ISGEC Heavy Engineering Limited Operationally strong Q4; sugar biz revival sweetens Viewpoint Powered by the Sharekhan 3R Research Philosophy Capital Goods Sharekhan code: ISGEC Result Update
3R MATRIX + = - Summary Right Sector (RS) ü Revenue/ EBITDA/ PAT stood at Rs. 1,618 crore/ Rs 122 crore/ Rs. 69 crore (+4%/ 86%/ 445%) respectively, this was led by a recovery in product segment’s margins to 14% while EPC margins Right Quality (RQ) ü rose 30 bps y-o-y to 4.5% supporting 86% y-o-y EBIDTA growth. Right Valuation (RV) ü Revival in sugar business continues as it reported an impressive 45% y-o-y growth to Rs.224 crore and EBIT of Rs. 12.6 crore for Q4FY21. ISGEC is planning to set up a distillery along with a + Positive = Neutral - Negative sugar plant, which will improve efficiencies and returns in the medium to long term. Operating cash flow was positive at Rs. 228 crore in FY21 versus Rs. 103 crore in FY20, besides, strong working capital management keeps liquidity position healthy. What has changed in 3R MATRIX We stay positive on ISGEC Heavy engineering (ISGEC) and expect an upside of 20-22%, Old New considering strong operational performance in Q4FY21 and a healthy order book, which provides growth visibility. RS ISGEC Heavy Engineering Limited (ISGEC) reported strong operational performance with better- RQ than-expected y-o-y growth in operating profit margins and PAT. Revenue/ EBITDA/ PAT stood at Rs. 1618 crore/ Rs 122 crore/ Rs 69 crore (+4%/ 86%/ 445%) respectively, this was led by recovery in RV product segment margins to 14% while EPC segment’s margins increased by 30 bps y-o-y to 4.5% supporting 86% y-o-y EBIDTA growth. Profitability improved during the quarter due to cost reduction initiatives taken by the management, which boosted productivity. In FY21, the company reported the highest-ever contribution from the domestic market at 82% and in terms of segmental revenue, Reco/View Change ISGEC saw manufacturing, EPS and sugar businesses contribute 27%, 60% and 13%, respectively. As of March 2021, the order book stood at Rs. 6,765 crore (1.25x FY21 consolidated revenue) with View: Positive 48% orders from PSU’s. The sugar segment continued its impressive performance, growing 45% y-o-y to Rs. 224 crore and an EBIT of Rs. 12.6 crore for Q4FY21. ISGEC is planning to put up a CMP: Rs. 769 distillery along with the sugar plant, which will improve efficiencies and returns in the medium to long term. The company is confident of traction in government-related orders and orders from FGD, Upside potential: 20-22% civil infrastructure and refinery segments in FY22. Around 48% of current order book is from the government and they are exploring opportunities in defence, buildings and factories including small Upgrade Maintain Downgrade á â airports, etc. ISGEC reported positive operating cash flow of Rs. 228 crore in FY21 and Rs. 103 crore in FY20 from negative cash flows in FY19. This indicates that the company’s core business activities Company details are thriving and provides an additional measure/indicator of the company’s profitability potential. Despite an increase in receivables, net working capital was under control due to higher payables Market cap: Rs. 5,654 cr leading to strong operating cash flows. We believe execution should gather pace in the near to 52-week high/low: Rs. 824/ 217 medium term. Public spending on infrastructure, emission norms, private sector capex and railway projects are major growth drivers. We stay positive on ISGEC and expect an upside of 20-22%. NSE volume: 2.45 lakh (No of shares) Key positives Strong operational performance with better-than-expected growth in operating profit margins and BSE code: 533033 PAT NSE code: ISGEC Sugar segment reported impressive performance registering 45% y-o-y growth Free float: Key negatives 2.8 cr (No of shares) The EPC segment reported decline by 9% and EBIT margins reported decline by 50 bps y-o-y. Our Call Shareholding (%) Valuation – Maintain Positive view and 20-22% upside potential: ISCEC is a well-established player with a leadership positioning in most of its business. The company had suffered in the past because Promoters 62.4 of rising working capital requirements, low order booking and hangover of delay in overseas asset FII 1.9 monetization. We expect the company’s strong order intake till date, positive order inflow outlook, improving execution and rising operating cash flows to aid in healthy earnings growth for the company. DII 7.0 The company is currently trading at a P/E of 17x FY23E EPS and 11x FY23E EBITDA which we believe does not fully capture the turnaround in business. Hence, we stay positive and expect an upside of Others 28.7 20-22%.
Price chart Key risk Decline in revenue due to lower order book execution, or a sizeable reduction in profit margins and 900 cash flow generation on sustained basis.
700 Further, higher-than-expected support to group entities or delay in liquidation of CBPI assets that may result in increased repayment obligations. 500 Valuation (Consolidated) Rs cr 300 Particulars FY20 FY21 FY22E FY23E 100 Revenue 5,882 5,426 6,159 6,899 20 21 20 21 - - - - OPM (%) 5.5% 8.4% 8.0% 8.3% Jun Jun Oct Feb Adjusted PAT 149.1 253.1 286.1 333.6 Price performance % y-o-y growth 2.5% 4.7% 4.6% 4.8% Adjusted EPS (Rs.) 20.3 34.4 38.9 45.4 (%) 1m 3m 6m 12m P/E (x) 12.6 14.5 19.8 16.9 Absolute 35.8 56.4 126.3 236.0 P/B (x) 1.00 1.82 2.45 2.14 Relative to EV/EBITDA (x) 8.1 9.7 13.0 11.2 1.0 4.9 9.6 48.2 Sensex RoNW (%) 7.9% 12.5% 12.4% 12.6% Sharekhan Research, Bloomberg RoCE (%) 7.9% 12.2% 12.0% 12.7% Source: Company; Sharekhan estimates
June 30, 2021 1 Powered by the Sharekhan 3R Research Philosophy Viewpoint
Strong operational performance in Q4FY21: ISGEC Heavy Engineering Limited (ISGEC) reported strong operational performance with better-than-expected y-o-y growth in operating profit margins and PAT. Revenue/ EBITDA/ PAT stood at Rs. 1618 crore/ Rs 122 crore/ Rs 69 crore (+4%/ 86%/ 445%) respectively, this was led by recovery in product segment margins to 14% while EPC segment’s margins increased by 30 bps y-o-y to 4.5% supporting 86% y-o-y EBIDTA growth. Profitability improved during the quarter due to cost reduction initiatives taken by the management, which boosted productivity. Sugar segment’s performance sweetens: The sugar segment continued with its impressive performance registering a 45% y-o-y growth to Rs. 220 crore and EBIT of Rs. 12.6 crore for Q4FY21. During FY21, the segment grew 42% y-o-y to Rs. 780 crore with EBIT of Rs. 1 crore. The company is planning to put up a distillery along with the sugar plant, which will improve efficiencies and returns in the medium to long term. Domestic capex revival & sell of overseas assets to aid growth: ISGEC is expected to benefit in terms of strong order booking as government envisages Rs. 111 lakh infrastructure investments over FY2020- FY2025. The gradual recovery seen in private capex is further expected to aid order intake and ease working capital requirements. The timely commencement and ramp-up of its operations in CPBI Philippines, would aid in sufficient cash generation for debt servicing and help in monetisation of assets and improvement in consolidated credit ratings and outlook. Key Conference call takeaways The EPC segment’s margins are expected to increase going ahead as the management has plans to implement cost measures in the segment. ISGEC will have to spend on retaining current manpower in the Philippines and ensuring security of the facility there. The entity has a debt of US$35mn and pending construction work worth ~ $15 million. Consolidated order book stood at Rs6765cr with exports constituted 18% of order book at Rs. 1218 crore. The management mentioned that the company has booked orders worth Rs. 1,500 crore in Q1FY22. The company has been selective in the distillery sector in terms of order booking and will continue to be so. The management has mentioned that business activity has increased largely on the government side post COVID-19 as compared to the private side. Impact from commodity price hike will be minor as per the management as 50% of orders are covered by commodity price escalation clause. Rest of the orders are covered by contingencies.
Results Rs cr Particulars 4Q FY21 4Q FY20 y-o-y 3Q FY21 QoQ Total Income 1617.7 1555.0 4% 1392.5 16% EBITDA 121.6 65.5 86% 100.6 21% Other Income 9.8 5.1 90% 31.0 -68% Interest 14.2 14.2 0% 9.3 52% Depreciation 21.6 27.9 -22% 25.8 -16% PBT 95.6 28.5 235% 96.5 -1% Tax 22.3 10.9 104% 30.2 -26% Reported PAT 68.5 12.6 445% 64.9 6% Adjusted PAT 68.5 12.6 445% 64.9 6% Adjusted EPS 9.3 1.7 445% 8.8 6% BPS BPS EBITDA Margin 8% 4% 330.5 7% 29.2 PAT Margin 4% 1% 342.7 5% -42.4 Tax Rate 28% 56% - 33% - Source: Company; Sharekhan Research
June 30, 2021 2 Powered by the Sharekhan 3R Research Philosophy Viewpoint
Outlook and Valuation n Sector View – Continued government focus on infrastructure spending to provide growth opportunities The engineering sector’s growth depends on the country’s infrastructure development, particularly on power, mining, oil & gas, refinery, steel, automotive, and consumer durables growth. Heavy Engineering Equipment and Machine Tools Industry contribute 12% to the manufacturing sector’s growth. India has a strong production base capable of manufacturing diverse range of machinery and equipment to serve industry segments ranging from defence, oil & gas, refinery, nuclear, chemical and petro chemicals, machine tools, to consumer durables, fertilizers, automobiles, textiles, steel, cement, paper, construction, mining, etc. It is estimated that India would need to spend $4.5 trillion on infrastructure by 2030 to make India a $5 trillion economy by FY2025 and to continue growing at an escalated trajectory until 2030. Rapid industrialisation combined with economic development is driving growth in the capital goods market. The Indian government’s ‘Make in India’ clause in tenders of Public Sector Undertakings (PSU) establishments stands to benefit the sector as it looks to promote local manufacturing, thus posing entry barriers to players with imported offerings. n Company Outlook – Domestic market expected to perform well ISGEC is an engineering, procurement and construction (EPC) company and a fabricator for equipment/machinery in the capital goods sector, aided by its long-term technical tieups/alliances with several recognised global heavy engineering companies as well as its in-house design and manufacturing capability. This apart, the ratings factor in the healthy order book of Rs. 6765 crore as on Mar 21 which lends revenue visibility over the medium term and the order book is well diversified across industry segments, customers and geographies; covering a wide range of product segments. The order booking is exposed to the cyclical nature of the end user industries and the profit margins are vulnerable to the competitive intensity in the domestic and international markets. With various cost optimisation measures undertaken in FY2021, the operating margins witnessed an increase from FY2020 levels. ISGEC’s exposure to price risks remains moderate as it enters into back-to-back arrangements with vendors for most of its material and the fact that many of its new orders have in-built price escalation for key inputs. However, the significant increase in the steel prices is likely to exert pressure on operating margins in the near term for orders which are fixed price in nature. The company has sufficient cushion in the non-fund based limits to address its fresh order requirements over the near to medium term. Further, the absence of cash margin requirements supports the company’s financial flexibility. n Valuation – Maintain Positive view and 20-22% upside potential ISCEC is a well-established player with a leadership positioning in most of its business. The company had suffered in the past on account of rising working capital requirements, low order booking and hangover of delay in overseas asset monetization. We expect the company’s strong order intake till date, positive order inflow outlook, improving execution and rising operating cash flows to aid in healthy earnings growth for the company. The company is currently trading at a P/E of 17x FY23E EPS and 11x FY23E EBITDA which we believe does not fully capture the turnaround in business. Hence, we stay positive and expect an upside of 20-22%.
One-year forward P/E (x) band 400 350 300 250 200 150 100 50 0 18 20 19 21 19 18 19 19 21 18 20 18 20 ------Jul Jul Jan Jun - Jun - Apr Apr Feb Feb Sep Dec Nov Nov
1 yr Fwd PE (x) Avg 1 yr Fwd PE (x) Peak Trough Source: Sharekhan Research
June 30, 2021 3 Powered by the Sharekhan 3R Research Philosophy Viewpoint
About company ISGEC Heavy Engineering Ltd., previously know as Saraswati Industrial Syndicate Ltd., produces and sells heavy engineering equipment, mechanical, and hydraulic presses and castings. The company also engages in the construction and erection of boilers, sugar plant and machinery, and related equipment, as well as produces and sells sugar. ISGEC also manufactures process plant equipment, including reactors, high pressure vessels, shell and tube exchangers, columns and towers, high pressure boiler drums, and boiler pressure parts; presses, such as mechanical and hydraulic straight sided presses, and mechanical gap frame presses; and boilers, comprising dump grate boilers, travelling grate boilers, atmospheric fluidized bed combustion boilers, circulating fluidized bed combustion boilers, oil / gas fired boilers, waste heat recovery boilers, deaerators, and related spare parts. The company was set up in 1933 and is based in Haryana.
Investment theme ISGEC Heavy Engineering Limited is a heavy engineering company. The company is engaged in the manufacture of process plant equipment, mechanical and hydraulic presses, alloy steel and ferrous castings, containers, contract manufacturing and execution of projects for setting up boilers, sugar plants, power plants and air pollution control equipment for customers in India and abroad. The company’s segments include Sugar and Engineering. The Sugar segment consists of manufacture and sale of sugar and its byproducts. The Engineering segment consists of production and sale of heavy engineering equipment, mechanical and hydraulic presses, castings and execution of projects for setting up of boilers, sugar plants, power plants and related equipment, and air pollution control equipment. The Company offers services in various sectors, including power, oil and gas, fertilizer, steel, cement, automobiles, defense, sugar and chemical.
Key Risks Decline in revenue due to lower order book execution, or sizeable reduction in profit margins and cash flow generation on sustained basis. Further, higher than expected support to group entities or delay in liquidation of CBPI assets that may result in increased repayment obligations.
Additional Data
Key management personnel Mr. Ranjit Puri Non-Executive Chairman & Promoter Mr. Aditya Puri Managing Director & Promoter Mrs. Nina Puri Whole-time Director & Promoter Mr. S.K. Khorana Executive Director & Company Secretary Mr. Kishore Chatnani Chief Financial Officer Mr. Sanjay Gulati Chief Executive Officer, ISGEC-Yamunanagar Source: Company Website
Top 10 shareholders Sr. No. Holder Name Holding (%) 1 Ranjit Puri 8.97% 2 Aditya Puri 6.21% 3 Nippon Life India asset management Ltd 2.66% 4 L&T Mutual Fund 2.55% 5 Parasram Holdings Pvt Ltd 2.46% 6 Ranjan Tandon 2.23% 7 Cold storage Pvt Ltd 2.04% 8 Goldman Sachs Group 1.88% 9 UTI asset management 0.93% 10 Sundaram Asset Management 0.70% Source: Bloomberg Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.
June 30, 2021 4 Understanding the Sharekhan 3R Matrix Right Sector Positive Strong industry fundamentals (favorable demand-supply scenario, consistent industry growth), increasing investments, higher entry barrier, and favorable government policies Neutral Stagnancy in the industry growth due to macro factors and lower incremental investments by Government/private companies Negative Unable to recover from low in the stable economic environment, adverse government policies affecting the business fundamentals and global challenges (currency headwinds and unfavorable policies implemented by global industrial institutions) and any significant increase in commodity prices affecting profitability. Right Quality Positive Sector leader, Strong management bandwidth, Strong financial track-record, Healthy Balance sheet/cash flows, differentiated product/service portfolio and Good corporate governance. Neutral Macro slowdown affecting near term growth profile, Untoward events such as natural calamities resulting in near term uncertainty, Company specific events such as factory shutdown, lack of positive triggers/events in near term, raw material price movement turning unfavourable Negative Weakening growth trend led by led by external/internal factors, reshuffling of key management personal, questionable corporate governance, high commodity prices/weak realisation environment resulting in margin pressure and detoriating balance sheet Right Valuation Positive Strong earnings growth expectation and improving return ratios but valuations are trading at discount to industry leaders/historical average multiples, Expansion in valuation multiple due to expected outperformance amongst its peers and Industry up-cycle with conducive business environment. Neutral Trading at par to historical valuations and having limited scope of expansion in valuation multiples. Negative Trading at premium valuations but earnings outlook are weak; Emergence of roadblocks such as corporate governance issue, adverse government policies and bleak global macro environment etc warranting for lower than historical valuation multiple. Source: Sharekhan Research Know more about our products and services
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