Ajay Jaiswal

Very few public sector undertakings (PSUs) have a record as phenomenal as Engineers India (EIL), which has played a significant role in the growth story of hydrocarbon, petrochemical and metallurgy sectors in the country. In the petrochemical segment, EIL has been involved in the setting up of a large number of mega petrochemical complexes in the country. The company has its footprints in 19 of the 22 operating refineries in India with a combined refining capacity of more than 150 million metric tonne per annum (MMTPA). It has also been involved in the establishment of seven of the eight mega petrochemical complexes in the country. In hydrocarbon consultancy, EIL’s endeavors have resulted in India achieving more than 90% indigenisation in terms of technology and around 80% in supplies. 

Importantly, EIL’s in-house research and development support has contributed to the consolidation of existing capabilities, development of new technologies and hardware, besides enhancement of the portfolio for special technology-related services. The company has 26 registered patents, as on March 2018, while 24 patent applications are under evaluation. Despite challenges that PSUs have to deal with, EIL has managed to stay debt-free with a healthy earnings growth and a track record of paying dividends consistently. 

Emerging Avenues 

After a period of turbulence, the relative stability in crude oil prices at $69/barrel level has prompted companies in the Middle East and North Africa region to pursue their planned investments worth $574 billion over the next five years across the hydrocarbon value chain. Also, the general expectations of demand growth for oil and oil-related products continue to remain robust, which is enough reason for refiners to maximise their throughputs. EIL’s increased capabilities and cost effectiveness has helped the company overcome entry barriers in international markets. Further, in a boost to EIL, there has been a consolidation in the international project management consultancy market with the number of players halving from 12 to six.

Closer home, EIL is poised to gain from investments being made in the development of airports across the country. In FY18, the company completed consultancy services for the preparation of master plan and a detailed project report for the development of Rajkot airport in Gujarat; engineering consultancy services for the development of Deoghar airport in Jharkhand; review of master plan for the development of a greenfield international airport at Mopa, Goa. Another growth area for EIL is water and waste management, where the company has completed the preparation of development project reports for water supply projects under the AMRUT scheme in nine cities of Odisha. 

The government, in the FY20 interim budget, has stressed on the need to increase India’s self-reliance in hydrocarbon requirement — a realisation better late than never. The very fact that oil prices shot up to $86/barrel from $50/barrel a year back had come as a jolt to the government. Further, the fall in the currency against the dollar has only added to the pain. For every $10 per barrel increase in oil price, inflation in the country rises by about 49 basis points, or pushes up the fiscal deficit by 43 bps, if the government decides to absorb the entire price shock, states a study by the RBI. Hence, it is inevitable for the NDA government or any other government that comes to power, to implement policies to boost the country’s hydrocarbon self-sufficiency.

The refining capacity of India is projected to surge from 247.60 MMT to 533 MT by 2040, enabling robust demand for consultancy and project business. Integration of petrochemicals with refineries by several OMCs, energy efficiency, and value addition thanks to the integration of natural gas, displacements of liquid fuels and clean fuels (BS-VI) projects are already underway in the country. 

In recent months, various initiatives in the pipeline sector have been announced, the vision of a gas grid is fast becoming a reality. The share of natural gas in the country is projected to be around 20% by 2030, that means more energy consumers driving regional growth. The per capita petrochemical product demand in the country is projected to reach around 15 kg by 2030 from 8 kg now, which means more capacity additions. In effect, EIL has enough and more to look forward to.

Poised Right

During FY18, the company bagged new business worth Rs.21.41 billion, of which Rs.13.57 billion came from domestic consultancy, Rs.4.80 billion from domestic turnkey and overseas business brought in Rs.3.04 billion. The momentum has continued in the current fiscal as well. Owing to strong execution in the turnkey segment, revenue booking in Q3FY19 surged 164% YoY to Rs.2.34 billion. As a result, the turnkey segment contributed nearly 41% to the topline, higher than the usual 25-35% share seen in the past. This helped overall revenue to grow by around 22% YoY to Rs.5.77 billion, even as consultancy revenue declined by around 11% YoY for the quarter to Rs.3.42 billion.

Total order inflow for the nine months of the current fiscal stood around Rs.57.86 billion, primarily following a large order win in the second quarter from HPCL for its Barmer greenfield project, worth Rs.54 billion. The company’s order-book has consistently grown and stood at Rs.107 billion at the end of December 2018, implying four to five years of revenue visibility. The order-book is likely to gain in the coming quarters as major petrochemical projects are being announced. The management is optimistic about winning Indian Oil Corporation’s Panipat refinery order, which is a brownfield expansion from 15 MMTPA to 25 MMTPA, for which it has already been declared L1 (lowest bidder), and an order from Bharat Petroleum Corporation for it polypropylene unit. The company is also expecting an overseas consultancy order in the range of Rs.3-6 billion for a greenfield refinery in the first quarter of the next fiscal. Besides, EIL is also pursuing other opportunities such as the two strategic crude reserves for the Indian Strategic Petroleum Reserves at Chandikhole in Odisha and at Padur in Karnataka, large fertiliser projects (such as the Ramagundam Fertiliser Complex) and infrastructure projects (such as Namami Gange, Atal Mission for Rejuvenation and Urban Transformation, among others). The government has also indicated that it would facilitate investment in oil and gas exploration in the country through its policies which, of late, had discouraged investment in this crucial sector.

Against such a backdrop, over FY18-21, while topline will continue to expand, we expect EIL to compound its operating and net profit at 14.25% and 9.62%, respectively, with increasing contribution from the turnkey segment. Further, a healthy balance sheet with a cash balance of Rs.23 billion and a book-to-bill of 4.1x offer enough cushion for growth. At 16x its estimated FY21 earnings, we expect the stock to touch Rs.158 by end of the current calendar year.

The brokerage has a buy call on the stock, but the writer, in his personal capacity, does not own the stock