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ISGEC Heavy Engineering

About the Company

ISGEC Heavy Engineering Ltd is a diversified heavy engineering company engaged in manufacturing and project business with an extensive global presence. It manufactures process plant equipment, presses, Iron & Steel castings & Boiler pressure parts.

 

Q4FY22 Updates

Financial Results & Highlights

Standalone Financials (in Crs)
  Q4FY22 Q4FY21 YoY % Q3FY22 QoQ % FY22 FY21 YoY%
Sales 1366 1342 1.8% 1118 22.2% 4470 4345 2.9%
PBT 47 93 -49.5% 49 -4.1% 147 284 -48.2%
PAT 35 74 -52.7% 37 -5.4% 113 218 -48.2%
Consolidated Financials (in Crs)
  Q4FY22 Q4FY21 YoY % Q3FY22 QoQ % FY22 FY21 YoY%
Sales 1597 1627 -1.8% 1402 13.9% 5512 5477 0.6%
PBT 48 95 -49.5% 78 -38.5% 158 356 -55.6%
PAT 39 68 -42.6% 52 -25.0% 115 253 -54.5%

 

Detailed Results:

  1. The company saw a very poor quarter with flat revenue growth while PAT de-grew by 50% YoY.
  2. Quarterly EBIDTA decreased by 18% YoY.
  3. Segment revenue for FY22 stood at –
  1. Manufacturing : 29%
  2. EPC : 59%
  3. Sugar : 12%
  1. Debt/Equity stood at 0.5 while interest coverage ratio stood at 3.4 times.
  2. Fixed asset turnover for FY22 stood at 6.3.
  3. Export: domestic stood at 10:90.
  4. Order book for FY22 stood at Rs.7,332 Cr.

 

Investor Conference Call Highlights: 

  1. The company’s EPC segment’s profitability was sharply lower due to a steep increase in material costs due to an increase in commodity prices, mainly steel, aluminium, nickel and copper, and time and cost overrunning EPC projects due to the impact of COVID-related disruptions coupled with a shortage of skilled manpower, a sharp increase in freight cost – both for purchase of materials and supply of goods to the customers along with higher employee costs.
  2. The management states that lower profitability on the EPC segment will continue for some time as the fixed price longer duration orders presently under institution were booked before the increase in commodity prices.
  3. The company’s profits in the Sugar segment are lower due to a a lower quantity of sugar sales i.e. 16.19 lakh quintals in FY22 versus 21.76 lakh quintals in FY 2021 due to lower exports.
  4. The Saraswati sugar mills plant is operating at full capacity.
  5. The construction of the the company’s Cavite biofuel plant in the the Philippines will be starting in June 2022 and it expects expectedto complete the plant by June 2023.
  6. The company’s largest operating sectors are Automobile & oil & gas segment.
  7. The company expects its Philippines plant to get operational within a year.
  8. The management expects topline growth of 5% in FY23.
  9. The company’s feedstock for ethanol production at Saraswati Sugar Mills is B-heavy.
  10. The company’s PSU order book is about 39% of its total order book & the management expects this to decrease to 25-30% in the coming period.
  11. The Order intake for the quarter on a consolidated basis was Rs.1,442 Cr.
  12. The company’s order booking from Hitachi for FY22 roughly doubled on a YoY basis to Rs.520 Cr.
  13. The exports for this quarter were nil due to high competition from coastal states & lack of geopolitical stability in its key exporting countries like Afghanistan & Sri Lanka.
  14. The management states that it is not entering into any long-term tie-up for one particular product in the defence sector because the investments are heavy, the gestation period is high, and the market is also uncertain.

 

Analyst’s View:

ISGEC is a large heavy engineering company that is involved in diverse and multiple industry sectors like power, refineries, and others. The company saw a big decline in performance in Q2 due to rising commodity costs and the unavailability of skilled manpower. It also saw a delay in the shipping of major orders which led to the postponement of revenue recognition of those orders. The management expects the margins for ISGEC to remain subdued if the RM inflation continues to rise. The Philippines project had also gotten delayed due to COVID in the country and the management expects the projects to be completed in the next 10-12 months. It remains to be seen how long the inflated commodity price scenario continues and whether the company will be able to bring back margins to normal levels soon. Nonetheless, given the company’s strong track record, strong tailwinds of the industry, and sustained demand from its customer segments ISGEC remains a pivotal heavy engineering stock to watch out for.

 

Q2FY22 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
Q2FY22 Q2FY21 YoY % Q1FY22 QoQ % H1FY22 H1FY21 YoY%
Sales 1173 1051 11.6% 814 44.1% 1968 1818 8.3%
PBT 31 78 -60.3% 19 63.2% 50 117 -57.3%
PAT 27 60 -55.0% 14 92.9% 41 89 -53.9%
Consolidated Financials (In Crs)
Q2FY22 Q2FY21 YoY % Q1FY22 QoQ % H1FY22 H1FY21 YoY%
Sales 1379 1352 2.0% 1134 21.6% 2513 2426 3.6%
PBT 14 107 -86.9% 18 -22.2% 32 164 -80.5%
PAT 10 78 -87.2% 14 -28.6% 24 120 -80.0%

 

Detailed Results:

  1. The company witnessed tepid revenue growth of 2% YoY in consolidated terms in Q2.
  2. The profits for the company were down for Q2 with a decline of 87% YoY in consolidated terms.
  3. The drop in profits was attributed to commodity price increases and time and cost
    overruns in projects.
  4. The company also states that delayed lifting of certain orders by customers as
    they could not arrange shipping led to loss of revenue and profit in the quarter.
  5. Total debt to equity was at 0.5 times while interest coverage ratio was at 2.4 times.
  6. Asset turnover ratio was at 3.3 times in H1 while inventory turnover was at 4.9 times.
  7. 60% of the order book is from the private sector while 40% is from govt & PSU projects.
  8. 88% of order book is from domestic orders while the rest 12% is from export orders.
  9. the order book breakup according to industry is:
    1. Power: 28%
    2. Sugar: 10%
    3. Railways: 8%
    4. Refineries: 20%
    5. Chemicals: 7%
    6. Metals: 14%
    7. Others: 13%
  10. The total order book is at Rs 7518 Cr.
  11. The company bagged 4 new orders in Q2 and the Saraswati Sugar distillery is complete and commercial production is expected to start from Nov 2021.

Investor Conference Call Highlights:

  1. Orders booked in Q2 were at Rs 849 Cr vs Rs 1396 Cr last year.
  2. The H1 orders booked were at Rs 3215 Cr vs Rs 1922 Cr last year.
  3. The Philippine project was owned by a private equity company that decided to cash out and close their fund and this project before completion raised all the issues regarding the project. The company has now decided not to participate in any private equity-owned projects after this experience.
  4. One of the things the company has implemented as a result of experiences in the EPC space is to do a quicker implementation of projects and do more engineering upfront so that ordering can be done very fast after the project is awarded. It also monitors the projects closely and stays clear on certain clauses that customer delays will cause delays and ISGEC needs to be compensated by the customer for any delays on their part.
  5. The company is now taking orders on the current high commodity prices only and the management doesn’t expect any such shocks to recur in the near future.
  6. The management states that the company got lesser orders in Q2 as it had already booked a lot of orders in Q1 and wanted to maintain enough executing capability.
  7. The company expects to start construction in the Philippines project by Dec and to complete it within the next 10-12 months.
  8. The Hitachi Zosen unit has seen a decline in performance due to delays in shipping out of orders for 3 major customers which prevented the company from booking those revenues in Q2.
  9. ISGEC Hitachi Zosen and Eagle have both also faced challenges due to the slowdown in the auto industry.
  10. The company’s market share in the sugar distillery space in India is around 15%.
  11. The company is now staying cautious by keeping higher contingency in its contracts for RM price increases.
  12. Margins are expected to remain subdued in Q3 as well according to the management.
  13. Auto sector orders are lagging but power, steel, cement, railways, and metals are all growing for the company.
  14. The company is indeed receiving re inquiries for air pollution control equipment, and it is expected to be finalized soon.
  15. The management expects Eagle to have some losses in FY22, but the rest of the JVs and subsidiaries should do fine.
  16. The management expects the order book to increase by Rs 1000 Cr at least by the end of FY22.
  17. The company is looking to bag new export orders from Q4 when travel restrictions go away.
  18. Close to 1/4th of the revenues in EPC are for boilers.
  19. In boiler orders, the company only manufactures pressure vessels which are 15% of the boiler value and the rest is outsourced.
  20. The working capital of ISGEC is stretched due to a large portion of govt orders.
  21. Yearly revenue from the ethanol plant is expected to be at Rs 200 Cr.

Analyst’s View:

ISGEC is a large heavy engineering company that is involved in diverse and multiple industry sectors like power, refineries, and others. The company saw a big decline in performance in Q2 due to rising commodity costs and the unavailability of skilled manpower. It also saw a delay in the shipping of major orders which led to the postponement of revenue recognition of those orders. The management expects the margins for ISGEC to remain subdued if the RM inflation continues to rise. The Philippines project had also gotten delayed due to COVID in the country and the management expects the projects to be completed in the next 10-12 months. It remains to be seen how long the inflated commodity price scenario continues and whether the company will be able to bring back margins to normal levels soon. Nonetheless, given the company’s strong track record, strong tailwinds of the industry, and sustained demand from its customer segments ISGEC remains a pivotal heavy engineering stock to watch out for.

 

 

 

 

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