Started in 1965 as a joint venture between GOI (Govt of India) and Bechtel, Engineers India Ltd (EIL) is India`s best engineering consulting services company. Part owned by GOI (70% stake), EIL is active in Refineries, Petrochemical complexes, oil and gas pipelines, Power plants (thermal, nuclear, solar) etc. Its latest FPO (follow on public offer) was brought out at a price band of Rs 140-150 (current market price is Rs 240), was over-subscribed by more than 2 times and was done by GOI to sell a 10% stake in the company.

INDIA`S MOST TECHNICALLY ADVANCED ENGINEERING CONSULTANT

EIL has worked on setting up 19 of 22 crude oil refineries working in India, on 7 of the 8 mega petrochemical complexes, on 10,000 km of oil and gas pipelines and several oil well platforms. The company currently has 16 live and 13 pending patents, has been awarded the strategic crude oil buffer storage project by GOI (in underground rock caverns) and has recently been awarded the engineering consultancy contract for a 400,000 barrels/day refinery cum petrochemical plant in Nigeria for $ 139 mi, making this the single largest engineering consultancy contract awarded to EIL, till date.

http://www.thehindubusinessline.com/companies/eil-wins-contract-worth-139-m-in-nigeria/article5386231.ece

With the technical capability to work in Oil and Gas (onshore and offshore), Ports, Power Plants, Pipelines, Mining and Metallurgy, Urban Infrastructure etc, EIL is by far the most technically advanced Indian engineering services company. The company has a technically qualified workforce of 3400 people.

REVENUE STREAMS

The company`s 2 divisions include Engineering Consultancy and Engineering, Procurement and Construction (EPC). The past 3 years, from 2011-12 to 2013-14, have seen revenues at Rs 3700 Crs ($ 615 mi) , Rs 2500 Crs ($415 mi) and Rs 2100 Crs ($ 350 mi) respectively. While revenues from consulting services have remained stable at Rs 1200 Crs ($ 200 mi) during all 3 years, the EPC division has taken a hit, due to the overall stalling of industrial growth in India.

Other than these 2 divisions, the company has been consistently earning Rs 250-300 Crs ($ 40-50 mi) each year as interest income from its massive cash pile worth Rs 1800 Crs ($ 300 mi). The profit before tax (PBT) of the consulting division has averaged a mouthwatering 40% in the past 3 years while the EPC division reports a humble 10% PBT in the same period.

VALUATION

With a market cap of Rs 8100 Crs ($ 1.35 bi) , 3 year average Profit after tax (PAT) of Rs 580 Crs ($ 95 mi), cash of Rs 1800 Crs ($ 300 mi), marketable securities worth Rs 720 Crs ($ 120 mi) and zero debt status, the company`s enterprise value (EV) stands at Rs 5600 Crs ($ 940 mi, Market Cap minus Cash and Securities).

EV/3 year avg PAT works out to 9.65 x, a puny valuation for a company that has been hitting ROCE`s (Return on Capital Employed) of 54%, 49%, 40% and 28% for the past 4 years. While the downward trend in ROCE may alarm analysts, this trend, I believe, has been caused due to the general industrial downturn in India and is bound to pick up in the near future.

FREE CASH FLOW GENERATION

The company has been paying out healthy dividends in the range of Rs 6/share/year with cash outflows totaling nearly Rs 250 Crs/year, uninterrupted for quite sometime now. The consulting division is the company`s cash cow and only has employee expense to pay for. It is only in the last 2 years that the company has spent Rs 80 Crs/year for purchasing capital equipment (believe this will be for the EPC division). The company`s working capital requirement is meager with the only flag being the Accounts Receivables, which stand at Rs 300 Crs or worth 52 days of receivables outstanding.

GOVERNMENT HOLDING WAS THE ONLY CONCERN

With public sector companies sitting on truck loads of cash, there was a fear among investors that the previous central government may pay itself very high dividends to improve its worsening fiscal condition. With a new business friendly government in place, such actions are unlikely to happen. Also, the new government is looking to divest stake in public sector companies, which is a positive sign for investors looking to invest in them. In 2008-09, the government held a 90% stake in EIL compared to the current 70%. The trend seems to downwards and hence, investors can be assured that the cash pile will be used responsibly by the company.

Currently, FII`s (foreign institutional investors) hold 8.5% stake in EIL.

CONCLUSION

Navratna refers to an ornament with 9 (nav) gems (ratna). India`s best public sector companies are called Navratna, akin to the historical practice of referring to the kings poets and noblemen as navratna.

As this recommendation`s heading points out, EIL, at current valuations, is not just a Navratna, it is a Hidden Ratna.

Disclosure: My family own shares in EIL at Rs 240/share