ISGEC Heavy Engineering - Healthy margins support earnings growth - ICICI Securities

ISGEC Heavy Engineering (ISGEC) has reported better-than-expected margins, product segment margins improved 230bps YoY to 10.1% and EPC margins grew 130bps YoY to 5.5%, supporting standalone earnings growth of 14% YoY at Rs553mn. While sugar segment revenues showed marginal dip at 3% YoY, margin expansion of 1560bps at 24.3% YoY lead to 4% YoY growth in consolidated PAT. Despite headwinds, ISGEC had consolidated orderbook of Rs68.63bn, of this, projects/products mix is 78%/22% with exports constituting 16% of orderbook at Rs10.8bn. Standalone orderbook is Rs61.9bn (1.4x TTM sales) providing growth visibility. Given better-than-expected earnings and improved execution expectations, we raise FY21E and FY22E earnings estimate by 3% and 14.6%, respectively. We factor-in 23.5% standalone earnings growth over FY20-FY23E and maintain BUY on the stock with a revised SoTP-based target price of Rs577 (earlier: Rs366).

- Healthy orderbook and pipeline led by government capex: Despite the challenging environment, ISGEC was able to book ~Rs13.6bn worth of orders in Q3FY21. It is confident of traction in government-related ordering and orders related to FGD, civil infra and refinery in FY22. Around 44% of the current orderbook is from government and the company is exploring opportunities in defence, buildings and factories including small airports, etc. On FGD front, ISGEC will participate in NTPC Lot 6 FGD tenders and expects to execute Rs4.5bn of Rs8.5bn pending FGD orderbook. The current orderbook at Rs62bn (1.4x TTM sales) lends growth visibility.

- Improvement in margins lifts earnings: Standalone revenues declined 11% YoY due to 5% YoY fall in EPC division to Rs9.7bn and 27% YoY decline in manufacturing to Rs2.7bn. Product margins grew 230bps YoY to 10.1% and EPC margins improved 130bps YoY to 5.5% resulting in standalone EBIDTA margin expansion of 170bps YoY to 7.8%. This supported PBT growth of 16.8% YoY to Rs747mn.

- Strong sugar segment performance continues: Sugar segment continued with its impressive performance as its EBIT zoomed 170% YoY to Rs379mn. Although Hitachi Zosen and Eagle press booked lower execution at Rs270mn and Rs350mn revenues, respectively, consolidated PBT grew 5.6% YoY at Rs966mn. Consolidated APAT in Q3FY21 grew 4% YoY to Rs649mn.

- Sale of Philippines plant delayed due to covid: ISGEC will have to spend on retaining its current manpower in the Philippines and ensuring facility security there. Hence, consolidated margins may 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 dues worth ~US$38mn.

- Maintain BUY: Despite the challenging environment and higher mix of EPC work, the company witnessed positive operating cashflow. We believe the company will be able to come out of the Philippines asset with no major impact and this continues to be an overhang on the valuation. We have introduced FY23 estimates and value the stock on Sep'22E earnings with a standalone target P/E multiple of 15x (increased from 13x earlier given the impetus for infra capex by government). We value ISGEC Hitachi Zosen at Rs21 (25x Sep'22E earnings) and Saraswati Sugar Mills at Rs25 (5x Sep'22E earnings). We maintain our BUY rating on the stock with a revised SoTP-based target price of Rs577 (earlier: Rs366).

Shares of ISGEC Heavy Engineering Ltd was last trading in BSE at Rs.432 as compared to the previous close of Rs. 437.9. The total number of shares traded during the day was 46481 in over 1228 trades.

The stock hit an intraday high of Rs. 450 and intraday low of 430. The net turnover during the day was Rs. 20437927.

Source : Equity Bulls

Keywords