ISGEC Heavy Engineering - EPC margin outperformance supports earnings - ICICI Securities

ISGEC Heavy Engineering (ISGEC) reported better than expected execution, which we believe was partly due to the booking of certain delayed products that were under inventory during Q4FY20. Product segment execution was better than expectations, with a decline of 5% YoY to Rs2.3bn. Project segment margins improved 130bps YoY to 4.6% limiting standalone earnings decline to 11% YoY at Rs291mn. Sugar segment revenues showed strong 87% YoY growth with 360bps YoY higher margins leading to 50% YoY growth in consolidated PAT. Despite headwinds, ISGEC was able to book ~Rs8bn worth of orders in Q1FY21, resulting in standalone orderbook of Rs62bn (1.3x TTM sales) providing growth visibility. We factor-in 8% standalone earnings growth over FY20-FY22E and maintain BUY on the stock with an unchanged SoTP-based target price of Rs330.

- Healthy orderbook and pipeline: Despite the challenging environment, ISGEC was able to book Rs8bn worth of orders in Q1FY21 and is L1 in another Rs8bn worth orders. 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 Rs63bn (1.3x TTM sales) lends growth visibility.

- Improvement in EPC margins limits earnings decline: Standalone revenues declined 24% YoY due to 28% YoY fall in EPC division to Rs6bn and 5% YoY decline in manufacturing to Rs2.3bn. Although product margins shrunk 510bps YoY to 8.5%, EPC margins growth at 130bps YoY (to 4.6%) resulted in standalone EBIDTA margin expansion of 110bps YoY to 7.8%. This limited PBT fall to 24% YoY to Rs386mn despite 60% YoY decline in other income.

- Rebound in sugar segment continues: Sugar segment continued with its impressive performance as its EBIT zoomed 87% YoY to Rs218mn. This in addition to turnaround of other subsidiaries that booked loss in Q1FY20 led to 16% YoY growth in consolidated PBT to Rs574mn. APAT for Q1FY21 grew 50% YoY to Rs425mn.

- 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: Due to depressed earnings in FY21E because of lockdown, we value the stock on FY22E earnings with a standalone target P/E multiple of 12x. We value ISGEC Hitachi Zosen at Rs19 (25x FY22E earnings) and Saraswati Sugar Mills at Rs19 (5x FY22E earnings). We maintain our BUY rating on the stock with an unchanged SoTP-based target price of Rs330.

Shares of ISGEC Heavy Engineering Ltd was last trading in BSE at Rs.248.55 as compared to the previous close of Rs. 259.1. The total number of shares traded during the day was 203054 in over 2197 trades.

The stock hit an intraday high of Rs. 264.3 and intraday low of 245.3. The net turnover during the day was Rs. 51779474.

Source : Equity Bulls

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