ProsperoTree.com first recommended a buy on ISGEC Heavy Engineering at Rs. 950 - Rs. 1,050 on 26th May, 2014. Post which, there were several updates as listed below.

Date	Price	Link
26-May-14	Rs. 1000	ISGEC - Power Investment Idea
10-Nov-14	Rs. 3200	ISGEC: Remains a POWERful Investment after 220% returns
05-Jan-15	Rs. 5800	ISGEC Forms New JV with Foster Wheeler

From our first recommendation, ISGEC has become 6.2 times. Even at the current price of Rs. 6,062, we recommend to HOLD the stock and add on declines.

Though the price run-up has been massive, we think there is enough juice left considering its future prospects.

ISGEC FY15 Performance Summary - The Year Gone By

1. Strong Show in Engineering Business Continues: Over last 5 years, even though the capex cycle in India was on a standstill, ISGEC has been able to double its sales to Rs. 3,631 crores in FY15.
This was achieved on the back of increased focus on international marketing and intensive efforts in the improvement of product design. Based on ISGEC international marketing efforts, we think that ISGEC should be able to maintain healthy growth rates in sales over next 3-5 years.

2. Increasing Product Basket through Technical Tie-ups: ISGEC has been quite aggressive in bringing in best technology from various parts of the world. In addition to its many existing tie-ups, ISGEC has further formed two joint ventures in the last 6 months:

a. JV with Amec Foster Wheeler North America Corp: ISGEC already has licensed technology of Foster Wheeler for three types of boilers. However, their relationship has strengthened with the Joint Venture now in place. This JV will commonly look to undertake detail engineering of Pulverized Coal Fired Boilers of both ISGEC and Foster Wheeler.

b. JV with Titan Metal Fabricators, U.S.A: Through this, the company will be taking fabrication for various types special metals like Titanium, Tantalum, etc.

3. Strong Order Book; Modest Growth should Continue: ISGEC currently has the highest ever order book due to which the coming year’s sales should be higher than that in FY15. Due to its constant efforts in the last 5 years, the company is well positioned to get further large orders from exports in the Sugar Refineries and Pertroleum Refineries. However, due to the fall in crude prices, the ISGEC Hitachi Zosen JV will face issues in terms of new orders.

4. Engineering Profits will Continue to Increase despite Higher Base: ISGEC's engineering business (non-Sugar) EBIT margins after adjustment of foreign exchange income / loss saw improvement from 5.3% in FY14 to 7.4% in FY15. The margin expansion coupled with growth in sales led to a sharp increase in its EBIT from Rs. 77 cr (6mFY14) to Rs. 262 cr (FY15). With higher base for margins in FY15 and currency depreciation of competitive countries like Japan, Korea, and Brazil, margins may moderate in near term. However, inspite of the same, the growth in sales should increase the profits in future.

5. Losses from Sugar Subsidiary (Saraswati): ISGEC has a subsidiary named Saraswati Sugar Mills which showed a Rs. 39 crores operating loss in FY15. This was in line with industry performance as the sale prices of Sugar has reduced to Rs. 22-23 per kg as against the cost of production of around Rs. 30 per kg. This remains a concern as the Sugar sector in India is bleeding badly due to the government control.

Valuation and View: At the CMP of Rs. 6,062, ISGEC has a market cap of Rs. 4,467 crores. ISGEC’s FY15 consolidated profits stand at Rs. 118 crores. This means ISGEC trades at a trailing multiple of 38 times. However, if we adjust the same with the sugar mill loss, ISGEC’s core business profits stand at Rs. 157 crores with a topline of Rs. 3631 crores. This implies that ISGEC is trading at a trailing price to earnings multiple of 28 times adjusted for sugar business loss. The price run in the last 1 year is substantial in ISGEC; in the longer run, ISGEC has a substantial scope to increase its sales and profits. We therefore recommend a HOLD on the same.

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Dhruvesh Sanghvi is a Research Analyst registered with SEBI having registration No: INH000000875.

Definitions of Rating system:

• Fresh Recommendation Reports: These reports are first-time initiation reports on the concerned stock. Usually these reports are followed by updates on the same.
• Update Reports: These reports include result update, event updates, annual report analysis and/or any other information that may be useful for the investor in relation to the concerned stock. Most of these update reports will have our current view on the same.

• Buy: This means buying the concerned stock at current market price.
• Buy on Dips: This means buying the concerned stock on the explained fall in price.
• Hold: This means holding the concerned stock until further update.
• Sell Partial: This means selling half of the existing position in the concerned stock.
• Exit: This means completely exiting the concerned stock.

4. Explanation of Indicative Target Price: Achievement of Target Price does not imply Exit / Sell Partial. We will explicitly release Exit/ Sell Partial Report at an appropriate time. If required, Indicative Target Price could be revised based upon business performance, market environment or any other important event.
DISCLOSURES by RESEARCH ANALYST UNDER SEBI (RESEARCH ANALYSTS) REGULATIONS, 2014 is as under:
• Introduction: Prospero Tree Financial Services is an independent equity research proprietorship firm of Mr Dhruvesh Sanghvi.
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• Disclosure with regards to ownership and Material Conflicts of Interest:
1. Neither Dhruvesh Sanghvi, Prospero Tree Financial Services, its associates, its Research analysts hold any position in the subject company.
2. Neither Dhruvesh Sanghvi, Prospero Tree Financial Services, its associates, Research Analysts, nor its relatives, have more than 1% ownership of the subject company at the end of the month immediately preceding the date of publication of this report.
3. Neither Dhruvesh Sanghvi, Prospero Tree Financial Services, its associates, Research Analyst nor its relatives, has any other material conflict of interest at the time of publication of the research report or at the time of public appearance.
• Disclosure with regards to Receipt of Compensation:
1. Neither Dhruvesh Sanghvi, Prospero Tree Financial Services or its associates, or Research Analyst has received any compensation or other benefits from the subject company or the third party in connection with the research report in past twelve months.
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• Other Disclosures:
1. The Research Analyst has not served as an officer, director, or employee of the subject company.
2. The Research Analyst is not engaged in market making activity for the subject company.

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