Prabhudas Lilladher has reaffirmed a BUY rating for Engineers India Ltd. (EIL) with a target price of Rs247, reflecting a potential upside from the current market price of Rs187. Despite soft execution in Q2FY25 leading to a revenue dip, EIL’s strong order book of over Rs120 billion and anticipated growth in the consultancy and turnkey segments provide a stable outlook. Key growth areas include oil and gas, green hydrogen, and international markets. EIL’s lean balance sheet and targeted revenue growth of Rs50 billion over the next two years underscore its solid fundamentals and growth potential.

Financial Highlights and Valuation

Current Market Price and Target Price: EIL is currently trading at Rs187, with a target price of Rs247, suggesting a 32% potential upside.
Revenue Decline and Margin Contraction: EIL’s revenue fell by 12.8% year-over-year (YoY) in Q2FY25 to Rs6.9 billion. EBITDA margins contracted by 347 basis points, landing at 9.1% due to increased employee costs and other expenses.
Revised EPS Estimates: Prabhudas Lilladher has adjusted FY25/26 core EPS estimates downward by 3.8% and 1.8%, respectively, due to lower consultancy margins.

Order Book and Growth Pipeline

Robust Order Book: Year-to-date (YTD) order intake reached Rs68.7 billion, with an additional Rs17.3 billion secured in October, pushing the order book to over Rs120 billion.
Turnkey Opportunities: EIL expects Rs10-15 billion in new turnkey orders, including consultancy work for Indian Oil Corporation Ltd’s Paradip expansion, where EIL holds the L1 position in two packages.
International Growth: The company is actively pursuing projects in the Middle East, Nigeria, Algeria, and Guyana, signaling a promising expansion of its global footprint.

Segment Performance - Consultancy vs. Turnkey

Consultancy Segment: Consultancy revenue rose 5.8% YoY to Rs4.0 billion, with the consultancy/turnkey revenue mix shifting to 57%/43% from 47%/53% in Q2FY24.
Turnkey Segment Challenges: Turnkey revenue declined by 29.5% YoY to Rs2.9 billion. EBITDA margin in the turnkey segment dropped by 620 basis points YoY, reaching 5.6%, impacted by execution delays.
Execution Cycle: Execution remains a key focus in H2, with management emphasizing faster project completions to improve efficiency and profitability.

Growth in Emerging Sectors

Green Energy Initiatives: EIL received an order for a bio-aviation turbine fuel (bio-ATF) demonstration plant from Mangalore Refinery and Petrochemicals Ltd (MRPL), marking its entry into biofuels.
Hydrogen Projects: The company has provided initial study services for green hydrogen projects for NRL and NLC India Ltd, highlighting its entry into the green hydrogen sector.
Oil and Gas Projects: EIL is involved in feasibility studies for projects by GAIL, ONGC, and BPCL, though board approvals for major investments are pending.

Operational Efficiency and Financial Outlook

Improving Margins: Despite Q2 setbacks, adjusted financials reflect improvements, with gross margins up 442 basis points YoY to 57.8%, driven by a favorable revenue mix.
Long-Term Revenue Target: EIL is on track to achieve Rs50 billion in annual revenue within two years, supported by new project wins and enhanced execution.
Balance Sheet Strength: With a lean balance sheet, EIL is well-positioned to fund its growth ambitions without significantly leveraging debt.

Investment Risks and Considerations

Execution Risks: Delays in project execution and turnkey segment challenges could impact short-term profitability and slow revenue recognition.
Market Dependency: A significant portion of EIL’s revenue comes from oil and gas projects, which are sensitive to economic and regulatory changes in the sector.
International Risks: While EIL’s global expansion holds potential, international projects are subject to geopolitical and currency risks that could affect profitability.

Investment Thesis and Recommendation

Prabhudas Lilladher’s BUY rating is based on EIL’s robust order book, strategic diversification into green energy, and strong market presence in consultancy and turnkey projects. With a target price of Rs247, the stock offers an attractive opportunity for investors focused on infrastructure and energy growth in India.

Disclaimer: Investors should conduct thorough research and evaluate their financial situation and risk tolerance before making any investment decisions.