The Economic Times daily newspaper is available online now.

    Buy Engineers India, target Rs 153: Kotak Securities

    Synopsis

    Buy Engineers India at a price target of Rs 153.

    GettyImagesGetty Images
    The current market price of Engineers India is Rs 112.90.
    Kotak Securities has a buy call on Engineers India with a target price of Rs 153.

    The current market price of Engineers India is Rs 112.90.

    Time period given by the brokerage is one year when Engineers India price can reach the defined target.

    Investment rationale by the brokerage:
    Valuation & outlook: We believe that EIL stock is trading at a cheap valuation at PER 14x FY20 core earnings (FY20E core EPS estimated at Rs.5.3). We value FY20 core earnings (excluding other income adjusted for tax) at PER 22x and maintain BUY with a revised target price of Rs 153 (Rs 155 earlier).

    Management meet update: We interacted with the management of EIL to get perspective on the overall business environment unfolding in the domestic and overseas business. Below are the key highlights of our interaction.

    Domestic market expected to remain buoyant in the long term driven by the ambitious target set by Ministry of Petroleum and Natural Gas of expanding India’s refining capacity to 440 MMTPA form 247 MMTPA currently by the year 2040. Our interaction with the industry players (including equipment manufacturing capital goods companies) suggests that demand from hydrocarbons has been gradually strengthening. Current demand-supply statistics implies that India might have to import refined oil in the next few years in case of delays in capacity de-bottlenecking in existing refineries and inclusion of greenfield capacities.

    Management reiterated long term positive outlook on the domestic order inflows driven by 1/ brownfield expansion of refineries (including small refineries with the capacity of less than 3 mmtpa) 2/ set up & integration of petrochemical plants with existing refineries and 3/ greenfield refinery expansion- including Maharashtra Refinery.

    Management is optimistic about winning 1/ IOCL Panipat refinery (planned brownfield expansion 15 to 25 MMTPA, EIL already declared L1) and 2/ BPCL (polypropylene unit) orders in the near term (Management refrain from commenting on order size as bidding process is still on).

    Beside these orders, management highlighted that the company has also received in-principle approval for Numaligarg Refinery (Assam) expansion from 3 to 9 MMTPA. The order is expected to materialize in FY20. Tabled below-refinery wise brownfield expansion plan till 2022.

    Acquisition of PDIL to bring synergy in the fertilizer business; management dismisses the threat of misuse of its cash reserves: EIL has recently made a bid for acquiring 100 per cent stake in another public undertaking-PDIL Ltd. Currently, PDIL is under the Ministry of Chemicals & Fertilizers. Founded in 1978, PDIL provides design engineering and consultancy services. It serves fertilizer and allied chemical industries, oil and gas sector, power and infrastructure sectors in India and internationally.

    Without divulging the valuation details, EIL management has posed confidence in PDIL being value accretive in the long term. As per management, PDIL has an efficient employee base and EIL could enhance PDIL’s reach into new geographies.

    EIL other investments till date include 1/ Rs 3.4 Bn for 26 per cent stake in Ramagundam Fertilizer plant (as of date Rs 2.4 Bn in already infused) 2/ Rs 600 mn in oil blocks (Rs 220 mn written off against this investment). Management stated that the company is not looking for major acquisitions in the near term and has reassured that the inorganic initiatives would be in line with company’s core operations in-Hydrocarbons, Fertilizers, Water Management and Smart Cities.

    We believe that the street has been sceptical about the company’s cash reserves (amounting to c. Rs 25 Bn), getting diverted towards recapitalization of other government-owned sick companies. Management, however, has dismissed any such threat to its cash reserves and has maintained that the company shall maintain its dividend payout at current 80 per cent level.

    Revenues likely to grow on the back of continued momentum in the capex by major Indian refineries: EIL’s order book stood at over Rs 107.8 Bn, offering four years’ visibility. Management believes that the pace of order booking should further improve in 2HFY20/FY21. In our estimates we build, revenue growth at 29 per cent CAGR between FY 18-20 from Rs. 17.8 Bn in FY18 to Rs 29.5 Bn in FY20E. Within the revenue streams, we expect PMC business to grow at 3.8 per cent CAGR (we expect meaningful growth in PMC division beyond FY21supported by execution of HPCL Balmer project) and Lumpsum turnkey project segment (LSTP) is expected to grow at 90 per cent CAGR (on a low base of FY18) between FY18-20.


    Valuation and recommendation: We believe that EIL stock is trading at a cheap valuation at PER 14x FY20 core earnings. We value FY20 core earnings (excluding other income adjusted for tax) at PER 22x and maintain BUY with a revised target price of Rs 153 (Rs 155 earlier).



    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more


    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
    The Economic Times

    Stories you might be interested in