ISGEC Heavy Engineering - Strong all-round performance - ICICI Securities

ISGEC Heavy Engineering (ISGEC) has ticked all the boxes in its Q2FY21 performance, major highlights being: i) strong manufacturing segment margins; ii) improvement in EPC margins; iii) recovery in the sugar business; and iv) positive cashflows from operations. Product segment margins improved 590bps YoY to 14.5% and EPC margins grew 170bps YoY to 5.3%, supporting standalone earnings growth of 31% YoY at Rs602mn. Sugar segment revenues showed strong 86% YoY growth with 850bps YoY margin expansion leading to 71% YoY growth in consolidated PAT. Despite headwinds, ISGEC was able to book ~Rs11.8bn worth of orders in Q2FY21 and has booked Rs10bn orders in Oct'20, resulting in standalone orderbook of Rs60bn (1.3x TTM sales) providing growth visibility. We factor-in 11% standalone earnings growth over FY20-FY22E and maintain BUY on the stock with a revised SoTP-based target price of Rs366 (earlier: Rs350).

- Healthy orderbook and pipeline: Despite the challenging environment, ISGEC was able to book Rs11.8bn worth of orders in Q2FY21 and has booked another Rs10bn in Oct'20. 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 government and the company is exploring opportunities in defence, buildings and factories including small airports, etc. The current orderbook at Rs60bn (1.3x TTM sales) lends growth visibility.

- Improvement in product margins lifts earnings: Standalone revenues declined 17% YoY due to 10% YoY fall in EPC division to Rs8.6bn and 29% YoY decline in manufacturing to Rs2.5bn. Product margins grew 590bps YoY to 14.5% and EPC margins improved 170bps YoY to 5.3% resulted in standalone EBIDTA margin expansion of 300bps YoY to 8.6%. This supported PBT growth of 35% YoY to Rs784mn, which was further enhanced by 43% YoY growth in other income.

- Rebound in sugar segment continues: Sugar segment continued with its impressive performance as its EBIT zoomed 380% YoY to Rs304mn. This in addition to turnaround of other subsidiaries led to 108% YoY growth in consolidated PBT to Rs1.1bn. APAT for Q2FY21 grew 71% YoY to Rs777mn.

- Strong ordering pipeline led by government capex: 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 ISGEC is exploring opportunities in defence, buildings and factories including small airports etc. On FGD front, the company will participate in NTPC Lot-6 FGD tenders; it is witnessing enquiries from Uttar Pradesh, Tamil Nadu and Haryana for the same.

- Sale of Philippines plant delayed due to Covid: ISGEC will have to spend on retaining its current manpower in the Philippines and ensuring security of the facility there. Hence, consolidated margins are expected to be hit by Rs100mn-120mn per annum. The entity has a debt of US$35mn and pending construction work worth ~US$15mn. ISGEC will have to either complete the pending work with an overseas loan, or find a buyer ready to fund the required capex and recover the dues of ~US$38mn.

- Maintain BUY: Despite the challenging environment and higher mix of EPC work, ISGEC witnessed positive operating cashflows. We believe, the company will be able to come out of the Philippines asset with no major impact though this continues to be an overhang on valuation. We value the stock on FY22E earnings with a standalone target P/E multiple of 13x. We value ISGEC Hitachi Zosen at Rs19 (25x FY22E earnings) and Saraswati Sugar Mills at Rs15 (5x FY22E earnings). Maintain BUY on the stock with a revised SoTP-based target price of Rs366 (earlier: Rs350).

Shares of ISGEC Heavy Engineering Ltd was last trading in BSE at Rs.271.8 as compared to the previous close of Rs. 262.6. The total number of shares traded during the day was 129765 in over 1423 trades.

The stock hit an intraday high of Rs. 276 and intraday low of 258.6. The net turnover during the day was Rs. 35017918.

Source : Equity Bulls

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