ICICI Securities Suggests Buy This Small Cap Navratna Stock For Robust 61% Returns

Stock Outlook & Returns

Engineers India's current share price is Rs 67.15 after an upside of 1.28% from the previous close of Rs 66.40. Its 52 week low is Rs 56/share and the 52 week high is Rs 82.50/share. It is currently trading at Rs 11.15/share above the 52-week low and Rs 15.35 below the 52 week high level, respectively.

Engineers India share in last 1 week has fallen 3.45% and gained 8.83% in past 1 month, respectively. In the past 3 months, the shares moved up by 11.27%. Over the 1 year, the share has fallen 8.2% and 33.35% in 3 years and 54.1% in 5 years, respectively. The shares have not performed well in the long term as they gave negative returns.

 

Healthy execution in turnkey segment; consultancy lags

Execution at HPCL Barmer improved as LSTK revenues during Q1FY23 grew 23% YoY to Rs4.5bn. Consultancy revenues fell 4% YoY to Rs3.5bn. Management expects revenues to gather pace over the coming quarters and reach ~Rs32bn for FY23 at standalone level.

Margin impacted by one offs, but expected to revert to normal levels

During Q1FY23, consultancy / LSTK margins contracted 1,300bps / 110bps YoY to 17.2% / 2% respectively. Gross margin fell 740bps YoY resulting in EBITDA margin to shrink by 850bps YoY to 5.7%. Margin was impacted due to provision of Rs180mn towards doubtful debt. Management guided the provision to get reversed and margins to return to 25-28% for consultancy and 3-4% for LSTK for the full year.

Muted orderbook intake, but outlook remains stable

Order intake during Q1FY23 declined 20% YoY to Rs 2.3bn, largely from the hydrocarbon segment. Key order wins include a Rs 440mn EPCM contract from Deepak Chemicals and a Rs 240mn order for Dahej regasification expansion for Petronet LNG. Orderbook grew to Rs88bn (3x TTM sales) with 64% from consultancy and 36% from LSTK. 18% of the orders' value is from overseas. LSTK order book grew from Rs 27.5bn to Rs40bn in Q4FY22 as there was a change in the scope of the order.

Maintain BUY

The company is currently undergoing feasibility projects across multiple hydrocarbon fuels, pipeline and renewable fuels like hydrogen, ethanol and other biofuels. "We believe, as the capex cycle picks up, these capabilities might help win execution orders for the company. Supported with improved order intake outlook and strong cash-rich balance sheet, we maintain our BUY rating on the stock," the brokerage said.

Buy For Target price of Rs 108

Engineers India's (EIL) Q1FY23 revenues grew 9.5% YoY to Rs8bn led by healthy execution in the turnkey segment. EBITDA fell 56% YoY to Rs460mn while EBTIDA margin contracted 850bps to 5.7% due to doubtful debt provision of Rs180mn and higher proportion of sales from turnkey segment. Management expects margin to normalise over the coming quarters with reversal of the provision made. Order inflow in Q1FY23 was weak at Rs2.3bn, down 20% YoY. However, current order backlog stands strong at Rs88bn (3x TTM sales). The Ramagundam Fertilizers project turned profitable with increase in capacity utilisation, which is further expected to improve. "Due to inexpensive valuation and robust order backlog, we maintain our BUY rating on the stock with a revised target price of Rs108 (previously: Rs103)," the brokerage said.