Published on 27/07/2021 10:34:06 AM | Source: ICICI Securities

Buy ISGEC Heavy Engineering Ltd For Target Rs. 914 - ICICI Securities

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Healthy tailwinds to support growth traction

ISGEC Heavy Engineering (ISGEC) in its earnings call indicated overall demand improvement in most of its business segments. Its consolidated order intake in FY21 was Rs48bn with the current orderbook at Rs67bn (1.2x TTM sales). Company has bagged ~Rs16bn worth of orders in FY22YTD and the overall order booking outlook is strong. ISGEC will commence operations at the Philippines facility with a likely investment of ~US$25mn and will look out for its sale later. Given the challenges in travel, export order booking was impacted and this is likely to normalise with the easing out of restrictions. Maintain BUY with the target price unchanged at Rs914.


Diversified orderbook:

Consolidated order intake for FY21 stood at Rs48bn spread across all segments. In the current consolidated orderbook worth Rs67bn, 38% is from power (including FGD), 13% from sugar, 13% from Railways and 9% from refineries. Export mix has reduced to 16% given the travel restrictions. Order outlook continues to be healthy with recent booking of ~Rs16bn worth of orders in FY22-TD. We believe, FGD, refinery and distillery segments will witness healthy growth. Hitachi Zosen, the JV, has an order backlog of Rs4.3bn.


Adjusted working capital lower; consolidated debt due to subsidiaries:

The reported receivables of Rs23bn include Rs2.5bn form Philippines plant; adjusted for this, debtor days is at 178 days and net working capital is at 70 days vs the reported 92. Consolidated debt of Rs8.8bn, includes Rs1bn in Saraswati Sugar Mills towards distillery capex, Rs2.8bn for Philippines plant, Rs1.3bn for Hitachi Zosen, and Rs700mn for Canadian subsidiary Eagle Press. Standalone debt is at Rs1.7bn and working capital debt in the sugar subsidiary increased due to inventory and is expected to normalise going forward.


Philippines plant to be completed:.

ISGEC has decided to complete the pending work in 12 months with an overseas loan of ~US$25mn. Post commencement of operations, the company will seek opportunity to sell (the current environment is favourable to ethanol distillery segment). Company’s overall exposure in the Philippines entity currently stands at US$38mn and it is confident of coming out of this successfully with no loss.


Maintain BUY:

Despite the challenging environment and higher mix of EPC work, ISGEC witnessed positive operating cashflow in FY21. We believe it will be able to divest the Philippines asset with no major impact, but this continues to be an overhang for now. We value the stock at a standalone target P/E multiple of 20x, ISGEC Hitachi Zosen at Rs21 (25x FY23E earnings) and the sugar subsidiary at Rs27 (5x FY23E earnings). Maintain BUY with an unchanged SoTP-based target price of Rs914.


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