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RESULTS REVIEW 3QFY17 15 FEB 2017

Engineers India
BUY
INDUSTRY CAPITAL GOODS On a road to recovery
CMP (As on 15 Feb 2017) Rs 151 Engineers Indias (ENGR) 3QFY17 results were in Highlights of the quarter
Target Price Rs 178 line with our estimates. Revenue declined 12% YoY On a segmental basis, PMC grew 14% YoY to Rs
Nifty 8,725
on the back of a weak opening order book. As 2.7bn, while LSTK declined 58% YoY to Rs 544mn.
guided by the mgmt, provision write-backs Revenue growth is expected to pick up in FY18E as
Sensex 28,156
continued (Rs 90mn in 3QFY17), leading to LSTK BS-VI upgradation projects (won in 1HFY17) are
KEY STOCK DATA margins of 28.4% (+1240bps YoY). Consequently, executed.
Bloomberg ENGR IN APAT for the quarter grew 26% YoY to Rs 850mn.
EBIT margins improved across both the segments, as
No. of Shares (mn) 674
Though the order inflow (Rs 2.7bn) for the quarter ENGR wrote back provisions to the tune of Rs 90mn
was muted, ENGR has announced large orders in on completion of several projects. The mgmt expects
MCap (Rs bn) / ($ mn) 98/1,468
4QFY17 which could help it to close with an order provision write backs to continue in 4QFY17 as well.
6m avg traded value (Rs mn) 681 book of over Rs 65bn. PMC margins stood at 29.4% (+1000bps YoY) and
STOCK PERFORMANCE (%) We continue to remain constructive on ENGR, given LSTK margins at 28.4% (1240bps YoY).
52 Week high / low Rs 172/72 a large underlying capex in the Indian refining space The order book stands robust at Rs 51.2bn (PMC-65%
3M 6M 12M (~70 MTPA over the next 4-5 years). International and LSTK-35%), implying a book to bill of 4x on
Absolute (%) 13.4 34.1 85.1
orders could also surprise positively, with execution trailing four quarters. Post 3QFY17, ENGR has
of the large Dangote project (~20 MTPA, order size announced orders worth Rs 25bn from HPCL, which
Relative (%) 6.4 34.1 65.6 should lead to a substantial improvement in the
of Rs 8.5bn). With cash of Rs 29bn (FY19E), core
SHAREHOLDING PATTERN (%) capital employed is zero to negative, implying order book post 4QFY17.
Promoters 58.87 infinite RoIC. In this backdrop, premium valuations Near term view: Large orders in the pipeline and
FIs & Local MFs 18.88
are justified for ENGR in our view. We reiterate BUY expected improvement in earnings should keep the
with TP of Rs 178/sh (25x FY19E core EPS + cash). stock in good humour. Reiterate BUY
FPIs 6.63
Public & Others 15.62 Financial Summary - Standalone
(Rs mn) 3QFY17 3QFY16 YoY (%) 2QFY17 QoQ (%) FY15 FY16 FY17E FY18E FY19E
Source : BSE
Net Sales 3,250 3,684 (12) 3,389 (4) 17,187 14,958 14,785 21,994 29,696
Pawan Parakh, CFA EBITDA 809 481 68 937 (14) 2,223 1,604 3,619 4,016 5,602
pawan.parakh@hdfcsec.com APAT 850 677 26 938 (9) 3,132 2,586 3,951 4,186 5,392
+91-22-6171-7314 Diluted EPS (Rs) 1.3 1.0 26 1.4 (9) 4.6 3.8 5.9 6.2 8.0
P/E (x) 32.4 39.2 25.7 24.2 18.8
Ashutosh Mehta, ACA EV / EBITDA (x) 34.4 47.2 20.9 18.5 13.0
ashutosh.mehta@hdfcsec.com RoE (%) 12.5 9.9 14.4 14.5 18.0
+91-22-3078-8241 Source: Company, HDFC sec Inst Research
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>
ENGINEERS INDIA : RESULTS REVIEW 3QFY17

Quarterly Financials Snapshot - Standalone


(Rs mn) 3QFY17 3QFY16 YoY (%) 2QFY17 QoQ (%)
Net Sales 3,250 3,684 (12) 3,389 (4)
Blend of revenue growth in Material Expenses 520 1,354 596
PMC (+14% YoY) and decline Employee Expenses 1,553 1,494 1,544
in LSTK (-58% YoY) led to SA Other Operating Expenses 367 354 312
revenues decline of 12% YoY EBITDA 809 481 68 937 (14)
Interest Cost 1 0 0
Depreciation 59 53 53
Other Income (incl E/o items) 559 612 561
PBT 1,308 1,040 26 1,445 (9)
Tax 458 363 508
Reported PAT 850 677 26 938 (9)
EO Items (adj for tax) - - -
APAT 850 677 26 938 (9)
Source: Company, HDFC sec Inst Research

Margin Analysis - Standalone


3QFY17 3QFY16 YoY (bps) 2QFY17 QoQ (bps)
PMC revenues constituted Material Expenses as % of Net Sales 16.0 36.8 (2,075) 17.6 (158)
83.3% of the total revenues in Employee Expenses as % of Net Sales 47.8 40.6 724 45.6 224
3QFY17 (vs. 64.6% in 3QFY16) Other operating expenses as % of Net Sales 11.3 9.6 168 9.2 210
leading to a reduction in EBITDA Margin (%) 24.9 13.1 1,183 27.7 (276)
material cost by 2,080bps YoY Net Profit Margin (%) 26.1 18.4 778 27.7 (152)
Tax Rate (%) 35.0 34.9 35.1
Source: Company, HDFC sec Inst Research

Segmental Quarterly Performance - Standalone


Rs mn 3QFY17 3QFY16 YoY (%) 2QFY17 QoQ (%)
Segmental Revenue
PMC 2,707 2,379 14 2,749 (2)
Provision write backs
LSTK 544 1,305 (58) 640 (15)
continued in 3QFY17, leading Total Revenues 3,250 3,684 (12) 3,389 (4)
to improvement in LSTK EBIT Segmental EBIT
margin (+1240bps YoY) PMC 797 464 72 863 (8)
LSTK 155 209 (26) 285 (46)
EBIT Margins (%)
PMC 29.4 19.5 995 31.4 (193)
LSTK 28.4 16.0 1,240 44.5 (1,608)
Source: Company, HDFC sec Inst Research

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ENGINEERS INDIA : RESULTS REVIEW 3QFY17

Revenue Trajectory EBITDA And EBITDA Margin


EBITDA EBITDA Margin (%)
Revenue YoY Growth
Rs mn Rs mn
6,000 20% 1,000 30%
5,000 10% 25%
Revenue growth is expected 800
to pick up in FY18E, as BS-VI 0% 20%
4,000
-10% 600
up-gradation projects (won in 3,000 15%
1HFY17) are executed -20% 400
2,000 10%
-30%
200 5%
1,000 -40%
0 -50% 0 0%

Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

LSTK - Revenue And EBIT Margin PMC - Revenue and EBIT Margin
LSTK Revenue LSTK Margins (%) PMC Revenue PMC Margins (%)
Rs mn Rs mn
2,500 60% 3,000 35%
50% 2,500 30%
2,000
25%
40% 2,000
1,500 20%
30% 1,500
1,000 15%
20% 1,000
10%
500 10% 500 5%
0 0% 0 0%
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17

Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

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ENGINEERS INDIA : RESULTS REVIEW 3QFY17

Order Inflow Trajectory Order Book As At 3QFY17


PMC LSTK
Rs mn
Order inflow (Rs 2.7bn) for 25,000 LSTK
3QFY17 was muted. However, 20,000 (Rs mn)
17,940
ENGR has already announced
15,000
large orders in Jan-17 (~Rs
25bn) which should help it to 10,000
close with an order book of PMC
5,000 (Rs mn)
over Rs 65bn.
33,220
0

Q1FY16

Q2FY16

Q3FY16

Q4FY16

Q1FY17

Q2FY17

Q3FY17
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

Key Assumptions & Estimates - Standalone


Rs mn FY15 FY16 FY17E FY18E FY19E
Order inflow 23,056 15,960 40,000 46,000 57,000
PMC 18,636 13,760 20,000 24,000 27,000
LSTK 4,420 2,200 20,000 22,000 30,000
Post completion of provision
write backs, PMC/LSKT Revenue 17,187 14,958 14,785 21,994 29,696
margins are likely to stabilise PMC 9,541 9,923 11,228 14,244 17,396
around 28%/6.5% for LSTK 7,646 5,036 3,557 7,750 12,300
FY18/FY19E Segment EBIT (%)
PMC 23.9 23.0 26.0 27.0 30.0
LSTK 7.3 2.4 30.0 6.5 6.5

APAT 3,132 2,586 3,951 4,186 5,392


Net margin (%) 18.2 17.3 26.7 19.0 18.2

Capex 540 372 500 600 700


NWC (ex-cash) as % of sales (28.8) (33.4) (27.7) (29.0) (29.0)
Source: Company, HDFC sec Inst Research

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ENGINEERS INDIA : RESULTS REVIEW 3QFY17

SOTP Valuation
Valuation Earnings P/E Valuation Value per
methodology (Rs mn) Multiple (x) (Rs mn) share (Rs)
EIL core business 25x FY19-EPS 3,505 25 87,623 130
Investment in Ramagundam Fertilizers
Book value FY19 3,902 6
& Chemicals Ltd
Cash and Cash Equivalents 28,658 43
Target Price 178
Source: HDFC sec Inst Research

Peer Valuation
MCap CMP TP EPS (Rs/sh) P/E (x) EV/EBITDA (x) ROE (%)
Company Rating
(Rs bn) (Rs) (Rs) FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E
Larsen & Toubro ^ 1,390 1493 BUY 1,625 64.8 69.2 69.8 17.9 16.7 16.6 17.1 15.6 13.9 13.1 12.8 11.9
Cummins India * 245 886 BUY 1005 27.3 30.6 34.4 32.4 28.9 25.7 29.4 25.9 22.7 22.8 23.3 23.6
Voltas 113 343 BUY 351 12.4 14.5 16.6 27.6 23.6 20.6 20.2 16.6 14.0 16.2 16.8 17.1
Suzlon 102 17 BUY 24 0.9 1.2 1.5 19.6 14.3 11.4 9.9 8.9 8.1 NA NA NA
Thermax 102 852 SELL 770 26.3 27.8 31.8 32.4 30.7 26.8 22.7 20.0 16.8 12.8 12.4 13.0
Engineers India * 98 151 BUY 178 5.9 6.2 8.0 25.7 24.2 18.8 20.9 18.5 13.0 14.4 14.5 18.0
Carborundum Universal 49 262 BUY 340 8.9 11.5 13.6 29.4 22.7 19.3 14.0 12.1 10.4 13.4 15.4 15.9
Kalpataru Power * ^ 44 289 BUY 376 17.2 18.5 21.3 12.8 12.0 10.4 9.3 8.5 7.4 11.1 10.8 11.2
Techno Electric ^ 43 376 NEU 388 18.2 21.1 23.9 17.0 14.7 12.9 13.0 11.9 10.4 19.5 19.7 19.3
KEC International 42 164 BUY 179 10.2 11.1 12.7 16.1 14.8 12.9 8.6 7.9 7.1 16.1 15.2 15.3
Triveni Turbine 42 126 BUY 148 4.0 4.5 5.1 31.8 28.2 24.8 22.5 19.5 16.7 39.0 34.5 31.1
Crompton Greaves ^ 42 66 BUY 82 -1.2 1.6 1.6 NA 34.9 33.8 12.5 11.0 10.1 -1.7 2.2 2.3
Inox Wind 39 178 BUY 298 21.4 24.9 25.8 8.3 7.2 6.9 5.5 4.6 4.3 22.8 22.0 19.8
Sanghvi Movers * 10 242 BUY 325 21.8 25.7 27.6 11.1 9.4 8.8 4.5 4.2 3.6 12.0 12.7 12.2
*Represent SA numbers ^ Adjusted for value of Subs /JV's / non-core businesses
Source: HDFC sec Inst Research

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ENGINEERS INDIA : RESULTS REVIEW 3QFY17

Income Statement - Standalone Balance Sheet - Standalone


(Rs mn) FY15 FY16 FY17E FY18E FY19E (Rs mn) FY15 FY16 FY17E FY18E FY19E
Net Revenues 17,187 14,958 14,785 21,994 29,696 SOURCES OF FUNDS
Growth (%) (8.8) (13.0) (1.2) 48.8 35.0 Share Capital 3,369 3,369 3,369 3,369 3,369
Material Expenses 5,892 5,804 2,988 7,285 11,316 Reserves 22,310 23,281 24,877 25,923 27,389
Employee Expenses 5,919 5,927 6,400 8,262 9,916 TOTAL SHAREHOLDERS FUNDS 25,679 26,650 28,246 29,292 30,758
SG&A Expenses 3,153 1,624 1,779 2,432 2,862 Long Term Debt 0 0 0 0 0
Total Expenses 14,964 13,354 11,167 17,979 24,094 Short Term Debt 0 0 0 0 0
EBITDA 2,223 1,604 3,619 4,016 5,602 TOTAL DEBT 0 0 0 0 0
EBITDA Margin (%) 12.9 10.7 24.5 18.3 18.9 Net Deferred Taxes (2,319) (2,194) (2,194) (2,194) (2,194)
EBITDA Growth (%) (41.4) (27.8) 125.6 11.0 39.5 Long Term Provisions & Others 175 78 81 121 163
Depreciation 196 248 242 297 316 TOTAL SOURCES OF FUNDS 23,534 24,534 26,133 27,218 28,727
EBIT 2,027 1,356 3,377 3,719 5,285 APPLICATION OF FUNDS
Other Income (Including EO Items) 2,649 2,566 2,581 2,592 2,844 Net Block 2,697 2,788 2,790 2,993 3,277
Interest 2 1 2 2 2 CWIP 191 244 500 600 700
PBT 4,674 3,921 5,956 6,310 8,127 Investments 164 269 782 2,342 3,902
Tax (Incl Deferred) 1,596 1,337 2,005 2,124 2,736 LT Loans & Advances 462 421 405 603 814
RPAT 3,078 2,584 3,951 4,186 5,392 Total Non-current Assets 3,514 3,721 4,477 6,538 8,692
EO (Loss) / Profit (Net Of Tax) (54) (2) 0 0 0 Inventories 8 10 0 0 0
APAT 3,132 2,586 3,951 4,186 5,392 Debtors 4,261 3,621 3,605 5,363 7,241
APAT Growth (%) (35.0) (17.4) 52.8 5.9 28.8 Other Current Assets 4,088 5,428 3,848 5,423 7,322
Adjusted EPS (Rs) 4.6 3.8 5.9 6.2 8.0 Cash & equivalents 24,969 25,815 25,747 27,068 28,658
EPS Growth (%) (35.0) (17.4) 52.8 5.9 28.8 TOTAL CURRENT ASSETS 33,326 34,873 33,201 37,854 43,221
Source: Company, HDFC sec Inst Research Creditors 8,295 9,740 7,291 10,847 14,645
Other Current Liabilities &
5,011 4,320 4,253 6,327 8,543
Provns
TOTAL CURRENT LIABILITIES 13,306 14,061 11,545 17,174 23,187
NET CURRENT ASSETS 20,020 20,813 21,656 20,680 20,034
TOTAL APPLICATION OF
23,534 24,534 26,133 27,218 28,727
FUNDS
Source: Company, HDFC Sec Inst Research

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ENGINEERS INDIA : RESULTS REVIEW 3QFY17

Cash Flow Statement - Standalone Key Ratios - Standalone


(Rs mn) FY15 FY16 FY17E FY18E FY19E FY15 FY16 FY17E FY18E FY19E
Reported PBT 4,674 3,921 5,956 6,310 8,127 PROFITABILITY %
Non-operating & EO items (2,649) (2,566) (2,581) (2,592) (2,844) GPM 65.7 61.2 79.8 66.9 61.9
Interest Expenses 2 1 2 2 2 EBITDA margin 12.9 10.7 24.5 18.3 18.9
Depreciation 196 248 242 297 316 APAT margin 18.2 17.3 26.7 19.0 18.2
Working capital change (572) (2) (892) 2,138 2,068 RoE 12.5 9.9 14.4 14.5 18.0
Tax Paid (1,596) (1,337) (2,005) (2,124) (2,736) Core RoCE (RoIC) NA NA NA NA NA
Other operating items (60) 105 0 0 0 RoCE 13.6 10.8 15.6 15.7 19.3
OPERATING CASH FLOW (a) (5) 370 721 4,030 4,934 EFFICIENCY
Capex (540) (372) (500) (600) (700) Tax Rate (%) 34.1 34.1 33.7 33.7 33.7
Free Cash Flow (545) (2) 221 3,430 4,234 Fixed Asset Turnover (x) 6.0 4.9 4.5 6.1 7.5
Investments 12 (105) (513) (1,560) (1,560) Inventory (days) 0.2 0.2 0.0 0.0 0.0
Non-operating Income 2,649 2,566 2,581 2,592 2,844 Debtors (days) 90.5 88.4 89.0 89.0 89.0
INVESTING CASH FLOW (b) 2,121 2,089 1,568 432 584 Other Current Assets (days) 86.8 132.4 95.0 90.0 90.0
Debt Issuance/(Repaid) 0 0 0 0 0 Payables (days) 48.3 65.1 49.3 49.3 49.3
Interest (2) (1) (2) (2) (2) Other Current Liab & Provns (days) 29.2 28.9 28.8 28.8 28.8
FCFE 2,114 2,458 2,288 4,461 5,516 Cash conversion cycle (days) 100.1 127.0 105.9 100.9 100.9
Share Capital Issuance 0 0 0 0 0 Debt/EBITDA (x) 0.0 0.0 0.0 0.0 0.0
Dividend (2,015) (1,612) (2,355) (3,140) (3,925) Net D/E (x) (1.0) (1.0) (0.9) (0.9) (0.9)
FINANCING CASH FLOW (c) (2,017) (1,613) (2,357) (3,142) (3,927) Interest Coverage (x) NA NA NA NA NA
NET CASH FLOW (a+b+c) 99 846 (68) 1,320 1,591 PER SHARE DATA (Rs)
Closing Cash & Equivalents 24,969 25,815 25,747 27,068 28,658 EPS 4.6 3.8 5.9 6.2 8.0
Source: Company, HDFC sec Inst Research CEPS 4.9 4.2 6.2 6.7 8.5
Dividend 2.5 2.0 3.0 4.0 5.0
Book Value 34.9 36.4 38.8 40.4 42.6
VALUATION
P/E (x) 32.4 39.2 25.7 24.2 18.8
P/BV (x) 4.3 4.1 3.9 3.7 3.5
EV/EBITDA (x) 34.4 47.2 20.9 18.5 13.0
EV/Revenues (x) 4.5 5.1 5.1 3.4 2.5
OCF/EV (%) (0.0) 0.5 1.0 5.4 6.8
FCF/EV (%) (0.7) (0.0) 0.3 4.6 5.8
FCFE/Mkt Cap (%) 2.1 2.4 2.3 4.4 5.4
Dividend yield (%) 1.7 1.3 2.0 2.7 3.3
Source: Company, HDFC sec Inst Research

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ENGINEERS INDIA : RESULTS REVIEW 3QFY17

RECOMMENDATION HISTORY
Date CMP Reco Target
Engineers India TP
190 17-Jan-17 155 BUY 178
170 15-Feb-17 151 BUY 178
150
130
110
90
70
Rating Definitions
50
BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period
Aug-16
Apr-16

Jan-17
Feb-16

Jul-16

Sep-16

Feb-17
Nov-16
Jun-16
May-16

Dec-16
Mar-16

Oct-16

NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period
SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

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ENGINEERS INDIA : RESULTS REVIEW 3QFY17

Disclosure:
We, Pawan Parakh, CFA & Ashutosh Mehta, ACA, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our
views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in
this report.
Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its
Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further
Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest.
Any holding in stock No

Disclaimer:
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Institutional Equities
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Board : +91-22-6171 7330
www.hdfcsec.com
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