Eng India Ltd

By Geetanjali Kedia

Update (10th Feb, 1pm): Issue closing extended to 12th February 2014, due to bank strike on 10th & 11th Feb. Issue subscribed 1.26 times.

Engineers India Limited (EIL) is entering the primary market on 6^th February 2014, with a further public offer (FPO) through an offer for sale of 3.37 crore equity shares of Rs.5 each, in the price band of Rs. 145 to Rs. 150 per share. The issue, offering Rs. 6 per share discount to retail investors and employees, represents 10% of the company’s paid-up equity share capital and closes on 10^th February.

Through the FPO, Government of India (GoI), which holds 80.4%, plans to raise between Rs. 481 to 498 crore, depending on the price discovered.  Post the offer, public shareholding in the company will increase to 29.6% from the present 19.6%.

EIL is a leading engineering consultancy and focussed on oil and gas, petrochemicals, infrastructure, metals and mining, water and waste management, serving clients both in India and abroad (mainly in South East Asia, Middle East and Africa). For FY13, it reported consolidated revenues of Rs. 2,773 crore (down 30% YoY) and net profit of Rs. 576 crore (down 11% YoY), resulting in an EPS of Rs. 17.09, on equity of Rs. 168.47 crore (33.69 crore equity shares of Rs. 5 each). Dividend of Rs. 6 per share was paid for the year. On standalone basis, although the topline was marginally lower compared to the consolidated numbers at Rs. 2,506 crore, net profit and EPS were higher at Rs. 629 crore and Rs. 18.66 respectively for FY13.

For the first half of FY14, EIL reported consolidated revenues of Rs. 1,038 crore and net profit of Rs. 221 crore, with half yearly EPS of Rs. 6.55. As on 30^th September 2013, its net worth was Rs. 2,537 crore and had nil debts. Cash and bank balance (standalone), as on that date, was Rs. 2,505 crore, which amounts to cash of Rs. 74 per share. Its order book (30-09-13) stands at Rs. 3,232 crore, which represents just 1.2 times of FY13 sales, shrinking from close to 3 times of sales 4 years ago.

Standalone revenue and net profit for quarter ended 31^st December 2013 stood at Rs. 420 crore and Rs. 135 crore respectively, leading to EPS of Rs. 4. EIL is expected to close FY14 with EPS of about Rs.14.

At the upper end of the price band of Rs. 150, the issue is priced at a PE multiple of 11 times, based on FY14 estimated earnings of Rs. 14. After applying the Rs. 6 discount for retail investors, the FPO price at the upper end of 144 is discounted by 10.3 times. Since the company is significantly cash-rich (almost equal to its networth), if the cash balance on its books (standalone) is deducted from the net FPO price, effective price per share for company’s business, clocking annual revenue of over Rs. 2,000 crore and profit of Rs. 450 crore, is Rs. 70 (at upper end), which implies a discount of 5 times current year earnings. The same is explained as under:

In July 2010, GoI had divested 10% of its stake in EIL through an FPO priced at Rs. 290 per share, which implies a wealth destruction of nearly 50% in less than 4 years. In addition, company has been showing de-growth on financial front for the past 2 years.

However, current share price of Rs. 150 seems to have bottomed out given the FPO overhang on the stock price, coupled with current negative perception looming across the PSU bandwagon. Increased public float post FPO, annual dividend yield of about 4%, diversification in other areas of consulting (from its core oil and gas) to water and waste management etc. should be positive, once the new government is sworn-in at the centre.

Moreover, retail discount of Rs. 6 per share along with a very low cash adjusted PE multiple of 5 times for a consulting company seems to be modest, on pure fundamental ground.

Thus, based on the above, one may apply in the issue. However, those looking solely at listing gains can give it a miss.