Buy This Small-Cap Engineering Sector Stock For Target Price Of Rs 601, Surged 7.64% In 1 Week

ICICI Securities' recent report on ISGEC Heavy Engineering Limited (ISGEC)comes with a buy call for a target price of Rs 601 apiece. Considering the stock's current market price and the estimated target price, the stocks could surge and deliver gains up to 25% in 12 months.

ISGEC is a small cap Engineering sector company having a market capitalization of Rs Rs 3,573.53 crore. ISGEC's standalone revenue grew 22.4% YoY to Rs9.9bn in Q1FY23 led by 75% / 9.2% YoY growth in manufacturing / EPC business.

Stock Outlook

The current market price of the stock is Rs 484.70 apiece, opened at Rs 478.78 apiece, trading 1.24% up. The current market price is trading Rs 59.7 above its 52 week low of Rs 435 apiece, and Rs 350.3 below the 52 week high recorded.

ROE is 5.13%. TTM EPS ratio is 15.37. TTM PE is 31.60. PB ratio is 1.62. The dividend yield is 0.41% and the face value is Rs 1.

Returns on Investments

Over the week, the stocks of the company surged by 7.64%. Whereas, over the month, the shares surged roughly 1.98%. Stocks over the year, have fallen nearly 29.97%. Whereas, over the past 3 years, the stocks surged with a positive return of 49.84%. In the past 5 years, the stocks have fallen 16.85%.

Improved performance; cost pressures prevail

According to the brokerage, "ISGEC's standalone revenue grew 22.4% YoY to Rs9.9bn in Q1FY23 led by 75% / 9.2% YoY growth in manufacturing / EPC business. Standalone EBIDTA margin expanded 130bps YoY to 5.7% led by improved execution in EPC segment. However, management maintained a cautious stance on margins due to volatile commodity prices and as it is currently executing pre-pandemic low margin orders. Current order pipeline is healthy at Rs100bn. However, order intake declined 44% YoY to Rs13.3bn due to delayed finalisation of orders and selective bidding by the management owing to a healthy orderbook. Current consolidated orderbook stands at Rs77.4bn (1.67x TTM sales)."

Cost pressures impact margins

During Q1FY23, manufacturing revenue grew 75% to Rs2.9bn while EPC revenue grew 9.2% YoY to Rs7.4bn. Margin for EPC expanded 410bps YoY to 5.1%, while manufacturing margin contracted 660bps YoY to 4% on account of loss on an export order. EBITDA/PAT grew 58% / 120% YoY, respectively.

Muted subsidiary performance

Consolidated revenue / EBITDA in Q1FY23 grew 10.5% / 49% YoY to Rs12.5bn / Rs718mn, respectively. Although sugar subsidiary performance improved led by higher sales and exports proportion, Hitachi Zosen revenue was impacted due to lower delayed delivery of equipment. Going forward, management expects subsidiary's performance to improve owing to a healthy orderbook and limited execution challenges. Philippines plant loss widened to Rs227mn against Rs125mn in Q4FY22, due to higher forex translation cost.

Stable orderbook despite low intake in Q1FY23 provides growth visibility

Overall orderbook stands at Rs77.4bn (1.67x TTM sales). Since the book is healthy, ISGEC was selective in bidding for further orders given the current volatility in commodity prices and a higher share of orders being fixed-price in nature. Also, since travel was only intermittent, the company had limited order intake for higher margin export orders; exports comprise ~14% of the total orderbook.

Update on Philippines plant

Construction at the plant has resumed and is expected to complete by Jul'23. Going forward, interest cost will capitalise and ~Rs50mn of quarterly operating costs will be expensed. The company is simultaneously looking for a suitable buyer with the option of selling it at an appropriate valuation.

Brokerage Maintain BUY

Due to commodity price inflation, ISGEC is currently executing variablepriced contracts, which are long-cycle and have resulted in slower execution in recent quarters. However, with completion of these orders in FY23, we expect execution on the recently booked orders to ramp up and support margin expansion. Hence, we maintain BUY on the stock.

 

Risks, Outlook and valuation; buy for a target price of Rs 601

Company has a strong orderbook of Rs77.4bn (1.67x TTM sales). "We await pick up in execution as older low-margin contracts complete and commodity inflation stabilises. We have marginally increased our execution estimates for FY23E and FY24E by 1.6% each to align with improvement in execution during Q1FY23. However, owing to the cost pressures, we keep our earnings estimates unchanged. We value the standalone business at Rs 512 (20x FY24E earnings), ISGEC Hitachi Zosen at Rs34 (25x FY24E earnings) and Saraswati Sugar Mills at Rs55 (10x FY24E earnings), arriving at a revised SoTP-based target price of Rs 601. Maintain BUY," the brokerage said.

According to the brokerage firm, the key risks would be: i) Further commodity price escalation (which might impact execution and margins), and ii) higher-than-expected losses on Philippines plant.

About - ISGEC Heavy Engineering Limited

ISGEC Heavy Engineering Ltd. is a multi-product, multi-location public company that has been providing engineering solutions to customers around the world for the past 89 years. We rank 252 in the ET 500 listing, and 253 in the Fortune India 500 listing. With 900 qualified engineers and as many technicians on board, the company provides state-of-the-art, sustainable, sensible solutions to customers from around the world. Company's customers are located in 91 Countries across 6 Continents.

Disclaimer

The stock has been picked from the brokerage report of ICICI Securities. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.