isgec_sunidhi

Robust Q3FY15 & 9MFY15 Results

ISGEC HEAVY ENGINEERING PR O VI D I N G PRO F I T B O O ST

CORP. LTD (GMDV)

Retail Desk

BUY

06 April 2015

Rating Buy

CMP (`) 5995

Target Price (`) 11445

Upside (%) 90

Key Data

BSE Code 533033

NSE Code SARASIND

Reuters code ISGE.BO

Bloomberg Code ISGEC IN

Sensex 28504

Face Value (`) 10

Mcap (` Cr.) 4436

52 week H/L (`) 6374/1011

2 Wk Avg Qty 2357 Share holding, December 14 Holding %

Promoters 62.2

DIs 1.1

Corporates 6.7

Foreign 1.2

Public 28.8 Performance (%) 3M 6M 12M

Stock-ISGEC 3.7 109.0 489.5

BSE 200 6.4 10.6 33.6

BSE 500 6.4 10.5 34.8

Price Chart: (One-Year)

http://www.isgec.com

Vijay Dave

[email protected]

Ph: 91-22-6760 7700

Technicals by Niranjan Sane

[email protected]

Company Description: Isgec has its origins in the Saraswati Sugar Mills, which were established in 1933, with a sugarcane crushing capacity of 400 tonnes per day. It has grown into one of India's largest sugar mills and now crushes 13,000 tonnes per day. It is today a subsidiary company. At the time of the nation's independence, the need for an Indian capital goods industry was recognized and Isgec was established in 1946. The initial activity was the manufacture of spares for sugar mills. In the course of its history, the company diversified into a range of engineering products.

In 1964, it established a joint venture with John Thompson of the UK to form Isgec John Thompson. In 1981, it acquired majority shares in Uttar Pradesh Steels. Both units were subsequently absorbed into the parent company. In 2011, the company name was changed from Saraswati Industrial Syndicate to Isgec Heavy Engineering with all businesses consolidated and now marketed under a common brand name Isgec.

Manufacturing Plants: Isgecs manufacturing operations span across Yamunanagar, Haryana; Dahej and Bawal in Gujarat & Muzaffarnagar in Uttar Pradesh with offices in Noida, Pune, Chennai, Mumbai & Kolkata. Spread over 100 Hectares (250 acres), Isgec's manufacturing facilities have a shop floor area of over 55,000 square meters (66,400 square yards) with world class manufacturing & testing facilities. ISGEC is ISO 9001:2008 certified approved by Lloyds Register of Quality Assurance.

Isgecs business activities span across Process Equipment, EPC Power Plants, Boilers, Sugar Plants & Machinery, Mechanical & Hydraulic Presses, Steel & Iron Castings, Contract Manufacturing, and Trading. The heavy engineering equipments are used in power, cement, automobile, sugar, chemical, steel & alloy casting, oil & gas, pumps & valves, fertilizer industries and defence sector.

The Boiler division has ventured into new products such as Heat Recovery Steam Generators, Waste Heat Recovery Boilers and Pin Hole Grate Boilers. The division has also ventured into Repair & Maintenance.

Key Financial: (Consolidated) (` crore) Year-March 9MFY15A 9MFY14A FY14A FY15E FY16E FY17E

Sales 2366.4 1847.4 1680.5 4200.0 4900.0 5880.0

PBIDT 224.3 156.0 111.0 365.4 426.3 511.6

Interest 13.2 18.4 16.1 32.0 34.0 36.0

PBDT 211.1 137.6 94.9 333.4 392.3 475.6

Depreciation 53.7 42.0 33.6 68.5 70.5 71.8

PBT 157.4 95.6 61.3 264.9 321.8 403.8

Tax 53.5 29.8 19.1 92.7 107.0 121.5

PAT 103.9 65.8 42.2 172.2 214.8 282.3

Equity 7.4 7.4 7.4 7.4

Reserves 743.8 916.0 1130.8 1413.1

Book Value (`) 1015.1 1247.8 1538.1 1919.6

EPS (`) 140.4 88.9 *114.0 232.7 290.3 381.5

CPS (`) 213.0 145.7 *204.9 325.3 385.5 478.5

OP Margin (%) 9.5 8.4 6.6 8.7 8.7 8.7

NP Margin (%) 4.4 3.6 2.5 4.1 4.4 4.8

P/E 25.8 20.7 15.7 *EPS and CPS for FY14 are annualised as results are for 6 months. 9M results are on standalone basis.

ISGEC Heavy Engineering

Sunidhi Research | 2

Products

Exports During the six months ended 31 March 2014, exports stood at `489 crore.

Q3FY15, 9MFY15 & FY14 Results During Q3FY15, standalone net profit rose 116% to `37.5 crore on 42% higher sales of During Q3FY15, standalone sales rose 116% to `789 crore. Q3FY15 standalone EPS stands at `51.

During 9MFY15, standalone net profit climbed 58% to `103.9 crore on 28% increased sales of `2366 crore. 9MFY15 standalone EPS works out to `140.

The financial results for FY14 were for six months. During this period, sales

stood at `1710 crore, which reflects an increase of 15% on an annualised basis. Net profit for the same period stood at `42.2 crore, which reflected an increase of 3% on an annualised basis. Annualised consolidated EPS worked

out to `114.

Financial Equity capital is `7.4 crore. With reserves of `743.8 crore, the book value of the share is `1015. With short term and long term borrowings of `481 crore, the DER works out to 0.64:1 as at FY14. Cash, current investments and short

term loans etc are `813 crore. (`1098/share).

The value of the gross block increased to `960 crore in FY14 from `939 crore in the previous year. Apart, capital work in progress stood at `40.7 crore. During H1FY15, ISGEC has reduced the standalone debts to `73 crore from `348 crore in FY14.

Strategic Partnership ISGEC has strategic partnership with ABB Lummus Heat Transfer, USA: Technology License Agreement for Helix Heat Exchangers; Belleli, Italy: Technology Agreement for manufacture of Breech Lock Heat Exchangers; Bosch Projects, South frica: Technology Transfer for Chainless Cane Diffusers; Envirotherm GmbH, Germany: License & Cooperation Agreement for Design, Engineering, Manufacturing and Commissioning of ESPs upto 1000 MW;

Foster Wheeler, Spain: Licensing Agreement for HP & LP Feedwater Heaters & Condensers; Foster Wheeler, USA: License Agreement for PC Fired Boilers upto 1000 MW; Foster Wheeler, USA: Collaboration Agreement for CFBC Boilers upto 99.99 MWe and Oil & Gas Fired Package Boiler upto 260 TPH; Hitachi Zosen Corp., Japan: Technology Transfer Agreement for Chrome-Moly Vanadium Reactors; Hitachi Zosen Corp., Japan: Agreement for Critical Heat Exchangers for Fertilizer industry; Hitachi Zosen Corp., Japan: Collaboration agreement for setting up Energy From Waste Power Plants, utilizing Municipal Solid Waste as fuel, on EPC basis and NEM Energy B. V., Netherlands: License Agreement for Heat Recovery Steam Generators (HRSGs)

Recently ISGEC had showcased advancement in pulverized coal (PC) and circulating fluidized bed combustion (CFBC) boilers based on its licensing agreement with Foster Wheel, a global market leader in these technologies. This technology will offer better heat rates and avoid the use of circulating pumps for higher subcritical pressure boilers.



Quality Leadership ISGEC has been known for its quality, timely delivery and post installation service. ISGEC enjoys numero uno position for a turnkey project provider to sugar plants.

On the power boilers side, ISGEC has a very strong experience of producing more the 500 boilers around the globe. In the past, ISGEC could only produce boilers in the range of 10 TPH to 250 TPH, however, it now has the capability to produce anything up to 1,000 TPH.

Joint venture With Hitachi Zosen Isgec Hitachi Zosen, is a joint venture between Isgec, India & Hitachi Zosen Corp., Japan. It has been set up to cater to the specialized & critical process equipment requirements of refineries, fertilizer & petrochemical industries, across the world.

Hitachi Zosen is a 131-year-old company, based out of Osaka, Japan with interests in Process Equipment, Environmental Systems, Industrial Plants, Industrial Machinery, Precision Machinery, Steel Structure, Construction Machinery, and Disaster Prevention Systems. The JV was expanding the capacity of this plant from 8,000 tpa per year to 13,000 tpa.

The joint venture brings together state-of-the-art technical & engineering skills of Hitachi Zosen and the manufacturing expertise of Isgec. It will take over Isgecs existing manufacturing facilities at the port town of Dahej (Gujarat), giving it easy access to the global market.

The new JV has a shareholding pattern of 51% (ISGEC) to 49% (Hitachi Zosen Corp.) and has orders on hand of about `500 crore.

Joint Venture Armec Foster A joint venture company along with Amec Foster Wheeler North America Corp., U.S.A has been incorporated in the name of "Isgec Foster Wheeler Boilers Pvt Ltd with a paid up equity capital of Rupees `2 crore. The shareholding pattern of the JV is 51:49 between Isgec and Amec Foster Wheeler North America Corp. respectively. The JV will render design engineering services for Fossil Fuel Boilers.

Prospects With a new government having been formed at the center, with a strong mandate to stimulate economic growth, the outlook for the sector appears positive in the medium term.

The Planning Commission (a department formed to develop and coordinate investment plans for the central government) had projected a US$1 trillion investment in infrastructure in the 2012-17 period, and the new government has expressed an intent to remove bottlenecks and barriers hindering new investment; growth in investment particularly in infrastructure and industrial projects is expected spur demand for construction over the next 12-18 months.

Outlook ISGEC has the diversified revenue streams coming from sales to more than 80

countries that has helped it to consistently grow from `300 crore in 2001 to `3,000 crore revenues in 2013 and to annualised `3360 crore in FY14 without facing any significant headwinds during the recessionary period post 2008.

The products offered by Isgec possess excellent quality, durability and performance. Its rapid growth shows the bright future outlook. Isgec has always adopted latest technologies, well aligned with technical advancements. To survive in the competitive market place, it is adhering to its quality parameters and objectives. Its values and beliefs have made it a systematic & committed high profile company in the industry.

ISGEC has maintained a very strong financial position. The liabilities majorly comprises of advances from customers for project execution. ISGEC as a policy does not believe in client financing and never takes orders without advance. Advances can vary from 10% to 20% of the order size and are usually shown under the long term and short term borrowings.



Valuation & Recommendation The fruits of the debottlenecking task taken by the new government will start to show up anytime in the next 1-2 years. The uptick in the domestic Capex cycle may help ISGEC to garner order from small and mid-sized power plants (captive and otherwise).

In addition to this, ISGEC is also planning to rope in a technology partner for large boilers used by UMPP that will help ISGEC to bid for larger projects. All in all, the opportunities from domestic market revival are quite big.

According Isgec, the recent spate of reforms from the government will help gradually revive the domestic economy and augurs well for the company as an improved Capex from the private sector will ensure a strong revival in the companys fortunes. But, even before the benefits of the reforms start trickling in, the company is witnessing improvement in the business.

Q3FY15 & 9MFY15 are a reflection of strong growth and a drastic improvement in business sentiment. Utilisations are picking up across businesses, upturn in margins and topline growth is clearly visible. The initiatives on clean India campaign have thrown open new set of opportunities to Isgec.

As the book value of the share is expected to touch `1200 this year, ISGEC is expected to reward shareholders with a hefty bonus issue. In fact, the strong book value will justify the frequent bonus issues in every 3-5 years. Plus seeing the strong business profile, the revenue and profitability will take a quantum jump going forward.

Due to the economic slowdown, some segments of Isgec have large under-utilized capacities and improving business climate would thereby lead to highly profitable operational leverage. Based on the going, Isgec is expected

to report an EPS of `290 in FY16 &, which would further go up to `382 in FY17 after the JV will start contributing heavily to the bottom line.

At the current market price of `5995 crore, the share is traded at a forward P/E of 20.7x on FY16E and P/E of 15.7x on FY17E. The reasonable P/E of 30 as it applies to blue chip companies will take the share price to `8700 in the medium term and further to `11445 thereafter on FY17E. This is expected to fetch a decent gain of 90 per cent.

ISGEC Heavy Engineering- Technicals

The stock of ISGEC Heavy Engineering rallied well in the last year. Thereafter, prices have been moving sideways. A

sideways corrective phase can be seen at present. The upper and lower limits of this sideways range are `6350 and `5150 respectively. Post-completion of the sideways correction, prices are expected to resume their prior uptrend. The upside target is `8400.



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