ISGEC Heavy Engineering Limited (Market Cap 3100 Cr.; Cash on books Rs. 700 Cr; Sales FY 15 Consolidated Rs. 4001 Cr; PAT Rs. 118 Cr; Standalone Rs. 3320 Cr; PAT Rs. 143 Cr; Equity Rs. 7.35 Cr)
Hallmark of good quality company and management possess the character to fight out headwinds faced by business and market for a very long period of time — If we believe in the argument, this company has done quite well during the period of extreme unfavorable business and market conditions.
The company is an old name in engineering with reputation for quality, timely execution and customer support. The name of the company changed from Saraswati Industrial Syndicate to ISGEC Heavy Engineering in 2011. It is primarily engaged in manufacture of Pressure Vessels and Heat Exchangers; Mechanical and Hydraulic Presses; Turnkey supply of Sugar Mill machinery; Ferrous & Alloy castings and Boilers for burning Biomass, Coal, Oil, Gas and other types of fuels.
Company has plant in Yamunanagar (Haryana); Dahej and Bawal in Gujarat and Muzaffarnagar in UP.
It has technology agreement or strategic partnership with some of the leading engineering firms… ABB Lummus; Amec Foster Wheeler; Hitachi Zosen Corp.; Belleli, Italy; Bosch Projects, South Africa; Envirotherm, Germany; Neuson Hydrotec, Austria and NEM, Netherlands.
It has a strong experience of manufacturing boilers and presently have capacity to produce up to 1000 TPH quality boilers. It has already delivered more than 500 boilers across industry till March 2015.
ISGEC Hitachi Zosen specializes in supplying critical and process equipment for refinery, fertilizer and petrochemical industries across the world. JV capacity is presently expanded to 13000 TPA. Hitachi Zosen is gradually reducing its manufacturing in Japan and gradually manufacturing volume is shifting to ISGEC facilities. The business prospect of the business in Middle East got a beating due to fall in commodity prices. As per market scuttlebutt, presently the capacity is properly balanced. Last year this JV had might have incurred large liquidated damage for delay in delivery due to capacity constrains which has since been rectified but the market got a temporary breather due to cooling of oil prices.
Amec Foster Wheeler JV will focus on providing design & engineering services for pulverised coal (PC) fired boilers up to 1000 mw for global requirement while the manufacturing of equipment would be done by ISGEC standalone operations. The order value here may be large and enquiries are encouraging. Under the agreement Company can procure business from overseas market where Foster Wheeler doesn’t have any collaboration. It can procure spot license and supply equipment.
ISGEC Titan Metal fabrication JV will focus on manufacturing small pressure vessels using specialised materials like Titanium (anti corrosive) which is quite high value materials costing > Rs.5000/kg. Margin from the business is expected to be good.
Sugar manufacturing subsidiary expected to reduce losses with the upturn in sugar cycle. They have a plant for crushing capacity of 13000 TPA. Last year the subsidiary incurred a loss of Rs. 45 Cr. How Haryana Government fixes the sugar price and how the subsidy is handled is a key thing to watch out. It would definitely have better consolidated PAT this year due to sugar.
On the standalone business there may be serious contraction in African business due to political turmoil in different countries but Indian business is expected to do well. Company is expanding its foot print in South Asian market to offset the Arfican slowdown. We need to keep a track on margin front though as in face of extreme global competition, some cost related benefit has to be passed on to customers. Present order book is estimated to be around Rs. 4000 Cr. with healthy enquiry pipeline.
In standalone books, the company is seeing steady inflow of orders from sugar industry in domestic market for some new projects in places like Karnataka and also witnessing high demand for boilers to burn distillery effluent (to meet pollution norms) and generate power. In this segment Thermax and KCP are their close competitors with similar might. But the market is set to expand in the coming days for environmental issues.
The Iron Foundry unit recently completed an expansion from 3000 MTA to 4800 MTA. It would augment their manufacturing of quality ductile iron casting.
Company’s Tubing and Piping Division continued to do well & for the first time, fabricated a 20 meter long panel. This will improve productivity and reduce site work.
In collaboration with Electrotherm 6 electro static precipitator (ESP) were supplied by ISGEC this year and it is believed it has a large order book for ESP for different fossil fuels.
The working capital management of ISGEC is excellent. It at least have 10% to 20% advance from customers and have wonderful traction of its creditors. And the trend sustained during the lean patch of the industry which shows some strength of its capabilities.
From a Rs. 300 Cr. revenue company in 2001, it reached a revenue of Rs. 4000 Cr in 2015 without any significant turmoil in 2008. Also, even though the margin contracted significantly during the period but in none of the years it posted loss and barring one year never had a negative cash flow from operations. The share of revenue from exports increased from 20% of revenue to 45% of revenue during this lull period. To me these are some important pointers to the quality of the business and management.
The total demand projections of its different lines of business and its timeline for fructification is a hazardous guess but possibly it can only be surmised that it’s promising.
Financials of the company can be reviewed from any screener and AR for last few years.
The equity base of the company is small and the share is relatively illiquid. And it is not clear why the company hold so much cash in balance sheet. The profitability and financial ratios are in the modest range but with a clean balance sheet, quality products, world class technology and able management ISGEC may reap good benefit from economic upturn in a year or two.
Disc.: Invested more than two years back. recent addition of a few shares more than 30 days back. The post is for discussion and further analysis by fellow boarders only.