Isgec Heavy Eng Q4 FY24 earnings call

What moved the numbers, as management explained it

• Consolidated revenue fell 2.6% YoY because the government restricted sugar releases and barred sugar exports, hitting the sugar business. (one-off)
• A Hitachi Zosen JV equipment scheduled to ship in Q4 FY24 was shipped in April/May 2024, pushing the revenue out of the quarter. (one-off)
• Standalone PBT jumped 30% on a higher-margin mix and the shift to short-duration, technology-linked projects.
• Consolidated net borrowing fell 43% to ₹594 cr on higher customer advances and unearned revenue booked under other current liabilities (₹2,359 cr vs ₹1,401 cr).
• Receivables of ~₹2,928 cr include ~₹400 cr tied to two large FGD orders, which management expects to collect in FY25 as those orders complete.

The numbers management led with

• Consolidated order book: INR7,905 crores as on 31-Mar-2024
• ISGEC Hitachi Zosen order book: INR1,048 crores (doubled from ~INR500 cr a year ago)
• Standalone net cash position swing: From net borrowing of INR308 cr to net surplus of INR45 cr in FY24
• Consolidated net borrowing reduction: INR594 cr as on 31-Mar-2024 vs INR1,032 cr — down 43% YoY

Guidance on this call

Filed figures are summed from the company's own quarterly results for the whole period (EBITDA excludes other income); where one sits against what was guided is arithmetic, not a judgement.

By business

Balance sheet, capex and funding

• Standalone net cash; Net surplus of ₹45 cr at 31-Mar-2024 vs net borrowing of ₹308 cr a year ago.
• Consolidated net debt; ₹594 cr at 31-Mar-2024, down 43% from ₹1,032 cr.
• Other current liabilities; ₹2,359 cr vs ₹1,401 cr, driven by higher customer advances and unearned revenue on new orders.
• Receivables; ~₹2,928 cr including ~₹400 cr from two large FGD orders scheduled for collection in FY25.
• Capex plan FY25; Not yet finalised; expected to be ₹50 cr or more, mainly in manufacturing capacity.
• Order book; ₹7,905 cr consolidated, with ₹1,048 cr in ISGEC Hitachi Zosen and ₹1,047 cr in international orders.

The industry, as management sees it

Management views the Indian capex cycle as strong across steel, oil & gas, refineries, and cement; export inquiries have picked up meaningfully. The company is positioning for a structural multi-year capex upcycle in heavy engineering while pivoting away from civil/site-intensive work.

Risks management named

• Commodity price volatility in copper, nickel, aluminium, steel — partially mitigated by shorter project duration
• Eagle Press order book uncertainty — orders close to finalisation but not yet booked
• Legacy long-duration project margins (3.5-4% EBITDA) weighing on consolidated near-term profitability

Not answered directly

• Specific FY25 order inflow number (in INR cr)
• Philippines FY25 revenue contribution number
• Quarterly project margin trajectory for Q4 FY25
• Cumulative Philippines investment
• Eagle Press order pipeline specifics
• Decarbonization revenue/segment classification

Asked for a number, answered without one

• Q1 FY25 order inflow: Counted only after advances are received; said pace is higher than normal but declined to share a figure.
• Philippines FY25 revenue contribution: Deferred to the next sugarcane season starting Oct/Nov 2024; said plant will not run at full capacity on molasses in the interim.
• Philippines cumulative investment: Said capitalisation will be completed this quarter; will provide the figure next time.
• Order inflow outlook for FY25 and FY26: Said demand is good and exports are turning around, but declined to provide specific numbers.
• Q4 FY24 commissioning gross block from Philippines: Said it has to be worked out from Philippines and audited; did not share a figure.
• Consolidated advances from customers: Asked the analyst to wait for the balance sheet.

Every question, with its answer

1. 1. Strategic priorities and order book strategy

   Digant Haria, GreenEdge Wealth

   Question. For FY25 what are the strategic business priorities? Order book has not grown in 2 years, revenues are flat across product/project/sugar, project margins have declined, working capital remains high — yet we are in the best capex environment in 7-8 years. Why is ISGEC showing a different picture vs L&T and Thermax?

   Answer, Aditya Puri, Managing Director. Strategy is deliberate: avoiding long-duration projects because of site work, labour, weather uncertainties. We are comfortable with a lower order book if it means shorter-duration, technology-linked projects. Manufacturing and technology-linked projects are well booked and we are confident things will improve fast.

   Follow-up. What is the benefit of shorter-duration projects? How much manufacturing capacity increase should we expect (~5-10%)? Should project margins rise to 6% which has been an aspiration? Are FGD/rail legacy orders near completion?

   Answer. Shorter duration gives working capital advantage, lower commodity risk and faster payment cycle. Manufacturing will invest to increase output, growth will be more than 5-10%. Project margins will gradually move towards 6% as long-duration orders finish. FGD and rail legacy orders are very near completion with most expected to wrap in the next few quarters.

2. 2. Order inflow outlook and Philippines contribution

   Nidhi Shah, ICICI Securities

   Question. What is the order book outlook for the upcoming year? Can you give a number for order inflow and what the backlog would look like? What is the Philippines plant's contribution expected to be in the upcoming year and can you quantify this year vs next year?

   Answer, Kishore Chatnani, Whole Time Director and CFO. Inquiries are more than enough; export inquiries are good. Better-than-normal orders booked in Q1 FY25 (April-May); most orders for current-year execution already in hand. Cannot give an inflow number but it will certainly be much more than last year. On Philippines: plant ran briefly on sugarcane in April, now on molasses at lower capacity; real contribution comes from sugarcane season starting October/November. No specific revenue numbers can be given at this time.

   Follow-up. Do you have a number for orders already booked in Q1 FY25?

   Answer. Not appropriate to give the number — orders are only counted once advances are received; pace is higher than normal quarterly pace.

   Not answered directly.

3. 3. Revenue growth guidance and EPC margin aspiration

   Siddharth, MK Ventures

   Question. Order intake has lagged execution for 2 quarters, FY24 standalone revenue up only 4-5% (consol -3%) — below guidance. Any challenges in fresh orders or execution? Can you give 2-3 year guidance on base business scale up and on EPC EBITDA margins which have been 3.5-4% vs peers at 8-15%? Outlook for Philippines numbers?

   Answer, Aditya Puri, Managing Director. Standalone revenue up 4-5% because capital goods is cyclical; we expect much higher growth this year. Consol drop due to (1) government restricting sugar exports and (2) one Hitachi Zosen equipment shipment slipping to April-May within contractual deadline — no fundamental problem. On margins: clearly stated we will NOT take any future EPC order below 7-8% EBITDA. Philippines numbers: will share closer to next sugarcane season.

4. 4. Working capital, receivables, WHR and oil & gas opportunities

   Renjith, Mahindra Mutual Fund

   Question. Other current liabilities jumped to INR2,359 cr from INR1,401 cr — main reason? Of the INR2,928 cr receivables, what portion is FGD-related? Are we seeing meaningful inquiry traction in waste heat recovery (WHR) for cement/steel and in steel/oil & gas/refinery capex?

   Answer, Kishore Chatnani, Whole Time Director and CFO. Other current liabilities rose because of better payment terms, higher customer advances and higher unearned revenue on technology-intensive and manufacturing orders — a steady-state improvement, not one-off. Of the INR2,928 cr receivables, ~INR400 cr relates to 2 large FGD orders completing this year and one more larger FGD order completing next year; remaining will reduce substantially as the EPC order book shifts to shorter-duration. On WHR: yes, we have many orders; recently commissioned one of the biggest cement waste heat boilers in the world for an Indian customer. On steel/oil & gas: excited about it — Hitachi Zosen has good orders in oil & gas, Pressure Equipment division has strong oil & gas orders.

5. 5. Legacy order book, segment mix shift, Philippines capex

   Rabindranath, Sunidhi Securities

   Question. What is the legacy low-margin order size in the total order book? Which of the 7 segments will see significant decline due to shift to short-cycle orders? Where is the unearned revenue surge coming from? What is the Philippines gross block addition in this quarter and any revenue guidance?

   Answer, Kishore Chatnani, Whole Time Director and CFO. Legacy low-margin orders ~INR2,000-2,200 cr. We are no longer booking fresh FGD orders but replacing with shorter-duration tech like Dry Sorbent Injection, bag filters for 210 MW and similar plants. Power sector share will fall but revenue should accelerate as shorter-duration orders execute faster. Unearned revenue / advances have gone up across multiple order types — a positive mismatch where we collect before spending. On Philippines: 95% will appear in CWIP this quarter as plant was commissioned; gross block addition to come. Revenue to date: ~3 mn litres at ~INR120/litre.

   Follow-up. So Philippines will NOT be commissioned this quarter? That means it will appear in gross block from this quarter? What is the total commissioning gross block for this quarter? Any revenue guidance for this quarter?

   Answer. It HAS been commissioned this quarter — that is why 95% is in CWIP, the asset is being capitalised this quarter. Exact gross block number not available (will be available next quarter after audit). No specific revenue guidance beyond the 3 mn litres already produced at ~INR120/litre.

   Partly answered.

6. 6. Hitachi Zosen JV margins and Eagle Press outlook

   Manish, Thinqwise Wealth Manager LLP

   Question. Manufacturing order book share rose from 21% to 29% driven by Hitachi Zosen (doubled to INR1,048 cr) — but Hitachi hasn't matched standalone margins. Going forward can we expect better margins? International share also rising — partly due to Hitachi? Any insight on Eagle Press turnaround?

   Answer, Sanjay Gulati, Whole Time Director and Head of Manufacturing Units. Hitachi Zosen has booked very good orders this year at better margins than prior years; profits in % terms already up substantially and expected to rise further to standalone manufacturing margins. On exports: yes, >50% of JV orders this year are from overseas. Eagle Press has an order booking problem; we are seeing orders come close to finalisation in recent weeks but not yet booked — better guidance next quarter.

7. 7. Capacity constraint and large-order disclosure

   Nilesh Doshi, Green Lantern Capital LLP

   Question. Peers like L&T and Anup Engineering suggest 20-25%+ revenue CAGR is possible over 3-5 years. You are guiding only double-digit. Is there a manufacturing capacity constraint? Can large orders be disclosed to the exchanges as and when received?

   Answer, Kishore Chatnani, Whole Time Director and CFO. When we say double-digit it starts from 10% — we are hoping to do closer to 15% this year. On disclosure: there is a board-decided threshold policy (different for EPC vs manufacturing) — yes we can and will try to do that.

8. 8. Order inflow guidance and margin objective

   Ruchi Jain, Asit C. Mehta Investment Intermediates

   Question. For FY25 on a consolidated basis what order inflow in INR cr are you expecting? Can we assume continuity of last year's run-rate? Confirming the 8% project margin objective.

   Answer, Aditya Puri, Managing Director. Depends a lot on the macro economy. Economy is good, exports are turning around; we are now booking export orders where we supply machinery under supervision at customer cost/risk — limiting civil work. Cannot give numbers but demand position is good, ISGEC products well in demand; we expect to do better in exports this year. On margin: yes, 8% is the objective for fresh project orders being booked.

   Not answered directly.

9. 9. Legacy order runoff timing, project margin step-up and manufacturing margins

   Anshul Saigal, Saigal Company

   Question. When do the legacy INR2,000-2,200 cr orders come off the book and should we expect a step-jump in margin? Can we expect 7-8% project margin in Q4 FY25 (runoff quarter)? Given boilers may be ~INR1,000-2,000 cr of the INR3,500 cr project revenue, why are project margins only 3.5% — isn't the 8% aspiration conservative? What is the manufacturing margin structure going forward?

   Answer, Aditya Puri, Managing Director. Of the INR2,000-2,200 cr legacy book, INR1,400-1,500 cr completes in current year, INR700-800 cr spills into next year — margin increase will not look like a step jump this year, may be a step jump next year. Don't expect 7-8% in Q4 FY25 quarterly — execution plays out over time. Boiler margins are NOT at double-digit anywhere; the margin step-up will be visible from next financial year. Manufacturing margins: 10-12%. Growth in manufacturing similar to company ~15%.

10. 10. Philippines strategy and new product/technology push

    Mayandra Jain, Way2Wealth

    Question. What is the longer-term strategy for the Philippines plant — are we looking to exit? What new products / technologies are being applied and in which industries?

    Answer, Aditya Puri, Managing Director. Plant built with intent to run and recover money — open to selling at a reasonable price but also willing to run it. Strategy shift means limiting civil/construction content of projects and engineering-heavy work (boilers, sugar machinery, material handling etc). New products: tail gas fired boilers, flue gas coolers, dry sorbent injection, higher-end electrostatic precipitators, bag filters, grain-based distilleries, energy conservation/waste heat and zero liquid discharge for sugar — moving up the value chain.

11. 11. Philippines revenue, capex and manufacturing investment

    Ashwani Sharma, Emkay Global Financial Service

    Question. What is the contribution from Philippines in the 15% revenue guidance? Will FY25 see the earlier INR500 cr Philippines number? What is the cumulative investment in Philippines? What capex are we doing in FY25 for manufacturing?

    Answer, Kishore Chatnani, Whole Time Director and CFO. 15% revenue guidance is standalone; Philippines revenue potential at 42 mn litre capacity (40 mn produced) is INR480-500 cr annually — plant has started, some revenue is coming this quarter, we'll see as it goes on. Cumulative Philippines investment figure not available in the requested format — will be answerable next quarter after capitalisation. FY25 manufacturing capex: ~INR50 cr plus, plan not yet finalised.

    Partly answered.

12. 12. Long-term aspiration and margin structural improvement

    Madhu, MK Ventures

    Question. Despite a strong industry outlook where is ISGEC's aspiration 3-5 years out? Why have margins consistently been low and is there a structural shift? Can we realistically target 11-12% EBITDA in 3-4 years? Can we hold an in-person analyst meet?

    Answer, Aditya Puri, Managing Director. Yes, structural shift is happening — we have decided not to book long-duration projects, moving up the value chain with new products, targeting long-duration energy storage, green ammonia components — positioning ISGEC in the critical decarbonization link. Yes, 11-12% EBITDA aspiration looks practically possible. Will look into organising an in-person analyst meet.

13. 13. Commodity risk and decarbonization classification

    Digant Haria, GreenEdge Wealth

    Question. With commodity prices (copper, iron, steel) going up, as seen in 2022 after Russia-Ukraine, how are we placed this time? Can the order book be segregated into new-age decarbonization vs traditional areas in future presentations? Can you share advances from customers on a consol level?

    Answer, Aditya Puri, Managing Director. Hedging is difficult; risk is always present. But shorter project duration and faster vendor ordering mitigate risk. We have contingencies built in and are within them. On decarbonization segmentation: may not give specific numbers; we are in waste energy, zero liquid discharge for sugar, green ammonia value chain — but no strict classification possible. On advances from customers: wait for the balance sheet.

    Partly answered.

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