IGI Logo

Strong outperformance from product division

ISGEC Heavy Engineering (ISGEC) has reported a healthy improvement of 290bps YoY in standalone margin to 7.4% in Q4FY21. This was led by recovery in product segment margins to 14% while EPC margins increased 30bps YoY to 4.5% supporting 67% YoY EBIDTA growth to Rs974mn. Despite increase in receivables, net working capital was under control due to higher payables leading to Rs2.1bn cashflow from standalone operations and Rs3.1bn from consolidated. Company was able to reduce standalone debt by Rs17bn and is likely to turn net-cash FY22E onwards at the standalone level. Given the better than expected margins and cashflows, we raise FY21E and FY22E earnings estimates by 12.8% and 12.7% respectively. Maintain BUY with a revised SoTP-based target price of Rs914 (earlier: Rs577). We roll forward our estimates to FY23E and increase the standalone multiple to 20x from 15x earlier.

Improvement in margins lifts earnings:

Q4FY21 standalone revenues grew 1.5% YoY to Rs13.2bn led by 40%YoY growth in products at Rs3.9bn, while EPC declined 10% YoY to Rs9.8bn. Product margins improved to 14% and EPC margins grew 30bps YoY to 4.5% resulting in standalone EBIDTA margin expansion of 290bps YoY to 7.4%. Standalone ‘other income’ witnessed a sharp 9x YoY jump to Rs209mn, which we believe was led by increase in dividend from the sugar subsidiary, Saraswati Sugar Mills.

Strong sugar segment performance continues:

Sugar segment continued with its impressive performance registering 45% YoY growth to Rs2.2bn and EBIT of Rs126mn for Q4FY21. During FY21, the segment grew 42% YoY to Rs7.8bn with EBIT of Rs1bn. Company is planning to put up a distillery along with the sugar plant, which will enable overall improvement in efficiency and returns in a medium to long term perspective.

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 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 it will be able to come out of the Philippines asset with no major impact, but this continues to be an overhang on the valuation. We roll over our valuation of the stock to FY23E earnings with a standalone target P/E multiple of 20x (increased from 15x earlier given the government’s impetus for infra capex). We value ISGEC Hitachi Zosen at Rs21 (25x FY23E earnings) and the sugar subsidiary at Rs27 (5x FY23E earnings). Maintain BUY on the stock with a revised SoTP-based target price of Rs914 (earlier: Rs577).

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer