Engineers India Ltd.

Type	Follow-on Public Offer (FPO), 100% Book-building	Shares on offer	Offer for sale of 33.69 m shares
Size	Rs 9.1 bn to Rs 9.7 bn	Face Value	Rs 5 per share
Offer Price	Rs 270 to Rs 290 per share	Promoters post issue holding	90.4% / 80.4%
Minimum subscription	20 shares	Promoters	President of India
Listing	BSE and NSE	Lead Managers	ICICI Securities Ltd., HSBC Securities, IDFC Capital, SBI Capital
Issue opens	July 27, 2010	Issue closes	July 30, 2010

	Qualified Institutional Bidders (QIBs)	Non-institutional Investors	Retail Investors
Percentage of issue size	50%	15%	35%
Minimum Bid/Application size	Such number of equity shares so that the bid amount exceeds Rs 100,000	Such number of equity shares so that the bid amount exceeds Rs 100,000	20 shares
Maximum Bid/Application size	Not exceeding size of the offer	Not exceeding size of the offer	Such Number of equity shares so that the bid amount does not exceed Rs 100,000

The issue is by way of an offer for sale of equity shares by the Government of India (which is selling 10% of its stake in the company). Thus the proceeds from the offer will be remitted to the selling shareholder and Engineers India Limited (EIL) will not receive any of the proceeds.

EIL is an engineering consultancy company established by the government of India in the year 1965. It provides design, engineering, procurement, construction and project management services to companies in the oil and gas and petrochemicals industries. EIL also operate in some other sectors including non-ferrous mining and metallurgy and infrastructure. The company's services in these industries and sectors cover the entire spectrum of activities from concept to commissioning of a project. It also executes projects on a turnkey basis.

The company has provided a range of engineering consultancy and project implementation services on more than 49 refinery projects, including eight greenfield refinery projects, seven petrochemical complexes, 35 oil and gas processing projects, 205 offshore platforms projects, 37 pipeline projects, 11 ports and storage and terminals projects, eight fertilizer projects and 26 mining and metallurgy projects. In the infrastructure space, it has provided a range of engineering consultancy services for more than 26 projects, including for airports, highways, flyovers, bridges, water and sewer management. It has also completed 16 turnkey projects, including refinery and petrochemicals projects and offshore platforms. The company's two main business segments are the 'Consultancy and Engineering' segment, and the 'Lumpsum Turnkey Projects' segment. Other than domestically, the company has also provided engineering consultancy services on various international projects, particularly in the Middle East, North Africa and South East Asia.

EIL is a technology driven company and has developed or has the right to license advanced technologies. It licenses these to its customers in the oil and gas, and petrochemical industries. It has developed 30 process technologies either on its own or in collaboration with its clients and research institutions. Its portfolio includes various technologies for petroleum refining, oil and gas processing and aromatics. It currently hold ten patents and has 20 pending patent applications relating to various process technologies and hardware developed by it. As on 31st March, 2010, it had an order backlog of over Rs 62 bn.

Mr. Ashok Kumar Purwaha is the Chairman & Managing Director of EIL. He has been on the Board since October 1, 2009. He has a Bachelor's Degree in Electrical Engineering from the Delhi College of Engineering, Delhi University. Mr. Purwaha has more than 33 years of experience in the hydrocarbon sector. He has served with the ONGC and GAIL and has worked on various projects such as cross country pipelines for gas distribution, gas processing and petrochemical plants, operation and maintenance of gas pipeline systems. Further, he functioned as the Managing Director of Mahanagar Gas, Mumbai for five years and he is currently responsible for the general administration and management of the company.

Mr. Rajan Jain is the Executive Director (Projects) at EIL. He joined the company in 1974. He has a Bachelor's Degree in Mechanical Engineering from Ranchi University. Mr. Jain has over 35 years of experience in the field of procurement, project management and general administration. He has previously served in Shriram Chemical Industries in the area of procurement.

Engineering activity is integral to the country's infrastructure, industrial development and energy industry. This includes engineering construction services for pipelines, storage terminals and processing facilities. It also includes urban infrastructure, townships, highways, bridges, roads, railroads, ports, airports, and power systems. A significant part of the global engineering and construction activity is concentrated in the oil and gas industry, the power sector and the metals and mining sector. These in turn are dominated by a few industry majors.

As far as India is concerned, economic growth has led to the primary energy consumption growth at a CAGR of over 6.0% from 2004 to 2008. While overall primary energy consumption has increased, per capita consumption remains below that of more developed countries. Oil and gas are projected to account for approximately 14% and 20% of the energy supply mix in India for the period for the period of 2024 to 2025. Additionally, India's refining capacity is projected to increase from 184 MMT during the period 2011-2012 to 358 MMT during the period 2024-2025.

In response to government of India's (GoI) recent privatization initiatives, large oil and natural gas companies in India have commenced oil and natural gas exploration and transportation projects. Some also propose to establish dedicated distribution networks. Investment in oil and natural gas pipeline infrastructure in India is likely to be influenced by the GoI's decision to permit oil retailing by the private sector. Many companies have planned to set up pan-India pipelines. More so to take advantage of the significant increase in supply volumes of gas expected between fiscal 2010 and 2023.

• Vulnerability to cyclical nature and economic downturns: The demand for EIL's services and products is dependent upon the existence of projects with engineering, procurement, construction and management needs. If the global economy remains relatively weak or if client spending continues to decline, then the company's overall revenue and profitability could be harmed. Moreover, given the nature of the markets the company serves, the recovery in its business has traditionally lagged behind recoveries in the overall economy and therefore may not recover as quickly as other businesses.
  
  Commodity based segments tend to be more cyclical in nature, and the company's commodity based business lines such as the oil and gas business, can be affected by a decrease in worldwide demand for these projects. Industries such as these have historically been and will continue to be vulnerable to economic downturns. As a result, the company's past results have varied considerably and may continue to vary depending upon the demand for future projects in these industries especially during periods of economic uncertainty.
• Occasional significant dependence on few customers: In the company's lumpsum turnkey projects segment, total income from a single client frequently contributes a significant portion of segment income. This is due the fact that most turnkey projects are high value. Also revenues on these projects depend on the stage of completion they are in. In contrast, in the consultancy and engineering services segment, it is uncommon for a client to contribute 15% or more of total income any given fiscal year. Thus the loss of one or more of the company's major clients could have an adverse impact on its business performance.
• Competitive Conditions: In the hydrocarbon sector, EIL competes against US, European, Japanese, and Korean engineering and construction companies or their regional operating entities. In the mining and metallurgy sector and in the infrastructure sector, its competitors include various Indian engineering and construction companies. Some of these competitors have greater financial and other resources and better access to capital than the company does. Intense competition could be an inhibiting factor for the company as far growth rates and margins are concerned.
• Big business with government entities: A large part of the company's business transactions are with government entities. This may expose it to risks of delayed receipt of collectibles and pricing pressure. EIL's business is focused on projects in oil and gas exploration, development and production, and transportation projects undertaken by Indian and international energy conglomerates, many of which are directly or indirectly controlled by the government or its agencies. Thus such contracts with government agencies expose the company to various uncertainties, restrictions, and regulations.

• Well entrenched position in the industry: Since its inception in 1965, EIL has played an active role in the development of the hydrocarbon sector in India. It has developed indigenous technology and expertise for offshore platforms, oil and gas processing, oil refining, petrochemicals and pipeline projects. Due to these competencies, it has an extensive track record of working on key projects with various Indian and international energy majors. This holds true even for some of the other industries that the company has a presence in like mining and metallurgy. Marquee customers it has worked with in the past include ONGC, HPCL, IOC, BPCL, Essar, GAIL, Hindalco, NALCO, Sterlite etc. Its key position across the entire value chain in the hydrocarbon industry in India and long-term relationships with its clients will continue to hold it in good stead in the years to come.
• A long portfolio of successful projects: EIL has worked on over 49 refinery projects, with a combined refining capacity of 100 million tons per annum. These include 8 greenfield refinery projects, 22 expansion projects, 9 diesel projects, as well as several modernization projects for various energy majors in India. The company has been involved in the establishment of 7 mega petrochemical complexes in India. It has provided engineering consultancy services for more than 10,000 km of pipeline projects in India and internationally for oil, gas and multiproduct pipelines. The company has also worked extensively with ONGC by providing various engineering consultancy services for the development of offshore oil and gas projects in Mumbai High and other fields. It has provided engineering consultancy services on more than 150 well platforms, 30 process platforms, as well as 7 other structural platforms. Some time back, the company also expanded its operations into EPC projects in the hydrocarbon industry. It already has under its belt 16 successfully complete EPC turnkey projects.
• A conservatively financed company: EIL has an emphasis on having a strong balance sheet and robust financial position. Despite that, it has not stopped short of turning in quite a good performance on the growth front. It saw a growth in total revenues at an average annual rate of 47% from Rs 6.8 bn in FY07 to Rs 21.9 bn in FY10. The company's bottomline too increased at an average annual rate of 47% from Rs 1.4 during the same period.
  
  Further, at the end of FY10, EIL stood debt free. This provides investors in the company with stability in times of uncertainty and sudden volatility in the business environment. Working capital requirements in the company's business are also relatively on the lower side because of the contractually agreed progressive billing and payment schedules based on project milestones.

EIL is an asset light company which is also quite well entrenched in its business. Further, it has an exceptionally strong balance sheet, making it well positioned to face any adverse changes in the business cycle. The fact that the company does not have any listed peers with a similar business profile makes it difficult to draw comparisons in terms of valuations.

At the FPO price band of Rs 270-290 per share the issue is priced at 22x at the higher end and 20.5x at the lower end based on FY10 earnings. The stock is thus richly valued at this juncture and hence does not make for a particularly attractive investment proposition. Hence, we recommend you to "AVOID" investing in this FPO.

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Disclaimer:
We would like to inform our readers that this IPO note is just a one-time view on the company and in no way implies that there will be regular coverage on the company's performance or any other development. Should we decide to bring the company under research coverage in the future, it will be available exclusively to subscribers of the respective subscription.