Engineers India Limited (EIL) FPO @ Rs. 145-150 – February 2014

by Shiv Kukreja on February 6, 2014

in IPO/NFO

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at skukreja@investitude.co.in

In a bid to meet its disinvestment and fiscal deficit targets, the Indian government has once again started milking the public sector enterprises (PSEs) falling under its centralised ownership. Last month, after the government failed to convince the trade unions of Coal India for the latter’s disinvestment, it made the company to declare a special dividend of Rs. 29 per share, which amounted to Rs. 16,486 crore for the 90% stake the government is holding. It is just one such case.

Now, the companies, which could have got sold at a valuation in the multiples of their current valuations, are actually getting divested at some very low price per share. One of these companies is Engineers India Limited (EIL). EIL is the same company which issued its shares at Rs. 290 a share in its July 2010 FPO and the issue got a huge response to get oversubscribed 13.14 times.

Now, even after three and a half years, its shares are getting sold at almost half of its earlier offer price. The company is again coming out with its follow-on public offer (FPO) and the issue for the same will open for subscription today onwards. The issue is scheduled to get closed for the institutional investors as well as the retail investors on February 10 i.e. Monday.

Price Band & Retail/Employee Discount - EIL has fixed Rs. 145-150 as the price band for its shares in the FPO and has decided to offer Rs. 6 as a discount to the retail investors and employees of the company. So, if the price gets fixed at Rs. 150 after the issue gets closed, the retail investors will get the shares at Rs. 144 per share.

Lot Size, Minimum & Maximum Investment - With a lot size of 100 shares each and the higher offer price of Rs. 144 per share (Rs. 150 per share less Rs. 6 discount), a retail investor would be required to commit a minimum investment of Rs. 14,400. Maximum investment for a retail investor would stand at Rs. 1,87,200 for applying 1,300 shares in the offer.

Shares on Offer - The issue size is relatively smaller and the government is going to sell about 3.37 crore shares in the offer, constituting 10% of the company’s existing paid up capital. The company is not going to get any money out of this share sale as the whole of this issue would be a disinvestment by the Government of India. After the FPO, the government’s holding in EIL will come down to 70.4% from the current 80.4%.

35% Issue Reserved for Retail Investors - There are three categories of investors – Qualified Institutional Bidders (QIBs), Non-Institutional Bidders (NIBs) and the retail investors. 50% of the issue is reserved for the QIBs, 15% for the NIBs and the remaining 35% for the retail investors. 5 lakh shares have been reserved for the employees of the company.

Financials of Engineers India Limited

Net Profit of the company for the six months ended September 30, 2013 stood at Rs. 221 crore with revenues at Rs. 1,038 crore. The same figures for the twelve months ended March 31, 2013 were Rs. 576 crore and Rs. 2,773 crore respectively. At the current price of Rs 149.05, the stock trades at 8.72 times its trailing twelve months earnings per share and 2.19 times its book value.

EIL is a cash-rich company and has zero debt. It paid Rs. 6 as dividend last year. At Rs. 149.05, it offers a dividend yield of approximately 4%. Its order book stands at Rs. 3,232 crore which is closer to 1.2 times its FY 2012-13 sales.

Is it a great opportunity for the investors to buy EIL’s shares at these valuations?

I would say No, as I think it is not a “not to be missed offer” and its market price has the potential to fall below the offer price in a very short period of time. Also, I think the government in the last few years has either created a deeply messy business environment for some of these companies/sectors or has failed to clear the obstacles in their growth.

At the same time, these companies have failed to deliver on the investors’ expectations so badly that the investors, who made huge investments a few years back in these companies, are regretting their decisions and are highly reluctant to do the same once again.

Should I subscribe to EIL FPO at Rs. 145-150?

Share price of Engineers India Limited on the NSE got closed at Rs. 149.05 on Wednesday and I think it is very much possible for the stock price to go down even below the offer price of Rs. 144 i.e. Rs. 150 less retail discount of Rs. 6 per share. So, why should I buy it in the FPO at Rs. 144 when I am getting it for a price less than Rs. 144 from the market itself? Probably one should not.

But, if your investment horizon is longer than just listing gains and if you have some hope that the business environment for EIL would improve in the coming months/years, I would say one should subscribe to it.

Again, prevailing is a bad time for the share market and this FPO has also been an overhang on the company’s price movement. Going forward, it would depend on the company’s financial performance and the government’s policy framework, how EIL share price performs and whether the investors remain stuck in losses or if they get rewarded for their patience.

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{ 31 comments… read them below or add one }

Biswajit February 6, 2014 at 7:39 am

Correction required for the statement: “The issue is scheduled to get closed for the institutional investors as well as the retail investors on December 10 i.e. Monday”

Reply

Shiv Kukreja February 6, 2014 at 9:52 am

I have corrected the date, thanks for pointing it out!

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Lalit Nambiar February 6, 2014 at 8:47 am

visisble error
The issue is scheduled to get closed for the institutional investors as well as the retail investors on December 10 i.e. Monday

I was’nt receiving post from last few days.

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Shiv Kukreja February 6, 2014 at 9:54 am

Thanks Lalit, I’ve corrected it now! Also, which posts you did not get?

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Mithlesh February 6, 2014 at 10:15 am

Hi Shiv,

I cannot agree with you more. Current govt seems to have sucked all the blood from the psus.Almost all of them are around 50% discount to their price three years ago.

I would say a must avoid ipo as the price is so close to cmp.

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Shiv Kukreja February 6, 2014 at 12:31 pm

Hi Mithlesh,

I am not sure whether I would call it a must avoid FPO, probably I’ll invest in it personally. But, one thing is for sure that the current government’s disinvestment policy is pathetic. This government is selling its Ratnas, Maharatnas, Navratnas etc. at a dirt cheap prices and the policies governing these companies are the worst. These companies are the assets of a nation and you just cannot play with them like this government is doing. Highly disappointing !!

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Mithlesh February 8, 2014 at 10:55 pm

I hope our govt reads your message and do something about the govt owned companies and help them grow.

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Shiv Kukreja February 10, 2014 at 1:47 pm

Its all politics and there is very little hope I have from the current government.

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ketki February 10, 2014 at 3:26 pm
ketki February 6, 2014 at 10:17 am

Thanks Shiv, for the timely advice and as always very detailed and useful analysis..

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Shiv Kukreja February 6, 2014 at 12:33 pm

You are welcome Ketki, thanks for your kind words !!

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Girish February 6, 2014 at 6:14 pm

What would be your advice for a long term investor with 3+ years horizon or even more, if company is doing good. I would be new investor in this scrip so looking at it freshly, discarding what happened to price in the last 3 years and focusing on current financials and future outlook. Looking at debt free status, decent margin, FCF and low valuation…I am leaning to the conclusion that the current price of Rs 144 (FPO or in the open market) may offer decent returns in the long run…counting the dividends of course.
Let me pl know your thoughts or counter opinion. Thank you.

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Shiv Kukreja February 6, 2014 at 7:13 pm

Hi Girish,
I think long-term fundamentals of the company are good, but we need good corporate governance for the company to deliver good shareholder returns. Even if the company has good fundamentals, why do you want to go for it in the FPO? Why not wait for the price to go below the issue price? I am not saying that it will go below the issue price for sure, but there is a good possibility about it.

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Shiv Kukreja February 6, 2014 at 11:56 pm

Day 1 (February 6) subscription figures:

Category I – zero subscription as against 1.66 crore shares reserved – 0 times subscribed
Category II – 8,500 shares as against 49.79 lakh shares reserved – 0.00 times subscribed
Category III – 6.76 lakh shares as against 1.16 crore shares reserved – 0.06 times subscribed
Category IV – Rs. 200 as against 5 lakh shares reserved – 0 times subscribed
Total Subscription – 6.84 lakh shares as against 3.37 crore shares on offer – 0.02 times subscribed

Very poor response on the first day.

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Sanjay Shah February 7, 2014 at 7:44 pm

Hi Manshu/Shiv,

Thank you for doing the EIL review. Can you please also do a review of Motilal Oswal’s MOSt Focused Midcap 30 Fund NFO which opened today and closed on Feb 17.

Thanks!

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Shiv Kukreja February 7, 2014 at 7:52 pm

Sure Sanjay, I’ll try to do its review sometime next week.

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Shiv Kukreja February 7, 2014 at 7:48 pm

Day 2 (February 7) subscription figures:

Category I – 3.76 crore shares as against 1.66 crore shares reserved – 2.26 times subscribed
Category II – 17,500 shares as against 49.79 lakh shares reserved – 0.00 times subscribed
Category III – 21.69 lakh shares as against 1.16 crore shares reserved – 0.19 times subscribed
Category IV – Rs. 300 shares as against 5 lakh shares reserved – 0 times subscribed
Total Subscription – 3.98 crore shares as against 3.37 crore shares on offer – 1.18 times subscribed

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Ronak February 10, 2014 at 5:58 pm

I really like that you’re posting the subscription figures. Will you continue updating them until the issue closes? Or is there an official website where I can get them myself? Thanks for the great posts.

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Shiv Kukreja February 10, 2014 at 6:22 pm

Thanks Ronak for your kind words!
I’ll keep updating the figures until the issue closes, but still if you want the link to these subscription figures, here you’ve it.
http://www.nseindia.com/products/content/equities/ipos/ipo_current_enginer.htm

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Ronak February 11, 2014 at 2:29 am

That’s perfect. Thanks Shiv.

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Shiv Kukreja February 11, 2014 at 11:08 am

You are welcome!

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Ramadas February 8, 2014 at 7:13 am

Hi Shiv

I understand that investing decision changes person to person and so is risk taking abilities. However , i have some different opinion than what you have qouted for EIL FPO

Stock had a huge overhang on what would be the price government would offer in FPO. That led to continious fall in stick price and that was the reason it was drifting down. Now that government announced floor price , i dont see any reason for stock to go down below Rs144/-. Valuations are at historic lows and dividend yield is at 4%. Economic conditions for capital good sector are at an all low and it can only improve from here. You dont have even pay brokerage for thsi purchase , so effectively your purchase price will be flat at Rs144/-

I agree corporate governance and government handling of PSU’s are a concern. Price offered is already discounting this factors ( PE close to 8). I expect retail to get oversubscribed on monday given that FII portion is over subscribed. I feel investing a small amount , say for 1 lot , makes sense as risk reward ratio is high.What do you think?

Regards
Ramadas

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Shiv Kukreja February 10, 2014 at 2:10 pm

Though the company’s fundamentals are favourable and valuations are very attractive, I think once these shares get listed, there will be enough supply for the stock price to go below Rs. 144. I think some good economic news can help its share price float above these levels. I think, on a safer side, there is no harm in applying 1 lot in the FPO though.

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Shiv Kukreja February 10, 2014 at 6:10 pm

The closing date of the issue has been extended to February 12 due to strike in public sector banks.

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Shiv Kukreja February 10, 2014 at 6:13 pm

Day 3 (February 10) subscription figures:

Category I – 3.87 crore shares as against 1.66 crore shares reserved – 2.33 times subscribed
Category II – 71,800 shares as against 49.79 lakh shares reserved – 0.01 times subscribed
Category III – 97.39 lakh shares as against 1.16 crore shares reserved – 0.84 times subscribed
Category IV – Rs. 18,100 shares as against 5 lakh shares reserved – 0.04 times subscribed
Total Subscription – 4.85 crore shares as against 3.37 crore shares on offer – 1.44 times subscribed

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Shiv Kukreja February 12, 2014 at 11:33 am

Day 4 (February 11) subscription figures:

Category I – 4.07 crore shares as against 1.66 crore shares reserved – 2.45 times subscribed
Category II – 1,96,500 shares as against 49.79 lakh shares reserved – 0.04 times subscribed
Category III – 1.33 crore shares as against 1.16 crore shares reserved – 1.15 times subscribed
Category IV – Rs. 21,900 shares as against 5 lakh shares reserved – 0.04 times subscribed
Total Subscription – 5.42 crore shares as against 3.37 crore shares on offer – 1.61 times subscribed

It is the last day of the FPO today.

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Vikram Gupta February 13, 2014 at 8:56 am

If unsubscribed quota of NII & employee reservation is added to retain category then retain category subscription figure will reduce to 1.81 times which increases the chance of getting more shares for those who have applied for full application.

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Shiv Kukreja February 13, 2014 at 1:38 pm

Final Day/Day 5 (February 12) subscription figures:

Category I – 6.53 crore shares as against 1.66 crore shares reserved – 3.93 times subscribed
Category II – 11.37 lakh shares as against 49.79 lakh shares reserved – 0.23 times subscribed
Category III – 2.88 crore shares as against 1.16 crore shares reserved – 2.48 times subscribed
Category IV – Rs. 1.11 lakh shares as against 5 lakh shares reserved – 0.22 times subscribed
Total Subscription – 9.54 crore shares as against 3.37 crore shares on offer – 2.83 times subscribed

Average response to the FPO. Not very encouraging. Stock is quoting at Rs. 155.55 right now.

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ketki February 17, 2014 at 4:50 pm

Hi Shiv,
Saw the following news..does it mean many more FPOs to come before May for PSUs ?

India plans over $9B in stake sales : India intends to raise 569.25B rupees ($9.17B) from the sales of holdings in state-run firms in 2014-2015. The plan is part of an interim budget that the government introduced today ahead of elections, which are due to take place by May.

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Shiv Kukreja February 18, 2014 at 2:40 pm

Hi Ketki,
It is for the whole of financial year 2014-15 and not just till May 2014. It is customary for the governments to make such announcements to show lower fiscal deficits (or better economic picture on papers) and then do nothing to improve corporate functionalities of these PSUs. As a result of which, investors keep suffering losses for a very long time.

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Vikram Gupta February 25, 2014 at 9:55 am

Do not sell EIL FPO shares today as the shares have got credited under temporary ISIN number IN8510A01019 which will get converted to correct ISIN number INE510A01028 on listing/trading date. Please wait for announcement from Registrar.

Reply

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