Engineers India (EIL) reported better than expected execution, especially under the LSTK segment. Led by Rs6bn of orders from IOCL Panipat, order intake was healthy, strong order pipeline provides growth visibility. Accounting for any likely principal default under employee provident fund trust, the company has provided Rs1.5bn towards the same in Q4FY21, and this has impacted the reported earnings. Company invested Rs7bn for 4.3% stake in Numaligarh refinery along with Oil India Ltd. The proportion of consultancy orders in the orderbook has increased and order prospects are healthy. Factoring-in the lower other income and higher near-term LSTK execution, we cut earnings by 5.5% and 8.8% for FY22E and FY23E.

Healthy execution implies gradual easing out of the shadow of pandemic: Execution on HPCL Barmer has gained traction and HPCL Vizag project is also progressing well. This has resulted in 58% YoY growth in LSTK execution to Rs7bn.

Acceptance of cost and other variation by clients supported margins: Consultancy margins improved 440bps YoY to 38.6% and LSTK margins improved by 270 bps YoY to 5.6%. This was due to recognition of certain costs incurred by EIL and acceptance of certain variations.

Strong order pipeline: Some large orders in the near-term pipeline include: (i) CPCL Nagapatinam expansion by 9mmtpa will be split into three packages - one large and two small portions (management expects one portion to be ordered in FY22E); (ii) one medium-sized order from Numaligarh; (iii) BPCL-related umbrella order of ~Rs2.5bn; (iv) HMEL petrochemical expansion (Rs6bn-7bn); and (v) MRPL petchem expansion.

Growth outlook and benign valuation: EIL has a strong balance sheet with net cash of Rs15.3bn, despite Rs7bn investment in Numaligarh and ~Rs6.5bn of buyback. Company has witnessed improvement in cashflows and reduction in working capital. Given the investment in various assets and the cash balance, we have valued the core profit separately and added back the cash and the investments in Numaligarh and fertiliser business. RoEs are expected to trend high due to lean balance sheet and free cashflows, which are set to be positive.