 870 mt (4117 mt in 2012) respectively by 2017.

Major refinery expansions in 12th Plan

Company Location Capacity (mtpa)

IOC Koyali, Vadodara, Gujarat 4.3

IOC Haldia, West Bengal 0.5

CPCL Manali, Tamil Nadu 0.6

HPCL Mumbai, Maharashtra 2.0

HPCL Visakhapatnam, Andhra Pradesh 6.7

HPCL (Maharastra Refinery) Ratnagiri 9.0

HPCL (Barmer Refinery) Pachpadra 9.0

BPCL Mumbai, Maharashtra 1.5

BPCL Kochi, Kerela 6.0

BORL Bina, Madhya Pradesh 3.0

NRL Numaligarh 5.0

MRPL Mangalore, Karnataka 3.0

Essar Oil Jamnagar, Gujarat 18.0

Total 68.6

Source: MoP&NG, SPA Research

FY13 Import Bill>US$150 Bn

FY35e Import Bill>US$400 Bn

Source: Company

3

Infrastructure

Government targets to incur a capex of INR 1252 bn (+57% than 11th Plan) in refinery and petrochemical space during the current planperiod. Although capex so far in past couple of years has remained sluggish owing to regulatory uncertainty and poor economics of theOMC's, we expect a) increasing shale gas availability, b) declining oil prices, c) ongoing reform process and d) improving macro economy,to kick start the capex in the hydrocarbon space.

12th Plan refinery capex by PSUs (INR bn)

050

100150200250300350400450

IOC CPCL HPCL BPCL NRL MRPL

11th Plan 12th Plan

12th Plan petrochemical capex by PSUs (INR bn)

0

20

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100120

140

160

IOC HPCL NRL MRPL GAIL

11th Plan

~ 134%

Source: SPA Research

80

138

323

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250

300

350

CO2

(Mill

ion

Tons

)

1994 2007 2020

Increase in Transport Emission

2010Total 410.2

2030Total 294.3

12th Plan

Source: PPAC, SPA Research

With the change of government at the centre, we expect the new government to clear several projects that were earlier put on the backburner. Though it might take another 6-8 months for the remaining projects to be cleared, we do not expect any shortage of projects in thehydrocarbon space over the next 3-5 years. Since PSUs have met their capex targets in previous five year plans, we expect players toannounce targeted capacity additions over the next three years. With long term relationships in place with major clients, EIL is expected tocapture most of the consultancy and EPC pie from the planned capex in the domestic hydrocarbon space.

Upgradation in fuel emission norms imminentWith speedy implementation of Euro V norms globally and increasing CO2 (carbon dioxide) emission domestically, pressure is mountingon India to implement Euro IV norms nationally and Euro V selectively, at the earliest. Historically we have seen that there has been a timelag of ~5 years in extending the applicability of a standard from few cities to the whole country (Euro II- Implemented in NCR in 2000 &applicable all over India in 2005. Euro III- Implemented in select cities in 2005 & all over India in 2010). Similarly Euro IV standards wereapplicable in few cities in 2010 (coverage extended to 17 cities as on date). Hence we expect Euro IV & Euro V standards to be implementedcountry wide by 2015 & 2020 respectively. Implementation of Euro V might also be hurried given time taken from conversion from Euro IVto Euro V usually is the least.

Importantly this would require investments of more than INR 400 bn by refineries to produce Euro V equivalent petrol and diesel (Ordersare expected to be placed from next year onwards). This would translate into consulting opportunities worth INR 20 bn for players like EIL,leading to potential incremental of ~INR 8 bn (2.1x FY14) over the next 3-5 years.

PM Emissions from road vehicles by region

4

Infrastructure

Order book recovering aided by consultancy segmentEIL's order backlog after declining over past couple of years (owing to weak investment cycle and lack of policy decision making), haswitnessed sharp recovery in the last quarter on the back of increased inflows from high margin consultancy orders from internationalmarkets. The company's order book has improved to INR 39.3 bn (2.2x TTM revenues) led by INR 12.9 bn of new orders booked in Q1FY15as against INR 11.5 bn booked in the entire FY14. Consultancy segment accounts for 68.6% (INR 27.0 bn) of order backog & 100.0% of orderinflows in Q1FY15. Turnkey segment's order backlog stood at INR 12.3 bn.

Order Inflow Mix

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FY10 FY11 FY12 FY13 FY14 FY15E FY16E

OI - Consultancy OI - Turnkey

Order backlog & Order inflow growth

0

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40000

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80000


-200%-100%

0%100%

200%300%

400%

OB - Consultancy (INR mn) OB - Turnkey (INR mn)

OI Growth - Consultancy (RHS) OI Growth - Turnkey (RHS)


Given the muted order flows in the domestic market, EIL's strategy of leveraging its domestic expertise to expand its presence in overseasmarkets like Africa, Middle East and South East Asia will hold the company in good stead. EIL has already bagged orders in Abu Dhabi(from Gasco, National Petroleum Corp), Algeria (from Sonatrach), Kenya etc, which in addition to its recent large ticket consulting ordersworth INR 11.2 bn from Dangote, Nigeria (INR 8.5 bn) & ORPIC, Oman (INR 2.7 bn) in Q1FY15 has increased EIL's acceptability in the MENAregion significantly.

Key orders bagged over past 18 months

Client Project Scope Segment Value (INR mn) Award date

ONGC Revamping of Unmanned Platform Phase-II Consulting 585 Q1FY14

CPCL Coker Block of Resid Upgradation Turnkey 6700 Q2FY14

Panca Amara Utama 1.900 TPD Ammonia plant Consulting - Fertiliser 235.06 Q2FY14

ADGAS Upgrade and Replacement of Substation Phase-1 Consulting - Power 194.5 Q2FY14

IOCLCoke Chamber Replacement and Allied Modernization inCoker-A at Barauni Refinery

Consulting 445 Q3FY14

GHB Housing Projects undertaken by Gujarat Housing Board Consulting - Infra 148 Q3FY14

TPAOAdv FEED Studies for Kuzey Marmara Fixed Offshore Platforms &Pipelines and Offshore Engineering & Consultancy Services

Consulting 109.049 Q3FY14

BPCL Kochi-Coimbatore-Erode-Salem LPG Pipeline Project Consulting - Pipeline 500 Q4FY14

BPCL Irugur Devangonthi Pipeline Project Consulting - Pipeline 230 Q4FY14

Petronet Dahej Expansion-Phase IIIA Consulting 200 Q4FY14

IOCL Delayed Coker Unit & allied facilities at Haldia Consulting 687 Q1FY15

BPCL CRU revamp at Mumbai Refinery Consulting 330 Q1FY15

Dangote 400,000 BPSD Refinery and 600,000 TPA Polypropylene Plant Consulting 8535 Q1FY15

ORPIC LIWA Plastics Project Consulting 2704 Q1FY15

BRASS Ammonia, Urea & Methanol Project Consulting - Fertiliser 435 Q1FY15

Source: Company, SPA Research

5

Infrastructure

With spends by oil majors in Africa, Asia Pacific and the MiddleEast expected to rise by 93%, 76% and 39% respectively in 2013-2017, overseas segment will drive the growth of company. Weexpect EIL to participate in several large scale expansion projectsin MENA region. Its low cost base and significant expertise in thehydrocarbon space will enable EIL to bag healthy order inflowsgoing forward.

To benifit from+66% surge in oil & gas capex ($ bn)

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Africa Asia Pacific Middle East

CY08-12 CY13-17E

Source: Bloomberg, SPA Research

On the domestic front, with stable government at centre, we expectrenewed focus on revival of investment climate both in energyand infrastructure sectors. Capex by Oil PSUs is expected tonormalise given their improving financial health (led by dieseland expected gas price hikes). EIL has MoUs with most of the oiland gas PSUs and is the partner of choice for project managementconsultancy orders. Further EIL having worked on 19 out of 22refineries in India, regularly receives base orders of INR 5 bn - 10bn for upgradation, de-bottlenecking, and revamp/modernisationof existing projects from the likes of ONGC and other oilcompanies.

Some of the major orders which can be expected over the nextthree years include: i) HPCL's Barmer Refinery (likely PMC orderof INR 12 bn, facing delay as a result of the Rajasthan governmentrenegotiating with HPCL on the tax concessions offered to it bythe previous government), ii) Numaligarh Refinery expansion(~INR 8 bn) and iii) Refineries of IOC at Panipat, Koyali, andMathura (brownfield likely on EPC basis) once it completesexisting projects and iv) Brownfield expansion of HPCL/BPCL(such as Bhatinda Refinery and Bina Refinery). EIL has also citedpotential order pipeline primarily from overseas which includesa INR 600 mn consulting order for a fertilizer plant, brownfieldrefineries (2*INR 2400 mn each), which would further strengthenthe order book.

Overall we expect EIL to bag orders worth INR 20 bn in FY15 and INR25 bn in FY16. Further since the order backlog mix is moving in favourof high margin PMC segment, we expect ~978 bps improvement inthe EBITDA margins for the next two years. Consequently net profitis expected to grow at a CAGR of 14.7% over FY14-16E.

Expanding internationally to tap huge growth marketsOver the years, EIL has expanded its operations internationally tobroaden its target market and de-risk its business operation fromslowdown in domestic hydrocarbon capex. The company has anextensive track record of working with various internationalenergy majors in overseas markets of Middle East (capex overCY13-17E +38% to $186 bn) & Africa (capex over CY13-17E +93% to$158 bn). It continues to strengthen its local presence in AbuDhabi to develop an engineering hub for projects and otherstrategic opportunities in the Middle East. EIL has recentlyestablished a joint venture company, Jabal EILIOT Co Ltd alongwith Jabal Dhahran and IOTL in Saudi Arabia to explore businessopportunities in hydrocarbon and infrastructure sector in KSA.The company is exploring an equity investment opportunity in anengineering company in North Africa to expand its operations.

Global Energy Demand to Grow By 4Bn toe over next 2 Decades

(Billi

on to

ne)

Source: BP Energy Outlook 2030, SPA Research

World Refining Capacity +20% 2012-16 (mn b/d)

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0.5

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2.5

US &

Canada

LatinAmerica

Africa Europe Russia &

Caspian

MiddleEast

China OtherAsia

Pacific

Source: OPEC, SPA Research

6

Infrastructure

Currently EIL is looking to strengthen its position in the MENAregion (primarily the 6 Gulf Cooperation Council countries), SouthAsia and Northern Africa (Algeria, Nigeria) for consulting jobs.These geographies have tremendous opportunity given that theyare hydrocarbon driven economies. MENA region ranks as no 1 interms of both crude & natural gas reserves accounting for ~52% &~42% of global reserves respectively. The International EnergyAgency, US in its World Economic Outlook states that the MENAregion would require an investment of USD 4.5 tn over the 2011-35 period, which would include the capex for the entirehydrocarbon space. In the near term, EIL is eyeing upcomingbusiness opportunities for large scale projects in Algeria, Omanand Bahrain.

MENA hydrocarbon capex (2013-17)

Iran23%

UAE15%

Saudi Arabia10%

Libya3%

Israel11%

Qatar8%

Egypt14%

Other16%

Source: Scottish report on MENA Spends & Trends, SPA Research

EIL has successfully bagged few large projects over the past coupleof years including its largest ever single consultancy assignmentworth US$139 mn from Dangote, Nigeria in Q1FY15. We believethis will significantly increase its international credentials therebyaiding it to prequalify for several large scale expansion projectsfrom MENA region. As a strategy, EIL does not intend to aggressivelygo for bidding and targets to earn margins of ~30-35% in itsoverseas consulting jobs.

Well placed to compete with global majors internationallyGiven the robust growth opportunities, MENA region has becomeextremely competitive and challenging over the last few years.Most of the orders are given through competitive tendering processand technical capabilities, track record of contractors and pricingis given due importance before awarding the order. Thus it is noteasy to register extraordinary success there quickly unless acompany is very sharp in execution and has mastered the methodsto control costs. EIL has a proven track record of superior technicalcapabilities having executed most of the projects in India andbagged several large ticket size projects internationally over thepast couple of years.

Given majority of expenses in the engineering consultancybusiness is incurred on employee cost, EIL enjoys significant costadvantage (management maintains that EIL has cost advantage of>20% over international players) in the consultancy space overinternational peers (namely Bechtel, Foster Wheeler, Flour Corpand Toyo Engineering amongst others) from the developed markets.Henceforth, margins (FY16 EBIDTAM 30.5% vs 7.5% average) andreturn ratios (FY16 RoE 20.5% vs 15.3% average) enjoyed by EILare significantly higher than that of international peers.

EIL enjoys significantly higher EBDITA margins

0%5%

10%15%20%25%30%35%

2013 2014 2015 2016

EIL Fluor CorpFoster Wheeler Jacobs EngineeringTechnip SA Toyo Engineering


7

Infrastructure

Leveraging its expertise to foray into other sectorsEIL has leveraged its Consultancy & EPC capabilities and superlative track record to selectively diversify into other potential projectsegments as part of our strategic initiatives for enhanced growth and diversification. It intends to focus only on high growth sectorswherein EIL enjoys competitive advantages.

EIL has been involved in many ammonia-urea complexes and has assisted Fertiliser Association of India in providing cost estimates forthe formulation of the recently announced new urea policy. In the mining and metallurgy space, its track record includes non-ferrousmetallurgical plants for alumina, aluminium, copper, zinc, lead titanium etc and includes all the metal majors of India as its clients. In theinfrastructure space, it has capabilities in segments such as airports, stadiums and sports facilities, office complexes, and data centres.Currently EIL is exploring opportunities in water & waste water management, city gas distribution, gas based fertilizer plants, power, etcto support its long term growth plans. As a strategy, EIL intends to focus only on those projects which involve high-end engineering workto ensure limited competition and better margins.

Potential opportunities in Infrastructure, Fertilizer and Non Ferrous Metallurgy

Source: Company, SPA Research

• Mining & Metallurgy - 3.0 MMTPA of Aluminum and 8.7 MMTPA of Alumina capacity addition envisaged in 12th Five year plan.

• Fertilizer - INR 40000 cc investment for Gas based urea capacity to increase capacity from 24 MMTPA at present to 32 MMTPA by 2016-17.

• Water - 12th plan targets INR 2.55 lakh crore of expenditure in water and sanitation space.

Roads and Bridges12%

Irrigation9%

Railways8%

Tele-communications26%

Water Supply & Sanitation

4%

Electricity31%

~$ 1 trillion projected investment in 12th Five Year Plan Water requirement for various sectors (in bcm) Power Capacity Addition during 12th Five Year Plan

69,800

118,537

2,54010,897

5,300

30,000

Coal Gas Hydro Nuclear Renewables Total

688910

1072

102

50

73

130

1,447

1,093

813

0200

400600800

1000120014001600

2010 2025 2050

Irrigation Drinking Water Industry Energy Others

EIL processTechnologies

Vis-breaking

DelayedCoking

SulphurRecovery

LPGSweetening

LightNaphtha

Isomerization

Aromatic Extraction

Technological EdgeEIL is technology driven organization having developed over 30 process technologies for the oil and gas processing, refineries andpetrochemical industries. The company currently holds 14 live patents and has 15 pending patent applications relating to variousprocess technologies. It has also established a state of the art R&D centre in Gurgaon and has an employee base of +3000 engineers witha wealth of domain expertise and experience. This enables EIL to successfully integrate sophisticated design and engineering methodologieswith project management practices and deliver world class engineering solutions to clients.

Technology driven full range of services for various process applications

Technology Licensing Services

SpecializedServices

CommissioningServices

Configuration andFeasibility studies

Process Design &Residual

Engineering

FEED

Integratedbusiness

1 2

36

5 4

Source: Company

8

Infrastructure

Increasing contribution of consulting segment to aid marginsIncreased inflow of consulting projects in addition to lack of anymeaningful orders in domestic turnkey segment owing to subduedmacroeconomic environment has tilted the balance in favour ofproject management consultancy segment. The share of PMCsegment in order backlog, which used to hover ~50% over FY12-14, has now increased to ~69% in Q1FY15 and is expected to growfurther to 80% in FY16 (since management is largely focusing onexecuting consultancy jobs both in India & abroad).

Consultancy segment driving order backlog

46.8

%

34.5

%

44.1

%

63.3

%

54.0

%

68.6

%

73.6

%

80.5

%

53.2

%

65.5

%

55.9

%

36.7

%

46.0

%

31.4

%

26.4

%

19.5

%

0%

20%

40%

60%

80%

100%

120%

FY10 FY11 FY12 FY13 FY14 Q1FY15 FY15E FY16E

Consultancy Turnkey


This will aid in improving overall margin profile of EIL as turnkeysegment being low on technology has relatively lower margin of~6% as compared to margin of ~40% enjoyed by the PMC business.However given the large number of small ticket sized orders baggedrecently and higher share of overseas consulting orders in thePMC segment, we expect the blended margin of consultancysegment to remain lower at ~34% since margins in internationalconsulting is ~400 bps lower than domestic consulting margins(travel cost in domestic consulting is ~5%, while the same is ~12%in overseas project). Overall we expect the share of revenues fromconsulting business to stand at 74% in FY16 resulting in ~978 bpsimprovement in operating margins over FY14-16E.

PBIT margin trend

0%

10%

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50%


Consultancy Turnkey Avg PBITM


Strong balance sheet with high return ratiosEIL has a debt free cash rich balance sheet with cash and cashequivalent of INR 25 bn as on FY14 translating cash/share of INR 74.It has been consistently generating high free cash flows on accountof superlative operating margins and low capital requirements.

33% of market cap is surplus cash / INR 74 per share

Particulars (INR mn) FY10 FY11 FY12 FY13 FY14

Cash & Cash Equivalent 18647 22409 22781 25012 25046

Cash/ Share (INR) 166 67 68 74 74

Market Capitalization 123546 102211 85583 52074 75812

% of Market Capitalization 15.1% 21.9% 26.6% 48.0% 33.0%

BV/ Share (INR) 99 43 55 66 73


EIL largely executes high end consultancy projects, which doesnot need any major fixed assets. Even in turnkey business itoutsources the capital intensive construction activity to thirdparties. Hence the core business of EIL does not need capex. Hencethe company has historically enjoyed average free cash flows of~INR 3.1 bn and ROCE of +25% over the past three years.

Positive operating cash flows

(3000)

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01000

200030004000

5000

FY12 FY13 FY14 FY15E FY16E

INR

mn

CF from Operations CF from Investing CF from Financing


Enhanced power being a Navratna companyEIL has recently got the "Navratna" status from the department ofpublic enterprises, which provides the state-owned firm with morefinancial and operational autonomy to work in domestic andoverseas markets. The upgraded status will provide the companygreater leeway in deciding on business propositions such as formingjoint ventures or taking call on projects involving major investments.

EIL will now be able to incur any capital expenditure on thepurchase of new items without any monetary ceiling, and it willalso be able to enter into technology JVs or strategic alliances.Since EIL has been looking towards overseas markets like MiddleEast, Africa and South-East Asia in a big way, this enhanced powerwill aid it in competing in overseas market as it can now easilyenter into strategic alliances with global majors or can incur anycapital expenditure to set up own offices.

9

Infrastructure

Financial OverviewEIL has been reporting subdued numbers over the past three years onaccount of declining order inflows amid weak investment cycle andlack of policy decision making. Resultantly EIL's topline has declinedby 13.6% p.a over FY11-14 owing to decline in order backlog from INR74.8 bn in FY11 to mere INR 29.1 bn in FY14 (inflows declined from INR40.5 bn in FY11 to INR 11.5 bn in FY14).

Revenue & Order backlog trend

0

10000

20000

30000

40000


-40%-30%-20%-10%0%10%20%30%40%

Revenue (INR mn) Order Backlog (INR mn)

Revenue Growth (RHS)


Going forward, with improving domestic macroeconomicenvironment and persistent focus on international consultingprojects, we expect EIL to return to growth path. The company hasalready witnessed order inflows of INR 12.9 bn in Q1FY15 and weexpect it to bag orders worth of INR 20 bn in FY15 and INR 25 bn in

FY16, resulting in order backlog of INR 37.7 bn in FY16E. Furthersince the order backlog mix is moving in favour of high margin PMCsegment, we expect ~978 bps improvement in the EBITDA marginsfor the next two years. Resultantly EBIDTA (exl. other income) isexpected to register a CAGR of 23.8% over FY14-16E.

Earnings recovery led by margin improvement

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Net profit is expected to grow at a slower pace at 14.7% CAGR overthe same period owing to muted growth in other income and 19.8%surge in depreciation expenses (following INR 1 bn capex in FY15on new offices in Gurgaon and Mumbai). Return ratios are expectedto recover with RoCE & RoNW recouping back to +30% & +20%levels respectively.

Peer ComparisonEIL holds monopolistic position in Indian hydrocarbon industry and hence has no competition. Companies like Cummins, Voltas andThermax are project management companies that participate in some of the works (mostly non oil & gas sectors) executed by EIL. EIL ismore comparable to global E&C companies that compete with EIL for project management projects in both domestic and global markets.

Although EIL trades at slight premium to international peers in terms of FY16E earnings (FY16 EV/EBIDTA 6.8x vs 5.5x average), the same is justifiedgiven significantly higher margins (FY16 EBIDTAM 30.5% vs 7.5% average) and return ratios enjoyed by EIL (FY16 RoE 21.5% vs 15.3% average).

Favorably placed than peers

Company CMP MCAP Revenue Earnings P/E (x) EV/EBITDA (x) EBIDTAM RoE (%)(INR) (INR bn) CAGR (14-16) CAGR (14-16) FY14 FY15E FY16E FY14 FY15E FY16E FY15E FY16E FY15E FY16E

Indian Players

Cummins 670 186 14.50% 13.66% 30.66 27.79 23.92 18.79 23.70 19.80 15.87 16.82 24.50 25.20

EIL 244 83 2.04% 14.72% 16.70 21.24 13.86 8.14 10.42 6.75 17.04 30.49 15.30 21.51

Thermax 889 106 15.67% 23.18% 38.10 34.07 25.56 17.72 15.41 12.40 8.69 9.45 13.87 16.55

Voltas 231 76 11.39% 26.21% 22.67 25.44 19.51 13.70 19.95 15.11 6.67 7.71 15.32 17.61

International players

Fluor Corp 4147 653 9.41% 14.51% 16.42 13.72 12.20 6.71 5.88 5.38 5.71 5.92 17.83 17.06

Foster Wheeler 1884 189 17.31% 17.89% 17.54 14.14 12.50 8.39 7.38 6.85 8.72 8.45 21.20 23.60

Jacobs Engineering 3106 413 8.81% 15.66% 16.67 13.74 12.19 9.46 7.57 6.84 6.77 6.85 10.55 10.54

Technip SA 5080 579 6.67% 20.85% 14.11 10.42 9.51 6.27 5.02 4.75 11.95 12.19 15.53 15.13

Toyo Engineering 274 53 14.59% 180.10% 93.86 15.45 11.57 10.82 4.22 3.49 3.75 4.15 8.11 10.01


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Industry key takeawaysGlobal consultancy opportunity of ~$1.1 bn p.aAs per OPEC estimates, world oil demand is expected to grow at aCAGR of 0.8% to 107.3 mbpd by 2035 (87 mbpd in 2010), largelyled by 2.2% CAGR in demand from the developing economies to60.6 mbpd (35.4 mbpd in 2010). ~6.1 mbpd of refinery capacity isexpected to be added over 2011-2016 (50% in the Asia Pacificregion), entailing an average capex of USD 21-23 bn p.a, therebyleading to global consultancy opportunity of USD 1-1.2 bn perannum for players like EIL.Global consultancy opportunity is estimated at USD 1 bn per annum

World capex 2012-2017 mbpd 6.10World capex 2012-2017 MTPA 305.00Asia Pacific MTPA 152.50West Asia MTPA 36.60World Capex Per annum (MTPA) 61.00Capex Per Annum USD Bn 21.00PMC Opportunity Per Annum USD bn 1.05

Source: Bloomberg, SPA Research

US$ 1500 billion opportunity over next 25 yearsWith the discovery of large oil and gas reserves in various parts ofthe world and the significant exploration, production andtransportation activity in the energy industry, and the capitalinvestment in the upstream and downstream oil and gas industry,the industry is well poised to witness better demand for engineeringconsultancy services. As per the World Energy Outlook, the MiddleEast, Africa, Latin America, India and China are likely to have aninvestment of about US$ 1500 billion in oil refining and NGtransmission & distribution segments during the next 25 years.

Investment over 2010-2035 ($ bn)

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Source: BP Energy Outlook 2030, SPA Research

Domestic demand growing at 4.3% CAGRIndia has total refinery capacity of 218 MTPA (FY13) with 63% ofthe total capacity belonging to PSUs (including JVs) while thebalance 37% belongs to the private sector. It is expected to growat a CAGR of 9.6% to reach 314 MTPA by FY17 as per the 12th Planestimates. The consumption of petroleum refinery products in

India, which has been growing at 4.3% CAGR during FY06-13 totouch 156.5 MTPA in FY13, is estimated to maintain the pace.

Refining capacity addition - 8% CAGR FY12-17

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INR 1.25 lakh cr capex in hydrocarbon spaceGovernment targets to incur a capex of INR 1.25 lakh cr (+57% than11th Plan) in refinery and petrochemical space during the currentplan period. The 12th Plan targets brown-field refinery expansion of~50.6 mtpa and green-field refinery expansion of ~30 mtpa. FurtherLNG regasification capacity addition of 36.4 mtpa (currently 13.6mtpa) is expected by 2017, given subdued domestic gas availability.Also increasing refining capacity and the natural gas infrastructurewould require necessary additions in the oil and gas pipeline networkin the country. In the petrochemical side, capacity of Ethylene andpropylene is expected to surge by 3220 mt and 870 mt respectively by2017. With long term relationships in place with major clients, EIL isexpected to capture most of the consultancy and EPC pie from theplanned capex in the domestic hydrocarbon space.

57.6% surge in hydrocarbon capex (INR bn)

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Impending gas price hike - Big booster for investment revivalGovernment's decision to increase the price of domestic naturalgas from the existing USD4.2/mmbtu to ensure commercial viabilityof the new deepwater gas discoveries and incentivize higherproduction is still pending. This move is a big sentiment boosterin terms of policymaking and together with new government'sagenda on capex revival. Higher domestic gas prices to at least abreakeven level of US$6.5/mmbtu should help raise domestic gasproduction by 50% or about 40mmscmd by FY20.

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Infrastructure

Outlook & ValuationDwindling supplies from traditional fields along with rising globaldemand has put immense pressures on energy producers to findnew viable reserves. Capex by oil majors in Africa, Asia Pacificand the Middle East is expected to be over $1500 bn during thenext 25 years. Indian Government targets to incur a capex of INR1.25 lakh cr (+57% than 11th Plan) in refinery and petrochemicalspace during the current plan period. EIL with more than 90%market share in domestic hydrocarbon space is the best play ondomestic as well as global oil & gas capex.

Foray into the international markets has already started bearingfruits given slew of projects bagged over the past year. Recentlarge ticket consulting orders significantly enhances EIL'sinternational credentials and would go long way in growing theinternational business. Diversifying into high growth non-oil andgas verticals would further aid growth. Robust order backlog ofINR 39.3 bn in addition to expected inflows of ~INR 22 bn over thenext two years will drive growth for the company. Increasing thruston high margin consultancy segment ensures high operating cashflows and strong return ratios. Operating margins henceforth areexpected to grow by 978 bps over the next two years resulting in14.7% CAGR in earnings over FY14-16E.

Currently the stock is trading at a P/E multiple of 13.9x and EV/EBITDAof 6.8x FY16E earnings and at P/BV of 2.8x FY16E BV. This we believeis attractively priced given its dominant position, excellent track record,technological edge backed by large talent pool and excellentgovernment relationships, cost advantage over international peers,cash rich balance sheet (cash/share of INR 74) and superior returnratios (FY14 ROCE of ~30%) that the company enjoys. We recommenda "BUY" on the stock with a price target of INR 319, assuming a P/Emultiple of 18x FY16E earnings (FY10-14 average 17.6x), an upside of30% from the current levels, over a period of 15 months.

Risks & ConcernsEconomic slowdownProlonged slowdown in domestic economy due to lack ofcommitment from government to push for reforms in addition toslow down in order intake in emerging and European countries,may adversely impact order inflow.

Increased competition in international marketAlthough EIL holds dominant position in domestic oil & gasmarket, increasing focus on overseas markets like the MiddleEast, North Africa and South East Asia, exposes it to highlycompetit ive international market. I t faces intensecompetition from US, European, Japanese and Koreancompanies in global market. This might lead to volatility inmargins of the company.

Diversification into other sectors might not bear fruitsThe company's foray into new sectors such as power - solar &nuclear, oil and gas exploration, gas based fertilizer projects,coal to liquid, water and waste management etc. will decreaseits reliance on the hydrocarbon sector and give a largeropportunity to tap. But it lacks experience in these new sectors.As a new entrant, the company might be forced to compromiseon profits for initial volume. This might affect the profitabilityof the company.

High dependency on oil and gas PSUsSince majority of EIL's revenue is derived from domestichydrocarbon sector, its growth prospects are directly linked tocapex by domestic oil & gas psus, which in turn are dependent onOil & Gas prices/subsidies etc. Any downturn in the sector willdry down the order flow.

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Company backgroundEngineers India (EIL), a "Navratna" company incorporated in 1965,is one of India's leading engineering consultancy and EPC companiesfocused primarily on hydrocarbon sector. Over the years, thecompany has also extended its consultancy and turnkey servicesto other sectors including fertilizers, non-ferrous mining andmetallurgy, power, strategic crude oil storage, water, and wastewatertreatment projects as well as other infrastructure projects. It offerscomplete range of project services including design, engineering,procurement, construction, and project management.

The company has executed several landmark projects in the acrossentire oil and gas value chain including 10 green-field refineriesgas processing plants, 40 offshore platforms refineries, 39 oil &gas processing plants, 42 pipelines, 13 port terminals and 7

petrochemical complexes. Apart from consultancy services, EIL alsoprovides turnkey services to airports, highways, flyovers, bridges,water and sewer management, as well as energy-efficient buildingprojects. It has completed 17 turnkey projects, which include refineryand petrochemicals projects and offshore platforms.

EIL has a workforce of 2,890 experienced professionals and has in-house and collaborative R&D support with 14 registered patents. Ithas also expanding its geographical presence in international marketsin Middle East, North Africa and South East Asia. It currently has twowholly owned subsidiaries, CEIL and EILAP incorporated in India andMalaysia, respectively, and two strategic joint-venture companies,TEIL Projects and JabalEILIOT, incorporated in India and Saudi Arabia,respectively.

KE

Y H

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• Worked forvariousengineeringconsultancyservices on theIndian WestCoast and EastCoast

• Providedservices on morethan 150 wellplatforms and 40processplatforms inIndia for ONGC

• Executedprojects in Qatarand UAE

• Engaged in theoffshoreplatformprojects for theDeen Dayal FieldDevelopmentProject of GSPC

• Oil & GasExplorationunder NELP IX

• Engineeringconsultancyservices formore than10,000 km ofoffshore andsubsea pipelineprojects in Indiaandinternationally

• EIL was involvedin thedevelopment ofthe HBJ pipeline –India’s largest gaspipeline network

• Engineeringconsultancyservices to GAILon one of theworld’s longestLPG pipeline

• Developmentstrategicpipelines forHPCL, BPCL, BORL,IOCL, HMEL andAbu Dhabi basedcompaniesTAKREER, ADNOC,NPCC

• Experience &engineeringcapabilities forthe design ofonshore facilitiessuch asmultistageseparation, crudedesalting &dehydration,heavy oil & souroil processing, etc

• Developed gasprocessingcomplexes atHazira and Uranand the LPGrecovery unit atAuraiya

• Engaged in gasprocessingprojects for GSPC

• Projects executedin Algeria and UAE

• Range of servicesfrom concept tocommissioning ofrefinery projectsranging fromsingle unitrevamp projectsto mega refineryor refinery cumpetrochemicalscomplexes

• Worked on over150 mtpa refineryprojects in India

• Worked on 10grassroot refineryprojects fromconcept tocommissioning

• Expertise in LPmodelling forconfigurationstudies andenergy savings inrefining process

• Worked onAlgiers and SkikdaRefineries ofSONATRACH,Algeria

• Provided servicesfor refinerymajors in MENAregion like KNPC,ORPC , KPRL,BAPCO

• Experience indesign andconstruction offully-integratedpetrochemicalcomplexes andindividualpetrochemicalunits

• EIL has beeninvolved in theestablishment of7 of 8 megapetrochemicalcomplexes inIndia

• EPCM services forGAIL, NOCIL,Petrofils Limited,IOCL, IPCL (nowRIL), OPaL, BCPLand others

• Worked onPetrochemicalprojects inMiddle Eastregion for KuwaitAromaticsCompany andBOROUGE

• Engineeringconsultancyservices ofvarious coastalengineeringprojects, includinggeotechnicalengineering,layout preparationfor ports andshipyards andmaterials handling

• Developedexpertise forstorage of crudeoil in unlinedundergroundcaverns - securityinitiative forstrategic crudeoil storage aspart of theIntegrated EnergyPolicy of GoI

• Developed LNGTerminalsregasificationand downstreaminfra facilities forPetronet LNG,RGPPL, ShellKakinada andSONATRACH

PetrochemicalsStorage, Ports &

TerminalsRefineriesOnshore Oil

& GasOil & Gas

TransportationOffshore Oil

& Gas

OV

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Presence across the Oil & Gas Value Chain


13

Infrastructure

FinancialsIncome Statement


Net Sales 25060 18236 17465 18986

Growth (%) -32.25% -27.23% -4.23% 8.71%

Employees Cost 5739 5955 6025 6360

Total Expenditure 19192 14457 14489 13197

EBIDTA (without OI) 5867 3779 2976 5789

Growth (%) -16.85% -35.59% -21.25% 94.51%

EBITDA Margin % 23.41% 20.72% 17.04% 30.49%

Depreciation 109 146 171 209

EBIT 5759 3634 2805 5580

EBIT Margin % 22.98% 19.93% 16.06% 29.39%

Interest Expenses 13 14 11 11

Other Income 3164 3360 3256 3608

EBT 8910 6980 6051 9177

Tax Expenses 2624 2193 1894 2915

PAT 6286 4788 4157 6262

Exceptional/Extraordinary Items 273 247 257 286

APAT 6013 4541 3900 5977

Growth (%) -0.88% -24.48% -14.11% 53.23%

APAT Margin (%) 23.99% 24.90% 22.33% 31.48%

Balance Sheet


SOURCES OF FUNDS

Share Capital 1685 1685 1685 1685

Reserves 20691 22933 24674 27533

Total Networth 22376 24618 26358 29218

Total Debt 0 0 0 0

Total Liabilities 22376 24618 26358 29218

APPLICATION OF FUNDS

Net Block 505 1179 1262 2051

Capital Work in Progress 1355 1318 1452 489

Investments 6531 7366 8366 10866

Total Current Assets 27692 25333 25228 26099

Total Current Liabilities 16071 12887 12276 12684

Net Current Assets 11621 12446 12952 13415

Net Deferred Tax 2364 2309 2326 2396

Total Assets 22376 24618 26358 29218

Cash Flow


EBT 8910 6980 6051 9177

Depreciation 109 146 171 209

Interest 13 14 11 11

Inc./Dec. in working capital (850) (1628) (123) 1095

Tax paid (2845) (2138) (1876) (2845)

Other Income (3164) (3360) (3256) (3608)

Cash flow from operations (a) 2173 13 977 4039

Inc./Dec. in investments (182) (835) (1000) (2500)

Change in Fixed Assets (57) (789) (254) (998)

Change in CWIP (839) 38 (134) 963

Others 1926 1871 2046 2408

Cash flow from investing (b) 848 285 658 (127)

Inc./Dec. in capital 0 0 0 0

Inc./Dec. in debts 0 0 0 0

Dividend paid (2022) (2190) (1853) (2696)

Interest paid (13) (14) (11) (11)

Others 1063 1105 429 353

Cash flow from financing ( c ) (972) (1099) (1435) (2354)

Opening cash balance 16431 18480 17680 17881

Cash Flow during the year (a+b+c) 2049 (800) 201 1558

Closing cash balance 18480 17680 17881 19439

Key Ratios


Per Share Data (INR)

Adjusted EPS 17.85 13.48 11.58 17.74

CEPS 17.51 14.07 12.14 18.56

DPS 6.00 6.50 5.50 8.00

BVPS 66.41 73.06 78.23 86.72

Return Ratios

RoACE (%) 43.72 29.76 23.78 33.06

RoAE (%) 29.46 19.33 15.30 21.51

Balance Sheet Ratios

Net Debt-Equity Ratio (1.12) (1.02) (1.00) (1.04)

Current Ratio 1.72 1.97 2.06 2.06

Interest Cover Ratio 670.89 514.24 577.29 820.37

Efficiency Ratios

Total Asset Turnover 1.23 0.78 0.69 0.68

Debtors Days 47 68 71 57

Creditors Days 90 84 77 72

Valuations

P / E 8.66 16.70 21.80 14.23

P / BV 2.33 3.08 3.23 2.91

Dividend Yield (%) 3.88% 2.89% 2.18% 3.17%

Market Cap / Sales 2.08 4.16 4.87 4.48

EV/EBIDTA 3.72 8.14 10.77 6.98

14

Infrastructure

Disclaimer: This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. SPA Securities Limited(hereinafter referred as SPA) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your information and shouldnot be reproduced or redistributed to any other person in any form. This document is provided for assistance only and is not intended to be and must not alone be taken as the basisfor an investment decision. The intent of this document is not in recommendary nature. The views expressed are those of analyst and the Company may or may not subscribe toall the views expressed therein The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied uponsuch. SPA or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the informationcontained in this report. Neither the Firm, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special orconsequential including lost revenue or lost profits that may arise from or in connection with the use of the information. SPA or any of its affiliates or employees do not provide,at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitnessfor a particular purpose, and non-infringement.The recipients of this report should rely on their own investigations. SPA and/or its affiliates and/or employees may have interests/ positions, financial or otherwise in the securities mentionedin this report. SPA has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.

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