 "Engineers India: Sound business, reasonable valuations")
Nothing compares with a good business that continues to generate healthy free cash flows and at the same time maintains growth. The government-owned Engineers India Ltd is one such company. Over the last five years (and despite the dip in sales and marginal fall in net profit in 2012-13), it has delivered a CAGR of 27 per cent in sales and on an average generated cash of about Rs 400 crore annually from operations. Importantly, its business model is such that it does not require much cash to grow and reinvest in the business, which are among key reasons the company has been able to reward its shareholders with good dividends.
The on-going FPO, through which the government is selling part of its holdings, will help the exchequer raise about Rs 500 crore, but it will also see the government’s stake in the company fall to 70 per cent from 80 per cent. The FPO, however, comes as an opportunity for investors on two counts: First, the company’s business is sound, and second, because of the FPO, the share price has fallen in the recent past. Additionally, for retail investors, there is a discount of Rs six per share on the offer price in the band of Rs 145-150. This means, if the allotment price is fixed at Rs 150, retail investors will get shares at Rs 144 apiece, which is about six per cent lower than its current market price of Rs 152.2. Notably, various parameters suggest that FPO valuations are reasonable.
On a revenue of Rs 2,800 crore and net profit of Rs 602 crore in FY13, the market capitalisation of Rs 5,129 crore translates to a PE of 8.5 times. Add to that, the current dividend yield of four per cent and return on equity of over 30 per cent, the valuations look far more reasonable. Notably, the company is sitting on Rs 2,500-crore cash, which is about Rs 74 per share or 50 per cent of its market capitalisation.
Because of its long history and capabilities, the company has been a preferred choice for the government-led projects or PSUs. Currently, its order book stands at Rs 3,800 crore or 1.5 times its FY13 sales, which provides reasonable growth visibility. Further, opportunities, particularly in the hydrocarbon space, are expected to continue for many years given India’s on-going energy reforms and growing energy needs.
Nevertheless, the company is well diversified. “Sixty five per cent of its order book comprises of high-margin consultancy orders, while the balance 35 per cent is from turnkey projects. Notably, 21 per cent of the order book is from international market. Engineers India order book is expected to increase further on robust order pipeline in domestic and international markets,” said Suhani Patel of Nirmal Bang Securities. Focus on the international markets should prove fruitful in the long-run, as there are growing opportunities, particularly in some of the smaller markets.
The on-going FPO, through which the government is selling part of its holdings, will help the exchequer raise about Rs 500 crore, but it will also see the government’s stake in the company fall to 70 per cent from 80 per cent. The FPO, however, comes as an opportunity for investors on two counts: First, the company’s business is sound, and second, because of the FPO, the share price has fallen in the recent past. Additionally, for retail investors, there is a discount of Rs six per share on the offer price in the band of Rs 145-150. This means, if the allotment price is fixed at Rs 150, retail investors will get shares at Rs 144 apiece, which is about six per cent lower than its current market price of Rs 152.2. Notably, various parameters suggest that FPO valuations are reasonable.
On a revenue of Rs 2,800 crore and net profit of Rs 602 crore in FY13, the market capitalisation of Rs 5,129 crore translates to a PE of 8.5 times. Add to that, the current dividend yield of four per cent and return on equity of over 30 per cent, the valuations look far more reasonable. Notably, the company is sitting on Rs 2,500-crore cash, which is about Rs 74 per share or 50 per cent of its market capitalisation.
Because of its long history and capabilities, the company has been a preferred choice for the government-led projects or PSUs. Currently, its order book stands at Rs 3,800 crore or 1.5 times its FY13 sales, which provides reasonable growth visibility. Further, opportunities, particularly in the hydrocarbon space, are expected to continue for many years given India’s on-going energy reforms and growing energy needs.
Nevertheless, the company is well diversified. “Sixty five per cent of its order book comprises of high-margin consultancy orders, while the balance 35 per cent is from turnkey projects. Notably, 21 per cent of the order book is from international market. Engineers India order book is expected to increase further on robust order pipeline in domestic and international markets,” said Suhani Patel of Nirmal Bang Securities. Focus on the international markets should prove fruitful in the long-run, as there are growing opportunities, particularly in some of the smaller markets.