Profitability boost for Engineers India

Earnings expected to rise faster on improving execution, better order flow in more profitable segments

The Engineers India Limited (EIL) stock has continued to move up, following optimism on better order flow, execution and profitability. The Street is finding more comfort, with the June quarter performance ahead of estimates. As a result, the stock hit 52-week high of ~266.5 on Thursday; over two sessions, it is up 14 per cent to ~260.

EIL’s June quarter performance was driven by meaningful growth in the consultancy & engineering projects businesses, despite decline in the turnkey projects segment. The 19 per cent growth in consultancy revenues to ~269 crore partly mitigated the 56 per cent fall in turnkey projects’ revenues to ~73.2 crore, which was impacted due to depleting order backlog, say analysts.

Thus, overall revenue fell 12.6 per cent over a year to ~342 crore. However, the decline was anticipated, as revenue came in line with the Bloomberg consensus estimate of ~341.4 crore.

Nevertheless, with orders reaching completion in the turnkey projects segment couple with a write-back of provision and increased contribution from the high margin consultancy division, overall operating performance got a significant boost. Ebitda (earnings before interest, taxes, depreciation, and amortisation) rose to ~73.3 crore, from ~35.5 crore a year ago and was way ahead of the Bloomberg consensus estimate of ~44.5 crore. Analysts say consultancy division’s margins improved 300 basis points (bps) over a year, while provision writebacks at ~27 crore were in the turnkey projects segment as orders moved closer to completion.

Thus, net profit at ~80.3 crore (up 49 per cent over a year) was also ahead of estimates of ~65 crore.

Profitability is set to improve further. Analysts at Religare Institutional Equities say further writebacks are expected during FY17 as well and the consulting segment margins are set to improve, as execution picks up towards FY17-end. The management has guided to Ebitda margins of 20 per cent-plus in FY17; the same stood at 10.7 per cent in FY16.

Analysts also highlight improved order inflows during the quarter, which will drive growth. Earnings, thus, are estimated to grow by an average 30 per cent during FY16-18. Analysts at Kotak Securities say the management shared encouraging outlook for the domestic business and expects significant pickup in order inflows over remaining FY17 and FY18, and has revised its FY17 order flows forecast to ~3,500 crore from ~2,000 crore earlier. Thus, better order flow, execution and improving profitability are keeping analysts positive. While consensus price target of analysts is ~280, those at Kotak have revised it upwards to ~335.