Crude connection

In one corner of Bhikaji Cama Place on New Delhi’s Ring Road stands the Hyatt Regency. In the early 1980s, around the time of the Asian Games, this place was earmarked for developing into a new commercial hub in the capital. Till the late 80s, only two large multi-storeyed buildings came up — one was the Hyatt itself and the other was a little known PSU called Engineers India (EIL).

Cynics were quick to ask: why does a PSU engineering consultancy company need such a big office? Where do they get the money to build such posh offices in one of the most prime locations in the capital? After all, even PSUs like IOC and NTPC did not own such huge office premises. The cynics would have been silenced had they known about EIL’s highly attractive performance as one of the country’s fastest growing listed companies. The PSU gem is now sitting on cash reserves of over Rs.2,100 crore. Its turnover has galloped by 37% and its profit after tax by 33% consecutively for the past five years.

EIL is especially interesting because, unlike some of the companies in its neighbourhood (GAIL, Mahindra & Mahindra, Jindals), it has no capital or fixed assets (like a manufacturing unit), nor does it have a stake in any company or project, although that looks set to change. After nearly five decades of existence, “we want to invest around Rs.1,000 crore in projects this year,” says AK Purwaha, chairman and managing director, Engineers India. 

Explosive growth

What was the need for a specialised engineering consultancy company for the hydrocarbon and petrochemical sectors? After all, other sectors also needed such firms but did not have them. “The growth of organisations more often than not depends on the vision of the individual behind the organisation,” says DV Kapur, first chairman of NTPC and currently member of RIL’s board. “EIL was created with the vision that there was a very high potential for the hydrocarbon sector in the country.”

Back in 1965, MS Pathak, then chairman of EIL, started the PSU in collaboration with the US-based Bechtel, already an established player in the field. The MIT-educated Pathak had an academic background in the hydrocarbon arena and had already worked with Bechtel and Foster Wheeler, another global engineering giant. Kapur explains that Pathak felt the joint venture route was better suited to gain expertise in the highly specialised business of refineries and petrochemicals. Though the JV lasted only a couple of years, it was enough to put EIL’s structure in place.

Interestingly, EIL had come into existence much before Bharat Petroleum and Hindustan Petroleum, though Indian Oil was formed a couple years before Engineers India was created. At the time, India had few refineries, like those of Esso, Caltex and Assam Oil — post-Independence refining capacity was a negligible 0.25 million tonnes (mt). EIL’s mandate was to refurbish and expand the then existing oil and petrochemical facilities, and help develop new ones.

Chennai Petroleum’s Nagapattinam refinery was EIL’s first, back in 1967, while its most recent greenfield project is the HPCL-Mittal Energy refinery in Bathinda, Punjab. Over this time, the company has worked on 56 refineries, eight petrochemical and 14 fertiliser projects plus a host of other complex structures such as pipelines, offshore platforms, port and storage terminals, and oil and gas processing projects. Purwaha says proudly, “Of the 21 refineries in India, 18 have EIL’s footprint. Of them, ten are grassroots projects.”

Meanwhile, India’s refining capacity has increased from 69 mt in 1999 to the current level of 216 mt. The PSU’s contribution to this addition in capacity is quite enormous. “The company’s rise in recent years is both on account of the boom in expansion and construction of refineries, as well as the NELP (New Exploration Licensing Policy),” explains Purwaha. 

EIL’s bottom line and experience have both benefited from its presence under the Ministry of Petroleum. “It readily got contracts to build projects for oil PSUs,” feels technocrat Kapur. But is that the only reason?

Observers point out that the attempts to get power PSUs to employ engineering services along the lines of EIL never went through. Suggestions to form joint ventures with other utilities to gain experience also went in vain. NTPC, for instance, got to where it is by studying other utilities abroad to gain experience. Companies like, say, IPCL (now with Reliance) or IOC those days (around the time EIL was conceptualised) probably did not have access to many petrochem and refining complexes in the world. Therefore, EIL took the joint venture route and smartly built upon its brief relationship with Bechtel.

It has been a long and profitable journey since then. “The entire business is a very complex one,” says Purwaha. The company holds to its name 13 patents and has developed 30 process technologies. We are at the cutting edge of our bread and butter business of refining and petrochemicals reveals Purwaha, adding, “we are planning for the future without forgetting our core business of being a one-stop shop for the entire hydrocarbon value chain.” 

Purwaha has some interesting plans that are looking beyond the hydrocarbon sector. He says EIL will take up contracts for building power projects and explore sunrise sectors like nuclear power and fertilisers in emerging markets. He explains that India imports around 7 mt of fertiliser to meet its domestic demand and plans are underway to increase domestic fertiliser production by 14 mt by 2015. As part of its fertiliser policy, the government also plans to revive old fertiliser plants.

In all, eight such plants have been identified and all of them present a great opportunity for EIL to grow. The company has already announced its intention to put equity into the revival of National Fertilizers’ Ramagundam fertiliser project. The revival of shut units is a major attempt to augment capacity addition because it doesn’t involve the controversial process of land acquisition. 

A changing world

Since inception, EIL has seldom had a bad year. But then good times don’t last for ever. The PSU is now feeling the pinch of the slowdown in the investment cycle thanks to the economic downturn. As of December 2012, its order-book stood at a 15-quarter low of Rs.5,700 crore. In other words, the orders are less than two times the company’s FY11 revenues of  Rs.2,677 crore. Not just that, the share of high-margin consultation business too is steadily shrinking in favour of low-margin turnkey projects (see: Key to margin trouble). “Increasingly, clients want turnkey projects and that’s the way the market is panning out,” admits Purwaha.

In short, the company’s rapid growth is going to be increasingly determined by market dynamics. “Though we are in a comfortable position, the growth we have witnessed in the previous years cannot be expected to continue forever,” Purwaha says candidly. However, as mentioned earlier, EIL, is trying to salvage growth by looking beyond hydrocarbons. Since over Rs.40 lakh crore is being spent on infrastructure during the 12th Plan, it’s important that EIL leverages its strengths to tap this opportunity.”

On the radar are plans to foray into nuclear power and fertiliser businesses, which will also see EIL putting its cash reserves of Rs.2,100 crore to work. In future, EIL can even pick up equity in nuclear power projects since it is a government-owned company. Besides, to reduce risks associated with a particular industry or geography, EIL is entering into JVs and strategic alliances in India and abroad.

EIL now has ten such alliances, including three overseas JVs, which should help since competition from US, European, Japanese and Korean players has been rising over the past two years. The challenges notwithstanding, the future looks rosy for EIL. With profits growing at 33% CAGR over the past five years, the PSU will remain an investor favourite. Here is a company that can pay richer dividends if it’s allowed to invest properly in its own future.