INSTITUTIONAL EQUITY RESEARCH Engineers ?· INSTITUTIONAL EQUITY RESEARCH ... As a result, the three…

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  • INSTITUTIONALEQUITYRESEARCH

    Page|1|PHILLIPCAPITALINDIARESEARCH

    EngineersIndia(ENGRIN)EarlybeneficiaryofanimpendingOMCrefiningupcycleINDIA|CAPITALGOODS|CompanyUpdate

    18January2016

    UpcycleinIndiasoilrefiningsectorWebelieveIndiasoilmarketingcompanies(OMCs)areinauniquepositiontoinvestinnewoil refineries because theirbusinessmodels aredelinked fromupstream (insulating theircash flows from the impact of a sharp decline in oil prices) and due to strong domesticdemandforfuel(+10%YoYinFY16YTD).Asaresult,thethreeOMCs(HPCL,BPCLandIOCL)shouldadd80mmtpaofrefiningcapacitiesoverthenexttenyears,implyinga35%increasein Indias current refining capacity. Given the execution leadtimes of 57/35 years forgreenfield/brownfieldrefineries,ordersforEPCconsultingpackagesshouldpickuppace inFY1718.Indialastsawsuchanupcycleinrefiningin2000.ImplementationoftighteremissionnormspresentsaneartermopportunityIndia has decided to adopt Bharat Stage (BS)6 emission norms for passenger andcommercialvehiclesby2020.Toadoptthesenorms,OMCswillhavetospend (capex)~Rs290bn.SincetheexecutionofaHydrogenTreatmentUnit(HTU)typicallytakes36months,ordersforconsultancyprojectsshouldbegininFY18.EILwillbeanearlycyclebeneficiary;wesee21%CAGRinorderinflowsoverFY1618Withitsconsultancybasedbusinessmodel,EILwillbeanearlybeneficiaryofapickupinoilrefiningcapex.Overthenextfiveyears,weexpectatotalopportunityofRs75bnbecauseofcapacityexpansionsbyOMCs,coupledwithinvestmentsinancillaryunitsandpetrochemicalfacilities.OurFY1618estimatesincorporate21%CAGRinEILsorderinflows,implyingthatonly 35% of the total Rs 75bn will be ordered in FY1718. An additional Rs 810bnopportunityshouldaccruetoEILbecauseofupgradationstoBS6norms,eventhoughtheseorderswillbebackendedinFY18.WeareconfidentthatEILwillhaveahigherstrikerateinordersduetoitsnearmonopolisticmarketshareamongstOMCs.Increasedvolumestodrivea520bpsmarginexpansion;14%CAGRinearningsDespiteamodestrevenueCAGRof9%overFY1618,EILsEBITDAmarginsshouldexpand520bps because of a strong 18% CAGR in its highmargin consultancy segment revenues(69% of total revenues). Increased capacity utilization should be the primary driver ofmargins;this,coupledwiththebenefitofapotentialwritebackofRs400mnforitsturnkeysegment,shouldleadto30%/14%EBITDA/PATCAGRs.PEreratingstronglylinkedtoorderinflowsEILsstockpriceisverysensitivetoorderinflows(seeninFY08,FY11,FY15;chartonpage8).Itslongtermaverage,excash,oneyearforwardPEis20x,whileitreratesto1+SD(32x)inyearsthathavehighorderinflows.ThestockcurrentlytradesatexcashPERsof30x/24xonourFY17/18estimates.UpgradetoBuywitharevisedtargetpriceofRs246While EILs stockpricehas risen 11% in the last threemonths,we see scope for furtherrerating because of increased visibility due to the imminent oilrefining order upcycle,leadingtoa21%CAGR inorder inflows inFY1618coupledwith520bpsmarginexpansion.WearriveatourrevisedtargetpriceofRs246(Rs185earlier)byascribinga30xPEtoourcore (excash)September2017earnings (averageFY17/18)andaddingacashvalueofRs71/share.Ourtargetmultipleisataslightdiscounttothestocks1+SD.NeartermriskspersistsIn thenear term,weexpectadowngrade in consensusestimates.OurFY17earningsare25%belowstreetestimatesmainlybecauseoflowerotherincome.

    Buy(Upgrade)CMPRS210TARGETRS246(+17%)COMPANYDATAO/SSHARES(MN): 337MARKETCAP(RSBN): 76MARKETCAP(USDBN): 1.1352WKHI/LO(RS): 252/157LIQUIDITY3M(USDMN): 4.1PARVALUE(RS): 5SHAREHOLDINGPATTERN,% Sep15 Jun15 Mar15PROMOTERS: 69.4 69.4 69.4FII/NRI: 7.0 7.9 9.0FI/MF: 13.1 12.5 11.0NONPRO: 1.2 1.3 1.3PUBLIC&OTHERS: 9.8 9.6 9.9PRICEPERFORMANCE,%

    1MTH 3MTH 1YRABS 8.7 10.9 0.4RELTOBSE 9.5 18.3 9.0PRICEVS.SENSEX

    Source:PhillipCapitalIndiaResearchKEYFINANCIALSRsmn FY16E FY17E FY18ENetSales 16,969 18,517 20,264EBIDTA 2,137 2,838 3,600NetProfit 2,888 3,247 3,728EPS,Rs 8.6 9.6 11.1PER,x 24.6 21.9 19.0EV/EBIDTA,x 21.7 16.6 13.1P/BV,x 2.7 2.5 2.3ROE,% 10.7 11.7 13.1

    Source:PhillipCapitalIndiaResearchEst. JonasBhutta(+912266679759)jbhutta@phillipcapital.inHrishikeshBhagat(+912266679986)hbhagat@phillipcapital.in

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  • Page|2|PHILLIPCAPITALINDIARESEARCH

    ENGINEERSINDIA COMPANYUPDATE

    FocuschartsandtablesOMC's2025capacityadditionplans

    Incrementalcapacityaddby

    2025(mmtpa) Capex(Rsbn)HPCL 21 586BPCL 23 640IOCL 36 845Total 80 2,071

    Source:PhillipCapitalResearch,Company,Mediaarticles

    ...andcapexbyoilrefineriestoupgradetoBSVIExpectedcapexbyOilrefineriestoupgradetoBSVIcompliantfuel RsbnIOC 120HPCL 40BPCL 50MRPL 45CPCL 10NRL 25Total 290

    ...willleadtoa21%CAGRinEILsFY1618orderinflows... and+520bpsEBITDAmarginsonhighercapacityutilisation

    Source:PhillipCapitalResearch,Company,MediaarticlesEILsPEhasexpandedwhenorderinflowswerehigh andstockreratestovaluationof1+SD

    Source:PhillipCapitalIndiaResearch,Bloomberg,Company,Mediaarticles

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  • Page|3|PHILLIPCAPITALINDIARESEARCH

    ENGINEERSINDIA COMPANYUPDATE

    IndiatoseerobustadditionsinnewoilrefiningcapacitiesIndianOMCsexpansionplansnotlinkedtodeclineinoilpricesDespite the sharp decline in oil prices in the past 18months, Indian OMCs willcontinue to invest in expansion of refining capacities based on robust domesticdemand for fuels and because their businessmodels are delinked from upstreamoperations.FY16YTDdomesticdemandforIndianpetroleumproductsisup10%mmt FY13 FY14 FY15 8MFY15 8MFY16LPG 15.6 16.3 18.0 11.6 12.5%Chyoy 2% 4% 10% 8%Kerosene 7.5 7.2 7.1 4.7 4.6%Chyoy 9% 4% 1% 4%Diesel 69.1 68.4 69.4 45.8 48.7%Chyoy 7% 1% 2% 6%Petrol 15.7 17.1 19.1 12.5 14.3%Chyoy 5% 9% 11% 15%Naphtha+NGL 12.3 11.3 11.1 7.1 8.7%Chyoy 10% 8% 2% 22%ATF 5.3 5.5 5.7 3.8 4.0%Chyoy 5% 4% 4% 7%LDO 0.4 0.4 0.4 0.2 0.3%Chyoy 4% 3% 5% 14%Lubes/Grease 3.2 3.3 3.3 2.2 2.1%Chyoy 21% 3% 0% 7%FO/LSHS 7.7 6.2 6.0 3.9 4.2%Chyoy 18% 19% 4% 7%Bitumen 4.7 5.0 5.1 3.0 3.3%Chyoy 1% 7% 1% 10%Petcoke 10.1 11.8 14.6 9.1 11.2%Chyoy 65% 16% 24% 23%Others 5.5 6.0 5.9 4.0 4.4%Chyoy 12% 8% 1% 10%Total 157 158 166 108 119%Chyoy 6% 1% 4% 10%

    Source:MoPNGThecapacityadditionplansofallOMCswillbebunchedupWe expect Indias three OMCs (HPCL, BPCL and IOCL) to add 80mmtpa of newrefiningcapacityby2025 thiswill lead toa35%growth in thecountrys refiningcapacity over the next 10 years. Given execution lead times of 57/35 years forgreenfield/brownfieldexpansions,ordersfortheseprojectsshouldbegininFY1718.WeexpectOMCstosetup80mmtpaofrefiningcapacitiesby2025

    Source:PhillipCapitalIndiaResearch,Company

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  • Page|4|PHILLIPCAPITALINDIARESEARCH

    ENGINEERSINDIA COMPANYUPDATE

    Companywisecapacityadditionplans;totalopportunityofRs75bnforEIL

    Capacity(mmtpa) Opportunity CommissioningFrom To Capex(Rsbn) forEIL(Rsbn) By

    A)IOCLRefiningcapexGujarat 13.7 18.0 108 2.7 CY20Panipat 15.0 20.2 150 3.8 CY22Mathura 8.0 11.0 75 1.9 CY20Baruani 6.0 9.0 75 1.9 CY20Haldia 7.5 8.0 13 0.3 CY20Paradip 15.0 20.0 125 3.1 CY25WestCoastGreenfield 15.0 300 10.5 PlannedParadipPetcokeGasification 150 3.8 PlannedIOCLTotalrefiningcapex 65 101 995 27.9

    B)IOCLPetchemcapexPanipatCracker 0.9 1.2 CY20ParadipPPU 0.7 32 0.8 CY18Paradipethyleneglycol 0.4 38 1.0 CY22ParadipPX/PTA 90 2.3 CY22IOCLTotalPetchemcapex 160 4.0

    C)BPCLRefiningcapexKochiExpansion 9.5 15.5 165 CY20

    NumaligarhExpansion 3.0 9.0 180 9.0Envclearancepending

    BinaCreepingExpansion 6.0 7.8 35 0.9 CY18BinaPhaseII 7.8 15.0 200 10.0 FY22MumbaiExpansion 12.0 14.0 60 1.5BPCLTotalRefiningcapex 38 61 640 21.4

    D)BPCLPetchemcapexKochiPropyleneunit 46 1.2BPCLTotalPetchemcapex 46 1.2

    E)HPCLRefiningcapexVizagExpansion 8.3 15.0 150 7.5 FY21MumbaiExpansion 6.5 9.5 42 1.1 FY20

    BarmerGreenfieldRefinery 9.0 372 11.2PendingStateClearance

    BhatindaRefineryExpansion 9.0 11.3 22 0.5 FY23HPCLTotalRefiningcapex 24 45 586 20

    TOTAL(A+B+C+D+E) 127 207 2,426 75

    Source:PhillipCapitalIndiaResearch,CompanyInvestmentsontighteremissionnormswillalsodriveneartermOMCcapexTheGovernmentof India recentlydecided to adoptBS6 emissionnormsby2020(bypassingBS5). Itsearlier target foradoptionofBS6normswas2024.Since theaveragetimeforsettingupaHydrogenTreatmentUnit(HTU)isabout36months,weexpectordersforconsultancyandEPCtobeawardedinFY1718.EILssharecouldbe34%ofthetotalcapexofRs290bn.IndiawillskipBS5willgofromBS4toBS6emissionnormsby2020 g/kmStage Date CO HC HC+nox Nox PM PNPetrolBSIV 2010 0.5 0 0.3 0.25 0.025BSVI 2020 0.5 0 0.17 0.08 0.005 6X10^11DieselBSIV 2010 1 0.1 0 0.08 0BSVI 2020 1 0.1 0 0.06 0.005 6X10^11

    Source:PhillipCapitalIndiaResearch,Company

  • Page|5|PHILLIPCAPITALINDIARESEARCH

    ENGINEERSINDIA COMPANYUPDATE

    Oilrefinerieswillincuraca

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