Better Performing PSU - Engineers India

The current market situation doesn't call for aggressive stock picking but scrips that are safe bets, as these counters would not only help investors to ride out the current volatile phase, but also give them better returns in the long term. Keeping this in mind we are recommending Engineers India as our Choice Scrip at a CMP of Rs 350.

EIL was started with an aim to provide engineering and related technical services for the petroleum refineries. But since then EIL diversified and started providing services to sectors such as pipeline, oil and gas processing, offshore structure, fertilisers, infrastructure etc, making it today Asia's leading design and engineering company. The company's revenues come from consultancy and engineering projects, which as on H1FY09 contributes around 58 per cent to total revenues, while the balance 42 per cent comes from the turnkey projects.

There are six reasons why we feel Engineers India will do well. Firstly, it should be noted that EIL is a very cash-rich company. Its books as on FY08 indicate that the company has around Rs 1252 crore cash in hand, per share value of which comes to around Rs 223. Apart from this, the company also has some liquid investments in its book worth Rs 136 crore.

Secondly, EIL is a zero-debt company, hence its interest outgo is nil. This augurs well for the company as in a hardened interest rate scenario, where corporate profitability is being affected on account of high cost funds, EIL's future profits would not be affected by the same.

Thirdly, investors prefer companies with good earnings visibility and EIL exactly fits this bill as its total order book stands at a massive Rs 5000 crore.

In fact, EIL is turning its focus more on international projects especially in neighbouring countries such as Myanmar, Bangladesh and Sri Lanka who are unable to tap huge oil and gas reserves due to lack of technological support and services. These projects taken together create total opportunity worth Rs 8000 crore and even if EIL is able to bag some of these projects it could drive its revenues and profits to a different trajectory altogether in the coming years.

Apart from that, it should be noted that EIL is one of the better performing PSUs with not only strong management but manpower bandwidth as well. This gives the investors good comfort level in such markets.

Last but not the least EIL's financial performance has improved in the last two years. H1FY09 numbers has only cemented this fact as its topline grew 87 per cent to Rs 596.44 crore (Rs 317.48 crore), with bottomline growing 34.17 per cent to Rs 116 crore (Rs 86.46 crore). This could be attributed to increased contribution from the Turnkey Project segment, which wasn't the case in prior two fiscals. For FY09 we estimate EIL to post topline of around Rs 1386 crore, while the bottomline could be around Rs 225 crore. Thus at an estimated EPS of Rs 40, EIL discounts its FY09 profits by 8.75x, which is quite attractive. EIL has already corrected by 70 per cent and we feel that downside may not be substantial from here on due to good yield, revenue visibility, zero debt and strong cash on hand. Hence investors can buy EIL with one year price target of Rs 441.