Companies in the capital goods space have been reeling under the economic slowdown with lacklustre order flows, run-up in debt and low profitability. But there are some beaten down businesses that stand out as good value buys in this segment due to their strong track record, negligible debt and technological capabilities. Engineers India is one such stock. An offer for sale of about 3.37 crore shares of the company is currently open for subscription.

Retail investors can subscribe to the shares, considering the company’s solid history of execution and its diversified clientele. At the price band of ₹145-150, it discounts its estimated earnings for 2014-15 by a reasonable 8.5-8.8 times. This is much lower than the three-year average of about 17 times. Retail investors and employees will get a discount of ₹6 on the issue price.

The company provides engineering consultancy, design, EPC (engineering, procurement, construction) and project management services. It has presence across the hydrocarbon value chain, be it offshore platforms or onshore processing centres, refineries, or oil and gas transportation and storage. It has helped put up 17 refineries and petrochemical complexes and over 35 processing plants and pipelines. It caters to sectors such as fertilisers, non-ferrous mining and metallurgy, power and water and waste management as a diversifier. It also has its own R&D centre at Gurgaon.

Its established rapport with public sector oil and gas companies in India has helped to expand internationally into South and West Asian and African nations. The company, both in India and abroad, has a large pool of non-Government clientele as well.

High margins

Consulting revenue streams have led to profit margins being traditionally high for the company. For the nine month ended December 2013, the consulting division brought in about 65 per cent of the revenues and an operating margin of 37 per cent.

The rest of the revenues came from turnkey projects, where margins were around 7 per cent. Blended margins stood at 23 per cent.

Although the tilt in orders is in favour of the consultancy division, the margin performance may vary depending on the mix of orders between consultancy and turnkey projects. Revenues on turnkey projects can be lumpy and so margins may not accrue uniformly during the year.

Given the ongoing slowdown, revenues for the nine months ended December dropped by 33 per cent over the same period last year, to ₹1,329 crore. Net profit also dropped to ₹376 crore from ₹448 crore. The company had an order book of ₹3,232 crore as on end September 2013, covering revenues of the year by 1.3 times. Engineers India is a debt-free company.

Once the economy recovers, the company will be a superior play in the capital goods space.

Investors with a perspective of two-three years can consider exposure to the stock.

(This article was published on February 7, 2014)
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