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Isgec Heavy Engineering Ltd
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Ladies and gentlemen, good day, and welcome to Q2 FY '23 Earnings Conference Call of Isgec Heavy Engineering Limited. [Operator Instructions]
Please note that this conference is being recorded.
I now hand the conference over to Mr. Ashwani Sharma from ICICI Securities. Thank you, and over to you.
Yes. Thank you. Good day, everyone. On behalf of ICICI Securities, I would like to welcome you all for the Q2 FY '23 earnings conference call of Isgec Heavy Engineering. Today, the management is being represented by Mr. Aditya Puri, Managing Director; Mr. Kishore Chatnani, Whole-time Director and CFO; and Mr. Sanjay Gulati, Whole-time Director and Head of Manufacturing Unit. We'll start the call with the opening remarks on the results and outlook by Mr. Puri, post that we can have the Q&A session.
I would now like to hand over the call to Mr. Puri for his opening remarks. Over to you. And thank you, everyone.
Thank you, Ashwani. Good afternoon, everyone, and thank you for joining us on our earnings conference call. I hope that you and your loved ones are all well and safe. We look forward to a fruitful interaction. You would have seen the quarterly financial results that we have published earlier today. We've also uploaded our presentation on the BSE/NSE website and on our own website, www.isgec.com, which was done earlier today. There's also much more information about our business on our website.
The stand-alone revenue for Q2 FY '23 is INR 1,160 crores compared to INR 1,132 crores in Q2 FY '22. The stand-alone revenue for the half year ended 30th September 2022 is INR 2,158 crores, which is about 9% higher compared to INR 1,986 crores for the half year ended 30th September 2021. Stand-alone profit before tax of Q2 FY '23 is higher at INR 67 crores, against INR 31 crores for Q2 FY '22. Further for the half year ended 30th September 2022, the profit before tax is INR 97 crores, which is about 93% higher compared to INR 60 crores for the half year ended 30th September 2021.
The consolidated revenue for Q2 of FY '23 is INR 1,515 crores which is about 10% higher compared to INR 1,379 crores for Q2 FY '22. Also, for half year ended 30th September 2022, the consolidated revenue is INR 2,765 crores, which is 10% higher as compared to INR 2,513 crores for 30th September 2021. The consolidated profit before tax for Q2 FY '23 is INR 49 crores compared to INR 14 crores for Q2 FY '22. And the consolidated profit before tax for the half year ended 30th September '22 is INR 79 crores as compared to INR 32 crores for the half year ended 30th September 2021.
In the standard-alone results, the profitability is closer to normal, both for the manufacturing and the EPC segment. The results have also been helped by receipt of dividends from subsidiary companies during the quarter. In the consolidated results, the profitability is better because of better process in Isgec Heavy Engineering Limited and profits in Eagle Press & Equipment Company Limited.
I will now talk about the order bookings. The consolidated order booking for Q2 of FY '23 is INR 1,508 crores compared to the INR 849 crores of order book in Q2 of last year. The consolidated orders in hand on 30th September 2022 are INR 7,762 crores against INR 7,518 crores as on 30th September 2021. The order book is satisfactory. Of the consolidated order book, 77% is for the projects business and 23% is for the product business. The order book includes INR 832 crores for export orders, which is about 11%. The order book for Isgec Hitachi Zosen is also good. It has INR 801 crores of orders as on 30th September 2022. The overall demand trend is encouraging as the inquiry position continues to be good. Export inquiries have picked up. As informed earlier, we have started construction at the Cavite Biofuel ethanol plant in the Philippines, and we are expecting it to be completed by July 2023. We are working on developing the feedstock in preparation for running the plant from August 2023.
My colleagues and I will be happy to answer any questions. Thank you.
[Operator Instructions]
We have our first question from the line of Niteen S Dharmawat from Aurum Capital.
So wanted to understand what is the contribution that we are having from the government sector now in the revenue? And what is our target to bring it down further? Does it remain same as we have stated earlier?
So if you notice in the order book, we have mentioned that we have public sector order book of 44%. Of the total order book, 44% is coming from the PSU sector. So yes, we are targeting to reduce it a bit largely because we are looking at shorter-duration orders, not really because we have any other issues with the public sector orders. But largely because some of their orders are longer duration, so we would like to bring it down. So presently, order book is 44% from PSUs, largely central PSUs. There are 2 orders from state PSUs also. We don't have any order directly from the government.
Okay. And how is the payment over there, the receivable numbers from the government side?
So Niteen, there is no difficulty in collecting receivables which are due. The issue that we have been talking about in the earlier calls is that most of the PSU orders have payment terms which are linked to milestones. So while we continue to supply material and cement and so on to the sites, it's only after certain construction or [ reduction management ] are done when the payment becomes due. So the idea of looking at a lower number of PSU orders is to look for better cash flow.
Okay. And my second question is about the debt. So what is the consolidated debt now we have?
Consolidated debt, give me a second. The consolidated debt is INR 1,177 crores as of 30th of September across all the group companies. This was INR 1,205 crores at the end of March '22.
Okay. And what is the plan to repay the debt?
So we have -- in terms of term loans, we have about INR 100 crores of term loans for the Saraswati Sugar Mills, which is for the ethanol that we established last year -- in December last year. And Eagle Press has a term loan outstanding of about INR 30 crores or so. And the other term loan is for the Cavite Biofuel Philippines plant. Rest of the borrowing is working capital borrowing.
Okay. And you mentioned about the export inquiries. So which are coming from any specific geographies?
Mostly Southeast Asia, Africa and Central America.
Sorry?
Southeast Asia, Africa and Central America.
[Operator Instructions] We have a question from the line of Digant Haria from GreenEdge Wealth.
Sir, firstly, we have seen some improvement in the operating margins, sequentially. Is it largely because we have a large revenue coming from the product side? Or is it that some -- the mix is that low-margin orders that we had taken in the material handling and railway segment have they run off?
Yes, yes. So the margin has increased in both the projects and the products business. And your second hypothesis is also correct that there is -- the low-margin projects are slowly -- their mix is reducing.
Okay. And so is it fair to say that going forward, the margin should only continue to improve because the raw material prices are now probably stabilize or they are down versus what they were 6 months back. And we have also consciously become more agile in terms of our pricing. Fair to say that next 2, 3 quarters, we'll see margins improve in projects? .
You're right, it should.
Okay. And then my second question is in the product division, this time we had a very large revenue, more than INR 500 crores. So is there any pattern, seasonality? Or it is just because the order sector did well? How should we look -- how should we read about this on an annualized basis? What kind of revenue can we do here now on?
So I think this INR 435 crores would probably represent fair average for the year for manufacturing businesses.
Okay. It was INR 569 crores this...
It's all consolidated.
Okay. So you are saying that this INR 569 crore, we should read more like INR 450 crores as the sustainable quarterly number?
I think we should look at INR 1,800 crores, INR 1,900 crores for the full year.
Okay. So that's a better way to look at it. Okay. And then any update on the -- if you can just provide the update on the Philippines plant, I know we started construction last quarter, but how is it progressing? And what is the P&L impact per quarter, which comes because of the -- we have pay the staff and the security and everything there?
So we've started the construction, and our target date was at that time also to finish it in a year's time. And we are still sticking to that -- the current schedule also for that.
That we will be completing by July '23 and we expect to start the operations in August '23. And on the numbers about the quarterly -- so there is a quarterly cost of about INR 8 crores, INR 9 crores per quarter, which is largely for salaries. This quarter, there was a large payment for insurance of the plant, also. And there has been some impact of the currency depreciation between peso, dollar and rupees.
So this quarter specifically, it's more than INR 8 crore, INR 9 crores?
INR 9 crores to INR 10 crores a quarter. And obviously, once the plant starts then that expenditure will go into the [ revenue ] for that company.
Okay. Perfect. And then last question, if I may ask that in terms of the end markets, how are we seeing the demand and the pricing environment? If you can give a slightly more elaborate answer in terms of how is the ordering looking, and how are the negotiations happening with the customers, for yourself as well as -- slightly more for the full cycle, CapEx cycle itself.
So CapEx cycle, we think slowly it is turning positive. The sentiment is turning positive. Yes, there are a lot of uncertainties because of the Ukraine war, and demand in Europe almost finishing and recessionary conditions -- expected recessionary conditions in Europe and North America. But as far as India is concerned, the demand is holding out and pricing is also okay. We are not facing any major issue right now.
Got it. So sir, fair to say like from hearing -- after a long time hearing you, it seems that the worst of margins and working capital for us, both is probably behind. In the next 12 months we'll feel better for both these financial...
I think 12 month horizon is a fair horizon to see. Yes, absolutely.
We have our next question from the line of Ashwani Sharma from ICICI Securities.
Sir, [ wondering ] that if you can -- you did mention about strong demand, which is seeing CapEx picking up. But if you could give us some idea on -- if you look at your end markets, which sector is looking more promising or they are doing CapEx, if you can give us some idea over there.
Refinery, petrochemicals and also certain equipment that we supply to cement plants. There is demand emanating from there, and from the power sector. Power sector in terms of -- so these are the sectors that are investing at this point in time.
So you say power is the government or private?
It's a mix of both, but mostly government. In power include air pollution control equipment, also.
Okay. But sir, if I look at how -- what kind of inquiry pipeline is there currently? And how we change over the last 6 months?
I think the pipeline is larger. The pipeline is certainly larger, and it has increased over the last 6 months. It's looking stronger. One sector where there is a little deficiency of demand is demand related to automobile sector. There, the numbers are not really -- on an aggregate level, the numbers are not very promising at this point in time. And yes, I think in October, the car sales are very close to what they were in October '20.
[Operator Instructions]
We have a next question from the line of Anurag Patil from Roha Asset Managers.
Sir, what percent of our current order book should be on the fixed price basis?
So all the private sector orders are fixed price. All the export orders are fixed price. The PSU orders, many of them have price revision clauses, which permit price variation for changes in steel price based on the index. Cement price, labor index and some of them -- and fuel. And some of them also have variations allowed for copper and nickel and aluminum. But because 44% of the order book is from PSUs, so most of it has price variation clauses.
But as we have been mentioning in earlier calls, the price variation -- only about 40%, 50% of the price variation we are able to pass on. Because, for example, steel with the supply that structures, there we can pass on the price variation, but the steel is part of an equipment then the customer is not able to gauge how much steel is gone into it, and therefore, we don't get an escalation on that. Also, most of the price variation clauses are linked to index. So there is a steel price index. But actually, the steel that we are buying is from the best companies, and their prices do not really move exactly in line with the index. So typically, we are able to pass on 40% to 50% of the price variation. And when I say variation, it means increase as well as decrease.
And sir, on the low-margin legacy projects which are impacting the margins till now. So in the current order book, what can be that portion? Very approx idea will be fine.
So it's not really low-margin projects. Some of these projects have had seen commodity price inflation, and that's caused some reduction in margins. Some of these projects have also seen site work, the time for the execution of the project getting extended because of multiple reasons, starting from COVID and with the customer or ourselves. And so most of -- when you say low margin, it's not that we took those orders deliberately at a low margin. But the margins that we are realizing are lesser than that because of these reasons that I've explained. So as Mr. Puri mentioned a little while earlier, in about a year's time, we should be back to normal profitability fully.
Okay. And sir, in our own ethanol distillery, what is the sustainable margins at EBIT level?
So I hope you've noted that we are expanding the distillery capacity from 100 KLPD to 150 KLPD. But I don't have an EBIT number on that readily. So let me look for it. I'll try to answer it, if I can find it for you.
Okay. So sir, this expansion to 150 KLPD capacity already it is operational or it is a work in progress?
It is work in progress, it will get operational sometime by the end of January '23.
But also, we have to clarify over here that we will be going to 150, and we will be doing -- we will be reducing the number of days the distillery will run, which will give us efficiencies in operations, and will pay back. However, if our distillery can use various raw materials. And if it is found to be economical, depending on the sugar price and ethanol price, we could extend the season. But as of now, this is more for operational efficiency and operational -- to reduce the cost of production of a unit of ethanol.
And for this 50 KLPD expansion, how much will be the CapEx?
INR 7.5 crores.
INR 7.5 crores.
[Operator Instructions]
We have a follow-up question from the line of Ashwani Sharma from ICICI Securities.
My question is on margins. So with commodity prices showing some signs of softness, what's your thoughts on the margin improvement on a blended basis? If you can touch individual segments, that would be more helpful.
I do not think that we can give you -- so I think we are -- see, when we say over a longer period of time, the indication is the same. We have talked about it earlier also. In manufacturing segment, 8% to 9% is sustainable. In the EPC segment, 5% to 6% is sustainable. Some quarters will have a 1% more, some quarter 1% less.
Okay. And any thoughts on the mix? I think where do you see your mix, I mean, between project and manufacturing? Because earlier when we look at your number, the mix was -- it was more heavy on the manufacturing and the margins were also better. Do you see that again changing to the earlier number going ahead?
So we are targeting an increase in the manufacturing turnover by about 15% next year. Project business will certainly not be less than this year, but how much that increases that we'll come to know by the time of the next call. But in manufacturing, we are targeting a 15% increase in revenue. .
Okay. And sir, if you could talk about Hitachi Zosen's performance, how is the order book over there?
The order book is good. We just spoke about it. The order book as on 30th September was INR 801 crores.
And how is the performance?
So the performance was not very good, as we just explained to you.
Sanjay Gulati here. so the performance of Isgec Hitachi Zosen for the quarter 2 was not very good because the amount of billing done was less. But however, their production was good, and the equipment are ready for dispatch. A lot of the equipment are ready for dispatch, and they will be shipped out in the third quarter and the fourth quarter. And the equipment was not lifted because of the buyer, because the buyer was not ready for the -- the shipment wasn't in his scope, and he was not ready for the shipment. And we recognize the revenue on sale of good basis as Isgec Hitachi Zosen's.
Somebody had asked earlier about the EBITDA on the ethanol operations. So for the current year, we're expecting it to be about 11.5%. And once the capacity goes up, we are hoping that it will go to something closer to 12.5%.
We have our next question from the line of [ Manish Goyal ], an individual investor.
On Cavite Biofuel, once we start the production next year, sir, what can we expect in terms of what could be normalized annualized revenues in that business? And what kind of profitability we can see? And will it be only sugar-based ethanol? Or how is it? If you can give some guide, number one. And number two, once we commence production by that time, what will be total investment from our side? From Isgec Heavy parent books, how much it will be? And what will be the other loan outstanding? That's the first question.
So in Cavite Biofuel, the annual ethanol production capacity is about 42 million liters. And so the revenue expected from the sale of ethanol and the sale of byproducts, it's something like INR 320 crores a year. But it's to be noted that the price of ethanol changes every 15 days. It is fixed by the Philippines government. And they take into account the input -- the feedstock price. So they take into account the price of molasses and the price of sugarcane. And based on that, the price of ethanol changes every 15 days. So whatever number I gave you just now INR 320 crores is likely to be actually going up in terms of revenue.
And it is entirely sugarcane-based, right?
The plants can run both on sugarcane and on molasses.
So initially -- and the Philippines government formula that National Biofuels Board formula gives 50% weightage to sugarcane and 50% to molasses. Our plant initially will have less of sugarcane as the sugarcane grows. But after about 3 years, we expect to do 210 days on sugarcane, and 120 days on molasses.
Sorry, can you repeat 110 days on?
210 days on sugarcane and 120 days on molasses in a year.
And sir, by -- what could be our peak investments we see in Cavite Biofuel from our balance sheet -- Indian balance sheet? And what will be the total capital investment?
So the capital expansion investment being done now to complete the plant, as I mentioned earlier, is INR 180 crores. And this INR 180 crores is being borrowed from a banks in Philippines. And of course, besides this, the numbers have not changed. They have not given any further money. So there is a INR 50 crore loan outstanding from us -- from Isgec to Cavite Biofuel, which is earning interest from them. And of course, the original outstanding amount due to us. So the number that I remember is INR 264 crores. Of course, it changes based on the exchange rate.
Okay. And so margins would be -- what kind of margins and what kind of returns we see, probably, on these projects, sir?
I think we've mentioned the situation remains the same. We have said that in about 6 years' time, we expect to get all our money back while servicing the bank loans, also.
Once the project starts, within 1 year we get our money back like INR 250 crores plus INR 50 crores?
Pardon me, I said 6 years. Because the bank loans also have to be serviced. So after that, our outstanding, of course, some of it is attracting interest. So it will take us 6 years -- between 5 and 6 years to get our all money back.
Okay. Okay. And sir, in India, we mentioned that we are looking to increase capacity from 100 KLPD to 150 KLPD to improve efficiencies so that ideally we can optimize the number of days of operation. But are we not probably contemplating to use other feedstocks like rice or any other where we can probably run the plant for the entire year?
So that's a more modifications are required in the plant. So we are not doing that right now. However, we will be exploring the possibilities not right now, but a year from now to make the plant fit to run on sugarcane juice efficiently.
Okay. Okay. And sir, what we see from the numbers, if you probably see consol and stand-alone and particularly on the manufacturing of equipment, we see a fairly good improvement on the profitability side. So what could it have been contributed by? Because I believe we mentioned that Hitachi has not done well. So the improvement would be driven by Eagle Press? Or how is it?
Yes, by Eagle Press. And yes, basically Eagle Press, Saraswati Sugar Mills has also done well. And Isgec profitability is also higher stand-alone.
So Mr. Puri, I was referring to when I probably remove stand-alone from consol and particularly on segment for manufacturing of machinery and equipment. I see a INR 15 crore profit number, which is on Y-o-Y basis, which has a loss of INR 6 crores. And on Q1, it was just a INR 2 crore number. So I was just trying to understand that if Hitachi has not done well, is that...
Eagle Press has done very well.
Okay. So this year, we expect Eagle Press to report a decent profits, how do we see it? Because annual report still says that could be a challenging year, and then probably after that, we can look at 30% growth. So trying to understand that.
It has been a challenging year, and it continues to be a challenging year because of automobile production not going up in North America because of the chip shortage. However, we are bullish that once this chip shortage is over, it should be -- people will start investing. So the next 6 months may be challenging. But the previous 12 months, it has been positive. The PBT has been positive.
Okay. Because the annual report mentions about 30% growth in FY '23. So I was a bit curious to get the...
Yes. But this chip shortage was not anticipated, and this is affecting production. But as of now, in the previous 12 months, it's been positive. The next 1 or 2 quarters may be challenging for Eagle Press, and we expect the things to improve after that.
And sir, I'll probably -- last question on Hitachi, last year, the profits were just a mere INR 4 crores as per annual report on a revenue of INR 331 crores. So can we expect a fair degree of improvement in top line and margins this year? Or it's still challenging, and we should expect it only next year? Because our order book has been growing quite well in last few quarters, sir.
So I think the whole impact of the commodity price and all because these are long-duration orders will be seen next year. This year will be an improvement on last year, but next year, we should see a much better improvement.
[Operator Instructions]
We have a question from the line of Ashwani Sharma from ICICI Securities.
Sir, 2 follow-ups. First is, if you could give us some indication on the execution time line for most of our markets like FGD, sugar, refineries, metal and chemicals?
So FGD typically 36 to 50 months, 48 to 50 months. The equipment for refineries and petrochemicals can vary. If it is Isgec, it is normally anywhere between 10 to 14 months, but if it is a joint venture, Hitachi Zosen, it could go up to 21 months. Sugar plants and ethanol plants are normally anywhere between 12 months through 14 months.
And metal?
On the process side, generally, the cycle times are lower.
Okay. Fine. The second question I had on the guidance. So earlier, you had guided for a 5% kind of a growth. Is there a change in the guidance now?
I remember last time I told you that we will give you a final guidance in March. So we'll give you our guide then. Right now things are looking -- are optimistic but we'll give you a final guidance, if we can, in March.
So can we assume that this 5% will remain for FY '23 in that case?
Yes, 5% will remain. Yes.
As there are no further questions, I now hand over the conference to the management team for closing comments. Over to you, sir.
Thank you so much for attending, and keep safe. And thank you, and all the best. Thank you very much.
Thank you. On behalf of ICICI Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.