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Engineers India FPO Note

February 7, 2014, Friday, 18:53 GMT | 13:53 EST | 23:23 IST | 01:53 SGT
Contributed by Nirmal Bang


Engineers India Ltd. (EIL, 80% owned by Government of India) is a engineering consultancy company providing design, engineering, procurement, construction and integrated project management services to industries such as hydrocarbon, chemicals, fertilizers, metallurgy, water, etc. It operates through two segments. Consultancy & engineering is a high margin segment, with ~35% average margins The engineering and consultancy segment (E&C) undertakes engineering consultancy, project management and implementation services. On the other hand, Lumpsum turnkey projects segment enjoys ~7% average margins. This segment’s projects are undertaken on a turnkey basis whereby all construction work and equipment is outsourced to a third party.
 
With corporate office in New Delhi, EIL also operates from its four regional engineering offices in Mumbai, Kolkata, Chennai and Vadodara and has inspection offices at all major manufacturing locations of the country. The company’s overseas presence is marked by an engineering office in Abu Dhabi, which caters to the business needs in UAE/Middle- East region. Additionally, there are offices in London, Milan and Shanghai to coordinate the activities of international procurement and marketing.
 
 
Issue details
 
- Engineers India Ltd. (EIL) is coming out with FPO (follow on public offer) to divest Government of India’s (GOI’s) 10% stake (post offer paid-up equity share capital), through sale of 33.69 mn equity shares. Through this FPO EIL would not receive any proceeds, as all the proceeds would go to GOI.
 
- Floor price for EIL will be Rs 145-150 per share. At upper band of floor price, GOI would garner close to Rs 5bn through this offer.
 
- Post this FPO, government’s share in EIL, would come down to 70.4%, from the current levels of 80.4%.
 
- This FPO issue opens for subscription on February 6, 2014 and closes on February 10, 2014. Of the total offer, 50% of issue size is reserved for QIBs, 15% for HNIs, 35% for retail investors (incl. 5% for employees).
 
 
Valuation
 
At CMP of Rs 152, the stock is trading at 9x current TTM EPS. It has debt free balance sheet with negative working capital. It has Rs 25bn of cash balance translating into Rs 74/share. The company has maintained good dividend payout ratio of 30% plus which gives dividend yield of 4% at CMP. We feel slowdown in capex cycle is priced in and any reversal in capex cycle can give substantial return in long term.