ISGEC Heavy Engineering - On a strong footing despite headwinds - ICICI Securities

ISGEC Heavy Engineering is currently at an inflection point in terms of transition towards higher proportion of turnkey contracts and execution of projects in diversified segments like emission control, factory construction, coal handling etc, which are relatively new segments for the company. The working capital intensity is likely to increase in the near term due to change in mix towards EPC and FGD; however, we believe, the company has strong balance sheet to manage the same. Delay in the sale of the Philippines factory and high remuneration by promoters (~11% of PBT) are certain risks keeping the valuation at lower levels. Given the healthy growth and order intake outlook, we maintain our BUY rating with a revised SoTP-based target price of Rs350 vs Rs330, previously.

- Healthy orderbook and pipeline: Despite the challenging environment, ISGEC was able to book Rs5bn worth of orders in Q1FY21 and is L1 in another Rs8bn worth of orders. The company is confident of traction in government-related ordering and orders related to FGD, civil infra and refinery in FY21. Around 47% of the current orderbook is from the government and the company is exploring opportunities in defence, buildings and factories including small airports, etc. The current orderbook at Rs59bn (1.3x TTM sales) lends growth visibility.

- Diversification and cost rationalisation have reduced dependence on sugar: The company has gradually reduced its dependence on the sugar cycle with diversification towards new segments. Material handling, buildings and factories, emission control etc. are some of the new segments identified to gradually reduce the dependence on sugar sector. Hence, despite a weak cycle of sugar industry, the company is able to witness strong order intake and healthy revenue growth.

- Strong ordering pipeline led by government capex: The company is confident of traction in government-related ordering and orders related to FGD, civil infra and refinery in FY21. Around 47% of the current orderbook is from the government and they are exploring opportunities in defence, buildings and factories including small airports etc. On FGD front, ISGEC will participate in NTPC Lot 6 FGD tenders; company is witnessing enquiries from Uttar Pradesh, Tamil Nadu and Haryana for the same.

- Sale of Philippines plant delayed due to Covid-19 outbreak: ISGEC will have to spend on retaining the current manpower and ensuring security of the facility. Hence, consolidated margins are likely to get impacted by Rs100mn-120mn per annum. The entity has a debt of US$35mn and pending construction work worth ~US$15mn.

- Maintain BUY: Given the healthy order intake and growth outlook, we marginally increase FY22E standalone target P/E multiple to 13x from 12x. We value ISGEC Hitachi Zosen at Rs19 (25x FY22E earnings) and Saraswati Sugar Mills at Rs15 (5x FY22E earnings). We maintain our BUY rating on the stock with a revised SoTP- based target price of Rs350 vs Rs330, previously.

Shares of ISGEC Heavy Engineering Ltd was last trading in BSE at Rs.266.25 as compared to the previous close of Rs. 273.15. The total number of shares traded during the day was 39478 in over 585 trades.

The stock hit an intraday high of Rs. 274.8 and intraday low of 264. The net turnover during the day was Rs. 10628516.

Source : Equity Bulls

Keywords