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ISGEC HEAVY ENGINEERING --- Well Managed Diversified Player

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.

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Thanks for the excellent note !

Just a few concerns that I want to highlight:

  1. High debtors more than 6 months
  2. Foreign exchange fluctuation gain of 98 Cr (consol) in Fy15 - not sure how sustainable it is
  3. Sugar business in subsidiary which is cyclical and unpredictable
  4. Very little or no information shared on order book thus reducing the visibility on future prospects
  5. HIgh KMP remuneration of ~25 Cr
  6. Streched trade payables
  7. 300 Cr of sugar in finished goods inventory (on annual sugar sale of 300 Cr) - represents a considerable commodity price risk
  8. Lease rent receipts of 27 Cr driving standalone profit
  9. While ~600 Cr of cash is great significant other income and profit on sale of investment is driving profitability

Overall while I like the business and the fact that they have grown significantly over last decade and generated cash I am not completely comfortable because of complete lack of communication on basic info such as order book, sugar business and few elements on BS highlighted above.

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@amehta

Thanks for taking the discussion forward… My pointwise responses are

  1. More than 6 months debtors of Rs. 200 Cr. against total of Rs. 900 Cr receivable is not very unusual in these types of long gestation project businesses. In the past company hardly encountered bad debt problem and it takes a good amount of advance from customers. Also it has robust cash flow from operations which are much higher than profits. Keeping these in view, I didn’t take receivable as a major area of concern.

  2. Yes. without FE fluctuation gain, the profit figure wouldn’t have been such inflated compared to previous year. In my review, I consider zero income from this foex matters going forward. If there, it’s a plus. Chance of Forex loss is minimal unless INR appreciates substantially.

  3. Sugar business is and will remain cyclical but for current year sugar has entered into a bullish phase as you can see from price of different sugar stocks and sugar analysis elsewhere.

  4. Company hardly ever comes to market to promote itself. However in the vendor and customer circle it is quite reputed. You need to do your due diligence to understand the order book.

  5. High KMP is related to Profit. And here I practically have no issue as these approaches generally (not always) dissuades promoters to siphon money from the company. Promoters reputation in market is quite high, as per my understanding.

  6. Stretched payable is a good sign unless it is for cash flow problem. From Balance sheet, it doesn’t appear to have any cash flow issue and I think, it only shows their bargaining power over suppliers. You will find very few company in Engineering Project sector, who works on a Negative Working Capital like ISGEC.

  7. Yes, commodity risk is there but sugar is not perishable or degradable commodity and entering a price upcycle.

  8. Lease Rent receipt is from Isgec Hitachi Zosen to Standalone ISGEC is for sub lease of equipment, plant and machinery and it is recurring in nature. Net Assets in the books of Hitachi Zosen is about Rs. 295 Cr. against sale of Rs. 333 Cr.

I didn’t discuss financials in my first post and focussed on overall business and management quality, in my way.

ISGEC standalone has a Gross Block of only Rs. 139 Cr. and Net Block or Rs. 83 crores. So, on standalone business, operating leverage is minimal but it can design, deliver and commission higher value projects over long period more due to its expertise and deep engagement with customers.

The Consolidated Gross Block and Net Block are Rs. 960 Cr. and Rs. 532 Cr. respectively. I guess, main growth, when comes, will be from Hitachi Zosen and Amec Foster Wheeler. This year (FY 2016) revenue from Hitachi Zosen may be flat as not much upward economic activity is visible on ground and Amec Foster Wheeler is in an interesting business where a single order will be of value Rs. 500 Cr. plus.

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A New Corporate Video of ISGEC

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Hi During FY16 Standalone revenue grew by 25% and EBIDTA grew by 20%. Lower growth in EBIDTA was due to lower ‘other operating income’ Engineering business of ISGEC showed a growth of 20% in profitability.

The big swing was in Sugar segment where they overcame heavy losses and made some marginal profits (in one of the best year for sugar !!).

Surprisingly it seems that Hitachi JV degrew while the profit stayed flat

Am wondering what kind of growth one should project going forward. What is the visibility and what would be the drivers for >20% growth in this company?

@aveekmitra
Any comments on consolidated balance sheet (Increase in long term debt)… Is it for Sugar Subsidiary ?

its almost increase of 30 crores… (8685 lacs in long term borrowings)

Hi

Any updates on this Company. Q2FY17 results had shown degrowth. There is no communication from the Company and am wondering what the outlook is. Any insights would be helpful

The Company is one of the most well managed company. When the going was tough they were still managing to deliver good results. They have joint venture with relevant international leaders in the segment and have been entering into new contracts as well. http://www.moneycontrol.com/stocks/reports/isgec-heavy-eng-signsvarious-agreements-6187681.html
http://www.moneycontrol.com/stocks/reports/isgec-heavy-eng-updates-6518581.html

ICRA has assigned a AA rating to all its funds based facilities of its subsidiaries
http://corporates.bseindia.com/xml-data/corpfiling/AttachHis/e7595e6e-d7b8-46de-86b8-8986023a48ab.pdf
Today when everybody is mentioning that the Heavy Industries and Engineering goods are expected to do well than this stock stands out.
Based on the Last quarter Standalone results it is still available at a reasonable of around 24. I expect that based on the consolidated results this is still available at a PE of around 12.

Disc : Invested 2% of my portfolio

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