An Investment Idea
EIL, 90.4% owned by Government of India, has reported commendable performance for quarter ending September 30, 2007. Net Sales grew @ 28% to Rs. 167 crore mainly led by 37.1% rise in sales of Consultancy & Engineering business (PMC) turnover of Rs. 149 crore (Rs. 108.7 crore). Lump Sum Turnkey (LSTK) turnover declined by 17.8% to Rs. 17.9 crore (Rs. 21.8 crore). OPM% improved significantly to 28.1% (21.7%) due to sharp improvement in PBIT% of Consultancy business to 33.3% (27.1%). Further boosted by 25% higher other income of Rs. 30 crore (Rs. 23.95 crore), PBT (before extra ordinary items) jumped up by 46% to Rs. 73.13 crore (Rs. 50.11 crore). Absence of extra ordinary expenses (Rs. 1.6 crore – VRS write off) lifted PAT up by 51% to Rs. 49.6 crore (Rs. 32.77 crore).
For H1 FY 2008, Net sales registered growth of 14.5% to Rs. 317.48 crore (Rs. 277.21 crore). PMC turnover soared up by 31.9% to Rs. 286.72 crore, while that of LSTK business dropped by 48.6% to Rs. 30.76 crore. OPM% enhanced to 25.8% (21.3%). Further aided by 42.4% jump in other income of Rs. 54.8 crore (Rs. 38.5 crore), PBT (before extra ordinary items) surged by 41% to Rs. 131.28 crore (Rs. 93.32 crore). PAT shot up by 45% to Rs. 87.67 crore (Rs. 60.59 crore) as there was no VRS write off as in H1 FY 2007 of Rs. 3.16 crore.
EIL has emerged as Asia’s leading design and engineering company, providing a complete range of project services to companies in industries such as refining, petrochemicals, offshore oil & gas, pipelines, fertilizers, power, ports & terminals and metallurgy.
Capex in Hydrocarbon sector in India and overseas is going to be colossal - be it refineries, petrochemicals, pipeline and EIL being an undisputable leader in refinery sector for PMC business, is well placed to exploit emerging opportunities. In addition to its stronghold in domestic market, it is rapidly gaining visibility for this business in UAE, Oman, Algeria etc.
EIL is leveraging its design, engineering & project management expertise and is diversifying into infrastructure sector (Airports and Urban Development), which will be a major growth driver going forward. During FY 2007, company has achieved a significant breakthrough in aviation sector where it has been appointed as Owner’s Engineers for both Delhi and Mumbai airports. It has got a contract to develop Connaught Place Central area in Delhi.
In LSTK business, EIL will be leveraging knowledge / designing / engineering base and project management skills in India and overseas thru JVs and will be thus well placed to qualify for large value bids. EIL has formed 50:50 JV with Tata Projects which will bid for EPC projects in India and abroad (except in UAE) mainly in areas of oil and gas, fertilizer, power and infrastructure. For UAE market, EIL has signed MOU with Technimont, Italy to form JV company, which is awaiting govt. approval. If JV with Technimont takes place, it will be a major revenue booster.
Going forward, EIL is thus poised to strengthen its position in LSTK business as an alternative to its traditional consulting business. And as company cannot be a consultant and EPC contractor for the same project, forthcoming projects will be carefully scanned so as to decide whether EIL will forego PMC business in favour of high volume LSTK business.
It is a cash rich company with surplus cash of Rs.1067 crore as on Mar.31, 2007, i.e. ~Rs.190 per share. Company will use this cash for few joint ventures mainly for EPC contracts.
Management thus believes that due to robust business outlook, strong order book position (~ Rs. 4,000 crore) and mainly JV company with Tata there will be a step-change in the operations of the company. At CMP of Rs. 754.65, share is trading at 21.6 times FY 2008 expected EPS of Rs.34.9 and 16.6 times FY 2009 expected EPS of Rs.45.4. In view of excellent future prospects, we recommend to “BUY” the share at CMP.
----- With due apologies and full credits to Geojit
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