Isgec Heavy Engineering Limited (533033) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Isgec Engineering Company Q1 FY '22 Earnings Conference Call hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Renjith Sivaram of ICICI Securities. Thank you, and over to you, sir.

Hi. Good afternoon, all. On behalf of ICICI Securities, I welcome you all for the Q1 FY '22 earnings of Isgec. The management of Isgec Engineering represented by Aditya Puri, the Managing Director; Kishore Chatnani, Executive Director and Company Secretary; Mr. Sanjay Gulati, Whole Time Director and Head of the Manage -- Manufacturing Unit; Mr. Kishore Chatnani, the Whole Time Director and CFO. So we will have an initial opening remarks regarding the results and the recent outlook by Mr. Aditya Puri and follow it up with a Q&A session. So I hand over to Aditya Puri for opening remarks. Over to you, sir.

[indiscernible] I hope that you and your loved ones are all well and safe. This is our sixth investor conference call, and I look forward to a fruitful interaction. We have also uploaded our presentation on BSE, NSE and our website earlier today. Many of you are familiar with our business. For the benefit of the new investors and analysts joining for the first time, I will give a brief introduction about our business. We are a diversified heavy engineering company engaged in manufacturing and project businesses. The manufacture process plant footprint, presses and INC castings. We execute turnkey projects for setting up boilers, power plants, air pollution control equipment, sugar plant distillery factories and bulk handling facilities. We've also developed strength in construction. We address the requirements of a wide spectrum of industries, mainly power, fertilizers, sugar and distilleries, oil and gas, automobile components, steel, cement, chemicals, railways and defense. Our presence across multiple industries and geographies helps us to spread any sectoral or geographical risk. Let me now talk about our consolidated financial results for the first quarter of this financial year. The total consolidated revenue for Q1 of FY '22 at INR 1,133 crores is higher by 5% compared to INR 1,075 crores for Q1 of FY '21. The consolidated EBITDA of Q1 of FY '22 at [ INR 73 crores ] is however lower compared to INR 96 crores for Q1 of FY '21. The consolidated profit after tax for Q1 of FY '22 is INR 14 crores as compared to INR 42 crores for Q1 of FY '21. The profitability has been lower due to impact of commodity price increases and our production and project execution work was impacted adversely in the quarter with the onslaught of the second wave of COVID-19. Factories were running normally until the third week of April 2021. However, after that, there was a shortfall in production because of nonavailability of oxygen and argon gas. The availability of argon and oxygen gas again normalized through June 2021. In the Projects business, we had to keep our offices in Noida, Pune and Chennai closed for 6 to 8 weeks in the first quarter, and employees worked from home. Offices have been reopened in June with partial attendance being committed on a rotational basis. While all projects are still operational, but considering the fear and panic around, retention of existing manpower of contractor was a challenge. Some difficulties were also experienced in resource mobilization such as tying up with testing agencies and procuring tools and crane. Supervision of erection and commission was also adversely affected due to some of the engineers being COVID positive. As you may be aware, commodity prices, especially steel, have gone up steeply. Prices of steel trade, structures and TMT bars have gone up sharply since January 2021. This have also had an adverse impact on our costs. All the above factors contributed to lower profitability for the quarter. Presently, the working of the project sites has improved in July 2021 and is now near normal. Factories are also running normally. I will now talk about the order bookings. The consolidated order booking for Q1 FY '22 is INR 2,366 crores, which is nearly 4.5x as compared to the order booking in Q1 of last year. The orders in hand as of 30th April 2021 are INR 7,924 crores against INR 6,560 crores as on 30 June last year. The order book position remains very satisfactory. Of our consolidated order book, about 83% is for the project business and 17% is for the product business. The order book includes INR 827 crores of export orders, which is just over 10%. Order booking for Isgec Hitachi Rosen was also good. It has orders of INR 489 crores -- INR 489 crores worth of orders as of 30th April 2021. Order stratification during Q1 FY '21 has been good with ordering book for almost all the products except for presses. Overall demand trends are encouraging as inquiry position is good. About 50% of our order book, our PSU customer, which has a price variation clause and the price increases for some of the materials can be passed on to the customers. So the rest of the order book we have fixed price contracts from customers but keep contingency margins at cost. These are not good enough given the extent of the commodity price increases. In view of this, we are trying to keep higher continuity margins and cost for new orders, but the market is very competitive. Regarding Cavite Biofuel ethanol plant in the Philippines, we are on track to restart construction of the plant. Construction is expected to restart by around the first week of October 2021. We continue to think it's a good business and will be profitable to run, though we will keep the option to sell it when it is complete. We have given special emphasis on vaccination and also organized some plans for vaccination at our offices and factories. 99.1% of the eligible manpower, our employees and contractors workers, have received their first dose, and 98.6% of the eligible manpower have received both dose. In general, we continue to be optimistic about our overall positioning in the market. And with our presence in multiple segments and geographies, a robust balance sheet, state-of-the-art inside manufacturing capabilities, technology partnerships and the right quality of people, we will continue to focus on strengthening our financial metrics and serve the community and people at large. Thank you.

[Operator Instructions] We have the first question from the line of Ankit from Bamboo Capital.

If you look at our margins on the EPC side, they have declined significantly to almost around 1%. So what has happened in the quarter? And how do you see the margins panning out on the EPC side as well as on the equipment side over the near to medium term?

So this quarter, there was a lot of extra expenses at this site, as I said in my presentation, to keep the sites going, to maintain social distancing, vaccinations of employees and also getting labor at a much higher rate because there was all around this year, a lot of people -- many of the workers actually left the site. So we had to put in a lot of extra expenses just to keep this site alive. And also, because of the steep hike in commodity prices -- because of the steep hike in steel prices and copper as a medium vehicles, we had to take a hit on that. So that is the reason for the very low -- the turnover was also lower than the previous quarter, and the costs were higher because of the reasons that I just mentioned. This contributed to a higher material price.

So you think we'll come back to a normalized margin of around 6%, 7% or even higher in Q2, Q3 for the rest of the quarters of this year on the EPC side?

Yes, we expected the rest of the quarter would be quite normal.

Okay. Okay. Okay. And sir, on the raw material cost increase, there has been a significant jump in commodity prices from across various commodities. So on the EPC side, we do -- as you have already mentioned that we have a price variation loss, but we do have a significant order book from private players as well. So how do you think we will pass on the prices of such sharp increase in prices to our private companies from which we are booking the orders?

So from the private company, where we've already received the orders, although we may sort of ask for a price increase, but we are not banking on that. We do -- this price increase has happened and it still doesn't -- and we've accounted for that. So now if the steel doesn't go up any higher or we do not -- or there is not a third wave of COVID, we should be okay in the quarter going forward. We are taking -- we have factored in the increased price.

Okay. Okay. And sir, on the order booking side, we have seen a significant increase in our order book and the order inflow has been [indiscernible] recently. Also we won quite a few others. So any outlook on the order book for the next 2 quarters or for the other remaining part of this year?

So in most lines of our business, the inquiry level is good, good and sustained. And therefore, we do not sort of expect any -- we do not expect a positive orders. But this quarter, a lot of order themes on tendering and other things. So this quarter has been exceptionally good. We don't expect this order booking of, say, INR 2,400 crores to continue every quarter, but we will be very comfortably placed and a very competitive basis where the order booking is concerned.

[Operator Instructions] The next question is from the line of [ Avadhut Joshi ] from [ Newbury Capital ].

I just -- I'm just looking for one clarification. The order book -- total order book of INR 7,924 crores, the split you mentioned in the initial remarks, that 83% of it is EPC and 17% of it is manufacturing. Is that right what I heard?

Yes -- Kishore? Yes, that's right.

Yes. And how much of this will be the fixed cost component in this? Can you split that one?

Roughly 50-50.

50-50? 50% will be fixed cost and 50% we can pass it on, correct?

Yes.

[Operator Instructions] The next question is from the line of Digant Haria from GreenEdge Wealth.

So my question is mainly that we have almost touched INR 8,000 crores in order book, probably the highest ever order book. And you also mentioned that you can easily see INR 1,500 crores to INR 2,000 crores of order inflow every quarter. So are we geared up for execution that we may not delay the execution of these orders on the committed time lines? How is our preparation on the ground considering COVID and the problems with contractual labor?

So the problem is the contractual labor are easing out. I'm not saying that they are totally finished, but it's certainly much better than what it was a month ago or 2 months ago. It's actually very much better than that. So one of the things that has happened is that the shift -- as a deliberate policy, the shift has been towards larger value orders. So if we have a larger order book, it will probably be representing smaller number of orders. So we are geared up to do the order book that we have and geared up to do it on time, barring any unforeseen COVID-related third wave occurrences. But we have geared up -- we are geared up for that. And then on the manufacturing side, we are making marginal small investments to debottleneck and to increase production.

Right, sir. Sir, and last time you mentioned that we have probably been missing out on international orders, because Indians, there's a lot of restrictions on Indians to travel and present and meet clients. So any easing up you see on this side? Or if, let's say, in the next 12 months that traveling restrictions ease, can you expect significant orders even on international side?

Yes, the bookings from international orders should improve, and we are seeing that the situation has improved in the last few months. We have been able to book some orders. So nothing very, very -- not very high-value orders, but orders have started trickling in. And the order book is -- the export order booking has started again and it's in real time orders that happened.

Right, sir. Sir, and lastly, I just saw that we won the first ethanol distillery order from this [indiscernible]. Sir, now it's almost like 6 months and we have the new ethanol policy and everything. Sir, what are your general thoughts on how much CapEx will happen? And will that -- is that CapEx profitable? Or you just see -- any thoughts on you and your strategy? You said that you will partner with somebody at the right time for 1 and 2G ethanol. Any thoughts on this?

So 2G, we are still looking at 2G -- economics of 2G ethanol. We are looking at it. But as far as ethanol is concerned, so your question, the ethanol is going to be profitable for us or ethanol -- people are putting up plants are they also on profits?

Sorry, my question is mainly for you that like in entering this whole space, is it going to be profit accretive for us or similar profit as the existing lines of business or lesser profit?

Cash [indiscernible] certain, yes. And there are ethanol charges which are going to come up, and we are also setting up now also the factory our own ethanol plant.

[Operator Instructions] The next question is from the line of Nishith Shah from Aequitas Capital.

Sir, I want to congratulate on your good numbers and your orders. So basically, our order book has been at record high now. So I wanted to understand that are the new orders we are booking have already considered the increase in price hike and the contingency of this raw material volatility?

Yes. The new orders, yes, certainly.

Okay. And sir, secondly, I wanted to understand is that level -- you said that we are doing debottlenecking. So can you please elaborate which particular segments are we looking at? And what kind of capacity addition?

Can I answer this question, Kishore?

Yes, of course, sir. It's all in the manufacturing segment.

It's all in the manufacturing -- so it's in the foundry area. Our foundry in Yamunanagar, we are doing some marginal investment in increasing its capacity so by about nearly 50%. And also on all the pressure parts, we are in debottlenecking to [indiscernible]. We've also been approved by DRDO for oxygen plants, and we got our first order -- this is just a here and now, so that also we are doing some marginal investment for that.

Sir, can you please repeat how much is the pressure part?

I can't give you the exact figures, but it's not very significant. The investments are not significant. Not very significant. I mean basically, it's not that we are investing INR 50 crores or something like that. It's not that.

INR 50 crores is overall?

No, no, it's not that. I'm saying it's not that. It's not very significant. But to increase capacity because our order book is out.

The next question is from the line of Kunal Sheth from B&K Securities.

I just have one question. Most of my other questions have been answered. Sir, as of now, we supply boilers for the ethanol applications. My question is pertaining to -- do we -- can we supply the entire plan for the ethanol? And are we thinking in those directions? Or we are not really keen for that?

No, no, no. I'm sorry. No, we are actually supplying the complete plant to ethanol.

Okay. So -- and this is our own technology? Or have we tied up with any one for?

This is our own technology, yes.

Okay. Okay. And sir, so we've been supplying this entire plant or this is a recent phenomenon? Because...

No, we have been supplying. We have been supplying. In a small scale, we have been supplying. Yes, we have been supplying.

Okay. And sir, so out of a total ethanol plant, what would be our scope of opportunity then, sir?

So in a complete ethanol plant, we can do everything. So the customer may not want us to do something. Some customers says that I will do the civil work or some customers say that I already have a turbine. So we exclude that. But we are capable of, and we do -- we can do everything. If you give us a plot of land, we can do everything.

Okay, okay. And we are capable of handling most feedstock, is it, sir?

Yes. Yes.

[Operator Instructions] The next question is from the line of Deepesh Agarwal from UTI AMC.

Sir, my first question is we understand some of the extra costs in 1Q. But would your margin guidance continue to remain the same in the past? You have highlighted 8% on EPC and 13%, 14% on boilers. Maybe if not for this year, at least for next year?

Yes, yes, yes. Yes.

Okay. Sir, also, there is a large burner order for boiler is expected. What would be the bidding time line? And would we be key player for this?

Sorry, can you just repeat your question? I didn't get your second question. There is a boiler order expected?

Sir, for [ Barmy ] Refinery, I guess there is a large boiler order, which is expected this year. Can you help us with the time line and how large this could be?

I should not surely use a number...

I can't talk about orders that are not booked by us.

But I think this would be ordering in the next 2 to 3 months. It's come to the stage when I think they should be ordering within the next 2 or 3 months.

Understood. Understood.

The inquiry must come out as yet. But yes.

Okay. And sir, can you talk about our initiative on the green side? So how we are looking at turning the company into a more greener company? Are we looking at the fuel cells, hydrogen or greener technology?

Yes, we certainly are looking at the greener technologies. We are looking at how the landscape is changing in India and the world over. We are very much aligned to it. And at the right time, we will strike. Let me put it that way.

The next question is from the line of Levin Shah from Valuequest Investment.

Sir, my question is on the order booking that we have seen during this quarter. So the order inflow has been very strong. If you can just throw some light on what are the kind of segments or industry from where you have seen this kind of good order inflows?

So basically, the orders have come from all our industries that we cater to, to most of the industry that we cater to. We have seen that the textile and automobile sectors have been sluggish during the last quarter. Although textiles is now picking up, I believe, in July, started picking up. But by and large, I cannot pinpoint any one particular segment. But we've got orders from pharma. We've got orders from chemicals, from metals, refineries, fertilizer plants, power plants, sort of the entire gamut. Except we had industries that are linked with automobile and textile has not really picked up, although in July, we see that they have also done better.

Okay. So sir, have you seen any like large orders flowing through and like some of the large orders contributing majorly? Because like you spoke about it in the earlier part that going forward, the order inflow run rate may not continue at this rate.

No. So yes, I did say that it may not continue at this rate, because if it were to continue at this rate, we would not be able to execute INR 10,000 crores of orders in a year. We are not geared up towards that. So we may not even take those orders. But as you know it's many times bunching of orders happen. And in capital goods, quarter-to-quarter is not a long time enough to say whether the order booking has been good or not. But this one quarter has been very good, and we expect the next quarter to be also very strong, but we may not like to take all the orders, and it may not be this INR 2,400 crores that we booked this quarter. But it is not to say that we are seeing any sluggishness in the economy. It's not that.

Right, right. Sir, and my second question is on the sugar orders or the order from the sugar industry. So what we have seen during last quarter is a lot of new announcements from the sugar mills for putting up fresh capacities. So are we seeing that kind of trend in our inquiries and order inflows? And do we see that going forward as well? There would be substantial order inflows from sugar business?

So what the sugar mills are basically doing is again debottlenecking to increase capacity, and we have gone from a number of orders for incremental increase in capacity, although there are not too many people who are investing in fresh greenfield plants, where you can expect very big orders.

Right. But on the distillery front, there are fresh greenfield brands that are announced. So are we catering to that market?

Yes. And we got an order for 1 distillery just very recently, last quarter, this April to June quarter.

Right. Sir, and what would be our market share in this sugar distillery business? Any ballpark range or any number that you would like to put as far as our market share is concerning the domestic market?

In the sugar, which is very high, it could be about 50%. But in the distillery sector, we are new entrants, and it would not be very high, maybe about 15% or so, something like that.

[Operator Instructions] The next question is from the line of [ Mehtan Afort ] from [ Q Advisor ].

I'm looking at this company current recently, so I don't have too much of a back. But I just wanted to understand, you have quite a few subsidiaries, joint ventures in your company. I just wanted to understand what is your longer-term strategy in terms of -- are you going to be continuing to focus on EPC? Or do you want to increase your manufacturing business? I also see you have a sugar subsidiary where you're putting up an ethanol plant. So I just wanted to understand how will the capital allocation policy be going forward? And how do you see this company maybe 3, 4 years from now? Do you look at maybe demerging some of these businesses and listing them separately? So just wanted your thoughts on that.

No. So as of now, the order book, which is good in the main companies, is also good in all the subsidiaries. So there is no plan to shut any subsidiary or to demerge any subsidiary. If there is an opportunity at some stage, yes, but they're not looking at that as of now. So to answer your question, every quarter, we do take a stock of what is happening. And we sort of have annual budgets and plans for each of the subsidiaries. And so we are not planning any major capital investment, but -- we're not planning any major capital investment. But at the same time, if an opportunity comes, we may take it. So capital allocation, in those terms, we haven't thought about anything very significantly at this point in time. But Kishore, would you like to say anything more on that?

So there are no plans to put any major money into any subsidiary as Mr. Puri has explained. And he also explained that there are some capital investments going to be done in small capital investments in the manufacturing segment. But that's largely about the fresh capital to be deployed. There are no major fresh large investments to be made.

Right. I'm just saying but what about the sugar business?

The sugar business?

It's profitable for us, and we plan to continue with that.

Right. Now I'm just trying to understand, would that kind of be a little bit different from your mainline businesses? Do you want to hive off that business into a separate entity? And I just wanted to understand what your thoughts on that, because you are spending quite a bit on the ethanol facility, right?

Right.

So just wanted to understand what are the contours of that in terms of how profitable is that business likely to be? And when is that likely to be commissioned, the ethanol business?

The ethanol business is likely to be quite profitable, and it's going to be commissioned next month. Hopefully, yes.

Okay. Okay. And what kind of utilization do you see in the ethanol business this year? And if you can just take us through in terms of what sort of return on capital employed can we expect from that?

Yes. Kishore, the capital employed?

So this year, because it's going to be starting now, and sugar business, the -- it has to be looked at not as a stand-alone distillery, because it is going to be buying and transferring the molasses from the sugar business. And this year, of course, we are carrying some molasses stock. But from the next year onwards, we are going to be making big heavy molasses, which is an intermediate process in the manufacture of sugar. So there will be some less production of sugar and more production of this molasses. So this business needs to be looked at combined between the sugar and the ethanol plant. Obviously, it will give us flexibility to decide whether to make more sugar or to make more ethanol depending on the prevailing price of sugar and the government-mandated price of ethanol. So it will give us a lot of flexibility to decide where the profit will be more. I don't think -- it's going to run for part of the year this year. I don't think the return on capital employed is a number makes sense at this point of time.

Okay. But over the longer run, in the medium term, what kind of return on capital employed do you expect from that?

I would imagine it will be more in excess of 15%.

The next question is from the line of Manish Goyal from Enam Holdings.

Yes. I have 2 questions, sir. Just first on -- just to clarify, the order inflow number, what you mentioned, is it for year till date or it is entirely in Q1? Because the list of orders, what you have stated in the presentation had certain orders which were announced recently. So if you can clarify what was the order improvement in Q1 and year to date?

Kishore?