Engineers India FPO Review – Analysis shows it to be a good safe play leveraging India's infrastructure growth

Engineers India Follow on Offering (FPO) is a sequel to the government PSU divestment through stake sales in companies with low public float.EIL FPO is going to see a 10% dilution of the government equity in the company on top of the existing 9.6% public float.The 3.36 crore (33.6 million) shares are being offered in a price band of Rs 270-290 which will yield approximately Rs 900 -960 crore ( $200 million) for the government.The other FPOs of companies like NMDC and NTPC have not been a big success.Even SJVN which promised to leave something on the table for investors proved to be dud on that respect.One thing is for sure that EIL is also not going to be hugely profitable Lister for flippers.Here is a list of the positives and negatives that I could dig from the 397 page prospectus.

Positives

1) Leveraged to Indian Infrastructure Growth – Engineers India is a direct play on India’s Infrastructure Growth Story.With budgeting of $500 billion to be spent in the next 5 years on India’s infrastructure EIL would be positioned to do well .

2) Fabulous Margins and Growth – The company has managed to grow at an excess of 40% CAGR on both topline and bottomline in the past 4 years.Its Net Margin of 20% has been consistent over the past few years and has shown an increasing trend.For an EPC company this is very good margin.

3) Long History and Government Owned Company – The Management is always a concern for an Indian company as most promoters are known to be unscrupulous and frequently ride roughshod over the rights of minority shareholders.Though people give lower valuations for government owned companies,I think they should get a higher valuation because you are sure that this company won’t defraud you like a Satyam.It has been operating since 1965 and has developed solid competencies and technology in the EPC field.

4) Good diversification across verticals like Oil/Gas,Mining and Power– The company is focussed on the oil and gas sector but also has done numerous projects in the mining and the power  verticals as well.It also has operations in other verticals like roads,airports,waster and water management etc.

Negatives

1) Valuation – The company did Rs 444 crore in Net Profit in 2010 which gives it a trailing P/E of around 20-22x which is a bit high for an EPC company.But given the great growth and margins,I would think it would be a fair valuation without being a screaming buy.On other measures like P/BV and P/S also the valuations are quite high

2) Other risks – Could not find any material risk factors despite the prospectus listing 88 risk factors.Most of them seemed trivial and a waste of paper and ink.

Summary

Compared to the junk being dished out in the Indian market,Engineers India seems a good fundamental stock though valued a little on the higher side.However I would recommend it to be a buy without it  being a compelling buy.