Engineers India Limited (ENGINERSIN) Earnings Call Transcript & Summary

[Audio Gap] everyone. I would like to welcome you to the Q3 FY '21 Earnings Call of Engineers India. The management today is being represented by Mr. Sunil Bhatia, Director of Finance; Mr. Suvendu Padhi, Company Secretary; Mr. R. P. Batra, Group General Manager of Finance & Accounts and Investor Relations; and Mr. Vinay Kalia, Chief General Manager of Business Development & Investor Relations. I'll now hand over the call to Mr. Bhatia for his initial remarks, post which we'll open up the floor for Q&A. Over to you, sir.

Good afternoon. I welcome, everyone, to the earnings call. I'll just brief you on the financial position of the company. During the 9 months period from April to December '20, we secured a business of INR 864 crores, and the order book as on 31st December 2020 was INR 8,297 crores. For the quarter ended December '20, we achieved a total turnover of INR 837 crores, comprising of consultancy in domestic of INR 267 crores, consultancy in foreign INR, 92 crores. So total consultancy was INR 358 crores and INR 478 crores was turnkey. The turnover as compared to corresponding period of previous year was lower by 6%. And as compared to the previous quarter of September 2020, it was higher by 22%. Business mix as on 31st December 2020 was consultancy, 43%; and turnkey 57%. For 9 months period ended December 2020, the total turnover achieved was INR 1,988 crores, comprising of turnover domestic of INR 730 crores, turnover consultancy foreign of INR 249 crores. So total consultancy of INR 979 crores and turnkey of INR 1,009 crores. As compared to corresponding period of previous year, the turnover of INR 1,988 crores is lower by 15% compared to turnover of INR 2,349 crores achieved during corresponding period of previous year. You will recall that last year, the turnover of INR 2,349 crores included onetime impact of change order of INR 97 crores. In case we compare on a like-to-like basis, the turnover of last year was INR 2,252 crores, and the decrease as against 15% gets reduced to 11.7%. We achieved the operating profit of INR 70 crores during the quarter ended December 2020, almost at the same level of operating profit achieved during the previous quarter, September 2020, of INR 71 crores and lower by around INR 10 crores as compared to operating profit achieved during December '19. Other income has reduced to INR 48 crores from INR 53 crores achieved during September 2020 and INR 66 crores achieved during corresponding period of previous year, mainly due to reduction in the interest rate on fixed deposits. Profit before tax achieved was INR 118 crores during December '20 quarter compared to profit of INR 124 crores achieved during September 2020 and profit of INR 145 crores achieved during corresponding period of previous year. Profit after tax achieved was INR 88 crores compared to INR 93 crores achieved during September 2020 and INR 109 crores achieved during December '19. EPS on an annualized basis was INR 1.39 per share compared to INR 1.47 per share during September '20 and INR 1.72 during September '19. For 9 months period, operating profit achieved was INR 156 crores as compared to INR 314 crores achieved during corresponding period of previous year. INR 314 crores of operating profit included 2 onetime impacts, one was INR 85 crores due to variation order and impairment adjustment expenditure of around INR 26 crores, which we had accounted for in the corresponding period of previous year. In case it is offset, then the operating profit has reduced by 39% as compared to corresponding period of previous year. Operating margin achieved was 8% as compared to 11% achieved during corresponding period of previous year on like-to-like basis. Other income achieved was INR 151 crores as compared to INR 190 crores of corresponding period of previous year, mainly due to reduction in the interest rate on fixed deposits and profit before tax of INR 307 crores compared to INR 503 crores and profit after tax of INR 229 crores compared to INR 301 crores. EPS, INR 3.62 per share compared to INR 4.76 per share. Segment results. The segment profit we achieved on consultancy and engineering Project of INR 91 crores as against INR 93 crores achieved during September '20 and INR 90 crores achieved during December '19. Turnkey project segment profit remains at almost at the same level as compared to September quarter of -- we achieved a turnkey segment profit of INR 6.51 crores compared to INR 6.27 crores achieved during September '20 as -- and the profit -- segment profit on turnkey achieved was INR 15.96 crores during corresponding period of previous year. Capital employed as on 31st December 2020 was INR 2,463 crores compared to INR 2,380 crores as on September 2020 and INR 2,510 crores as on December '19. As you all know that the buyback process is on. The offer got opened on 22nd of January, and it will close on 5th of February. Buyback offer comprises of shares not exceeding 6,98,69,047 fully paid up equity shares at a buyback price of INR 84 per equity share for an aggregate consideration not exceeding INR 586.90 crores through tender route under stock exchange mechanism. I would also like to inform you on the development with respect to our joint venture company, RFCL. The commissioning of the RFCL project was targeted during December 2020. But because of some equipment-related problem in the CPP plant being executed by BHEL, the commissioning got delayed. The problem has been rectified, and the commissioning activities are on. And now we are targeting commissioning of the project in February 2021. Now the house is open for queries from your side.

[Operator Instructions] The first question is from the line of Arafat Sayyed from Reliance Securities.

Yes. Sir, I just want to understand your project pipeline for next 2 years. And what kind of projects you're looking for next year and also order inflow guidance for '22 and '23?

We have already shared in the past that we have 2 committed orders, one from IndianOil for the Panipat refinery expansion and one for petro RFCC and PP projects of BPCL. Both these projects are under Phase 1 and Phase 2 of execution. The main project execution for both the projects are being targeted by next year. They were being targeted earlier in this year, but because of the COVID impact, there have been delays, plus clients are also looking at the optimization of costs and reconfiguration activities, which we are already doing in Phase 1. And so the Phase 2 activities of both these projects are targeted for next year -- by middle of next year. Panipat refinery, the main project execution would be in the range of INR 600 crores and BPCL refining project would be in the range of INR 200 crores. We are also looking for a new refinery at Cauvery Basin at Nagapattinam for IndianOil. IndianOil during the news have already announced CapEx approval for this refinery. The bidding process has already been initiated by CPCL, and we expect some orders to come through by the end of this year or beginning of next year. This is another project that we are targeting by end of this year or next year. The -- it's still under bidding process. So values will be known in due course once the bids are announced. Subsequently, we are looking for some more projects in next year only after the second half like the Mangalore refinery expansion project for which the feasibility study has already been done. We are also looking at 1 or 2 small projects this year also from Numaligarh, which could materialize by the end of this quarter for the revamp and quality upgrade in Numaligarh refinery. We can also look at HMEL expansion next year, which is a cracker expansion from 1.2 to 1.5 MMTPA. The cracker project is currently ongoing for 1.2 MMTPA and subsequent expansion is also being planned by HMEL in the next year. So these are large ticket value orders, and there are some small pipeline orders from pipeline segment, from LPG segment, and from the strategic results and LPG tenants that we are expecting to come up in next year also. So going forward, as of now, since we are coming out of COVID and project CapEx announcements are gradually taking shape again, we feel the targets for next year could be in the range of INR 1,500 crores to INR 2,000 crores, but the numbers will be finalized as and when the CapEx plans get concluded by the NOCs. There have been some delays because of COVID and because of the shortfalls in the cash flows in the oil companies. So it will take some time for us to out to rebound the targets for the next year.

[Operator Instructions] The next question is from the line of Varun Pattani from Prospero Tree.

Sir, as you mentioned, the IOCL and BPCL have been postponed to the next year, what would be the guidance for the current year FY '21, given that we have already secured business of INR 853 crores? So how much of it -- there's any more steam left for the next quarter?

We are expecting one order from Numaligarh refinery in this year of the order of about INR 100 crores, that can materialize within a month or so. We are expecting the opening of tenders for Cauvery Basin Refinery, the bids have been submitted. We are expecting some announcements from Cauvery Basin. If those announcements are made because now the CapEx investments have also been approved by the IndianOil Board, we can expect another big order in this year also.

Right. But the bidding process is yet to be done for that?

Bidding process has been done. The bids have been submitted. They are under evaluation, they can open at any time now.

Okay, okay, okay. That was helpful. Another question I had was with respect to the order execution. So from the consolidated profit and loss statement, we could see that the execution has been INR 358 crores for this consultancy. And if we look at the order book, then if we add opening and the business secure less the closing, the figure comes to INR 383 crores. So what about the difference of INR 25 crores, if you could explain something more that?

Yes. Basically, this is a sort of adjustment. There are certain reduction and addition in the scope of work over a period of time. So these type of reduction and addition take place. The difference is only on account of the, basically, some reduction in the scope of work for the -- some contracts.

Okay. Right. So this is not happening first and this happens on a consistent basis.

This is a normal practice. Sometimes you find increase, sometimes you find decrease.

Right, right. Correct. And sir, with respect to the NRL, if you have some kind of update with respect to that?

You're talking about the order that we are going to secure?

No, no, no. The divestment of BPCL and NRL.

See, we'll be informing you at various times. As I said in our last meeting also, that lot many things are taking place simultaneously. As you know that our buyback offer is there, then due diligence process has to get completed, then whatever valuation is finally worked out based on all these factors and our equity, we'll be taking a considered view that whether we intend to go for taking equity stake in NRL or not, and if yes, to what extent. So as of now, it is too early to say anything on that. Once the total process gets completed, only then we'll be in a position to comment on that.

Okay. Okay. With respect to RFCL, sir, we could expect the revenues coming in from February and March this year? Or it would be taking on from next fiscal?

See, we are targeting to declare commercial operation date by February end or sometime in March. So a very marginal part will come in the current financial year. And otherwise, it will go to the next financial year.

The next question is from the line of Samarth Singh from TPF Capital.

My question was on RFCL. Do we have any plans for a separate listing of RFCL in the future?

Not now. Because I think that decision will be taken by RFCL Board, as per my understanding, after the major -- after the total debt is paid off or a major chunk of the debt has been paid off. So it will -- I think it will be taken in due course of time once the plant gets stabilized and it is into 1 or 2 years of operation, only then the Board will give some consideration to this.

Okay. Just given that gas prices are at historical lows and reduced subsidies due from the government and the combination of that with liquid equity markets, I think fertilizer companies are getting a great valuation today. So perhaps we should think of not waiting from the debt pay down and doing a listing and taking some money off the table today is -- this is just a suggestion, it does a couple of things that it will help us get a good valuation for our investment. It will help us take some money off the table, and it will also prove to the markets that Engineers India management is very capable at investing in ancillary businesses and creating value for shareholders.

See, your suggestion is appropriate for existing urea units, where the different policy governs them. As far as these new projects are concerned, they are governed by a separate new investment policy in which gas price is a pass-through. So it doesn't -- the price of gas doesn't impact the profitability of the company. In case the gas price is low, the concession price to be given by government also comes on the lower side. So a better proposition as far as we understand would be that once the plant gets stabilized. And also, I would like to share with you that since government borrows beyond 100% capacity utilization to meet the urea deficit in the country, in case that happens in future once all the revival projects and new projects are into commercial operation, then government may resort to buying on merit order basis. And RFCL's cost of production, variable cost would be among the lowest. So they will be in a better position to sell beyond 100% to the government. But those things will get stabilized only after 1 or 2 years of operation. And once all new plants are there, that should be the period when RFCL should venture into the market. And that decision in any case will be given due consideration by the RFCL Board at an appropriate time.

Okay. And could you just give me, on the balance sheet, the cash debt and the customer advances, please?

For EIL? Sorry, for EIL -- are you asking for EIL, for RFCL?

For EIL.

The cash is around INR 2,500 crores. And there is no debt on the company's balance sheet.

And the customer advances.

Customer advances are around 100 -- cash advances around INR 100 crores to INR 150 crores.

Okay, okay. And the last question from my side, I read somewhere that the government is coming up with new targets for PSUs where the rating is decided based on return on equity and the market value, et cetera. So has that happened? And does that apply to EIL as well?

No, those parameters have not yet been formed by the government. So the evolution and MOU rating is presently based on the existing parameters.

The next question is from the line of Viral Shah from Prabhudas Lilladher.

Sir, what has been the reason for our margins being lower part of the turnkey business? Because if you look at last 3, 4 quarters, we are in the range of around 1.9% to 1.4%, and we have been guiding around 3% to 4% kind of EBITDA margin. So what has led to that? Is this only the top line? Or there is something else as well?

You are talking about the turnkey segment?

Turnkey segment, sir.

Yes. Turnkey segment, you see, basically, right now, we are executing the jobs which are cost-plus jobs. So those jobs are basically negotiated at a fee on our plant and machinery. So whatever the expenditure is being incurred on that, we are getting a certain amount of percentage as a fee. Over a period of time during the last few years, the fees negotiated with the client are in the range of around 3% to 5% that we are basically giving to you also. So taking into consideration that our basically margins are in the range of around 3%. Just you see the December '19 quarter, our margin was 3%. At that time, we were executing certain LSTK jobs also. So we had written certain provisions due to the completion of that particular job. Right now, we are majorly executing 2 jobs. One is our Rajasthan refinery project and another is the HPCL VRMP project. So these are cost-plus project and the margins are being, basically, we have got the job under a strict, you say, competitive prices. So we are also providing certain provisions for these jobs, including the guarantee and warranty liability. So as and when those projects will be completed, we might get released certain provisions. And as such, margins may increase in that particular quarter or year. Going forward, taking into consideration our present project order book, we are expecting the margin to vary between around 3% maximum and minimum will be 2%, something like that.

Fair enough, sir. Sir, is the understanding correct that you would have bidded for around 3% to 5% kind of margin, but you have made a provisioning of roughly 1%. So once the provisioning got released and at that quarter or that financial year, per se, the margins will be substantially higher? Is the understand correct?

Yes, you are very right. In case no liability comes, definitely, there will be written back with the provision and the margin to the extent will increase during that particular quarter or year.

See, for any turnkey project, the clear position emerges only when the contract gets closed. So during execution, in terms of accounting standards, we keep some provisions. And once the contract is finally settled and closed, then the clear position will emerge.

No, no, I agree to it, sir. So okay, got it, got it, sir. And sir, that is also the main reason because your contribution of turnkey business has been substantial during the quarter. And that is the main reason why your EBITDA margin on console level would have come down, right? Is that understand correct? Or there is some...

Yes. Yes, your understanding is correct. Yes, definitely.

Yes. Correct. Sir, what is the status -- second question is what is the status of our bid, which you were supposed to bid for HPCL with IOC on HPCL refinery? Any update on that?

Could you repeat your question, sir? We could not hear that.

Sir, we were supposed to put a bid with IndianOil -- IOC, right, for bidding for the BPCL refinery. Any update on that strategic bid, which we are supposed to put on?

We have bid for the Cauvery Basin Refinery of IndianOil. It is CPCL refinery, which is IndianOil group company. The bids have already been submitted about 2, 3 months ago. And meanwhile, CPCL was going for internal approval for the CapEx. Finally, the IndianOil Board has announced the CapEx investment for Cauvery Basin, and now we feel the bids would be opened soon.

And do you know how many participants would be there for the bid, 2, 3 or...

There are 2, 3 or -- 3 bidders at least in the bids that CPCL have floated.

Fair enough, sir. Fair enough, sir. Sir, apart from the pipeline, which you would have announced, how is the projects, which are looking globally? Could you touch upon the export market and the opportunities, which might come up there as well? That would be helpful.

Export markets will still be sluggish because they are crude exporting nations. They are dependent upon crude inventories for more revenues. So with the fall in crude prices, they have cut down a lot of their CapEx plans. They are looking at revamp and quality upgrade projects, energy efficiency improvement projects, value maximization projects, which are of small size. So we are not looking at large projects from their side. We might be looking at small annual contracts coming up from Middle East.

The next question is from the line of Saket Kapoor from Kapoor Company.

[Foreign Language] Sir, on this Barmer refinery partner, there are expansion expected there also. So what is the update on that? What scope of work are we -- have we eyed or are we eyeing in this refinery?

See, we are already executing the Barmer refinery. This is an integrated refinery with a petrochemical complex. We are both -- the consultants for this refinery, plus one of the projects has been given on a cost-plus basis, which is a turnkey segment. So currently, that project is under execution as of now, and we are the main consultants for the same. Some more small value assignments could come in from their expansion of marketing terminal and some value additions in the existing refineries, they feel like. But yes, the larger CapEx is already committed and we are executing that.

Where are we in the stage of completion? How much has been spent on the project? And when it will be nearing completion?

See, the OBE contract or the cost-plus contract is about 30% complete. And the consultancy contract for the main refinery and petrochemical complex is around 20% complete. Neither a lot of EPC packages have been already awarded. And some more packages are yet to be awarded in the refinery complex. So sooner or later, you will see the execution of main EPC phase in the refinery.

And the total cost of the project, sir, that we are handling? The scope of work, which we are...

Cost that we are handling is around INR 45,000 crores to INR 48,000 crores, but it is expected to increase further because CapEx is being re-estimated as and when the EPC contracts get awarded, the CapEx numbers keep on changing.

Okay. And on the 30% and 20% is what has been executed. So there's a lot of revenue that is going to come from the -- as and when the project...

Basically, we are executing 2 jobs. One is as a PMC that is around INR 1,182 crores and another is basically OBE job, where the contract's price is around INR 3,700 crores. So these 2 jobs, basically, we are executing.

This is the CapEx, which I was sharing with you, around INR 45,000 crores to INR 48,000 crores.

Yes. Yes. Regarding sir, this buyback part of the story, sir, which is continuing right now. Sir, what is the Government of India shares are in this? They must have -- you must have consulted them, sir. Out of the total, I think so 686 you precisely mentioned, what would be the tendering ratio from acceptance from the government side, how much?

Government of India currently is holding 51.49% in EIL. While participating in the tender, they participate -- given their concern, they have given a condition that they will retain 51% holding in EIL.

Okay, post the issue, it will be 51% for them?

Yes.

So sir, that is what I'm -- what is the calculation you have done, sir? How much is the tendering that is going to come from there?

It will depend on the participation by other shareholders until the closing date. So I think government will be tendering during that time only after seeing what is the percentage or number of shares tendered by other shareholders. Government is clear that they don't want to go below 51%.

They don't want to go below 51%. And, sir, looking at now the -- our this -- RFCL project also coming on stream and the cash we are generating and the cash, which we have on the balance sheet...

Mr. Kapoor, sir, this is the operator. There's a disturbance coming from your line from the background. I would request you to mute your line once the management answers your question.

Absolutely, ma'am. Let me complete now, ma'am. Sir, I was talking about the cash flows, which are generated for this quarter. Sir, can you give the idea, sir? What has been the cash flow for this quarter, sir?

Yes. Basically, cash flow, whatever the profit is there, that is basically more or less the cash flow generated during the current quarter, plus we have made the payment of the dividend also during the -- in the October -- in the month of October. So considering that, our cash flow as of date is around -- we are having a cash and bank balance of around INR 2,500 crores.