Isgec Heavy Engineering Limited (533033) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Isgec Heavy Engineering Company's Q2 FY '22 Earnings Conference Call hosted by Emkay Global. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Abhineet Anand from Emkay Global. Thank you, and over to you, sir.

Thanks, Stephen. Good afternoon, everyone. And on behalf of Emkay Global, I would like to welcome you all for 2Q FY'22 Earnings Call of Isgec. The management team is being represented by Mr. Aditya Puri, Managing Director; Mr. S.K. Khorana, Executive Director and Company Secretary; Mr. Kishore Chatnani, Whole Time Director and CFO. We will have an initial opening remarks regarding the results and recent outlook by Mr. Aditya Puri, post which we'll have the Q&A season. I hand it over to Mr. Aditya Puri for the opening remarks. Over to you, sir.

Good afternoon, everyone, and thank you for joining us on our earnings conference call. I hope that all of you and your loved ones are all well and safe. This is our seventh investor conference call, and we look forward to a fruitful interaction. We've also uploaded our presentation on BSE and NSE and in our website, www.isgec.com, earlier today. For the benefit of the new investors and analysts joining for the first time, I will give a brief introduction about our business. As you all know, we are a diversified heavy engineering company engaged in manufacturing and...

Sir, sorry to interrupt, but your voice is getting a bit muffled. If you can speak a little closer.

Okay. As you know, we are a diversified heavy engineering company. Is it better?

Yes, sir, this is better. Please carry on.

Yes. So as you know, we are a diversified heavy engineering company engaged in manufacturing and project businesses. We manufacture process plant equipment, presses and iron and steel castings. We execute turnkey projects for setting up boilers, power plants, air pollution control equipment, sugar plants, distilleries, factories and bulk material handling facilities. We have also developed strength in construction. We address the requirements of a wide spectrum of industries, namely power, fertilizer, sugar and distillery, oil and gas, automobile components, steel, cement, chemicals, railways and defense. Our presence across multiple industries and geographies help us to spread any sectoral or geographical risks. Let me now talk about our consolidated financial results for the second quarter of this financial year. The total consolidated revenue for Q2 of FY '22 is INR 1,379 crores, which is about 2.5% higher compared to INR 1,352 crores for Q2 of FY '21. The total consolidated revenue for H1 of FY '22 is INR 2,513 crores, which is 3.5% higher compared to INR 2,426 crores for H1 of FY '21. The consolidated EBITDA for Q2 of FY '22 at INR 50 crores is, however, lower compared to INR 148 crores for Q2 of FY '21. The consolidated EBITDA of H1 of FY '22 at INR 103 crores is also lower compared to INR 244 crores for H1 of FY '21. The consolidated profit after tax for Q2 of FY '22 is INR 10 crores as compared to INR 78 crores for Q2 of FY '21. The consolidated profit after tax for H1 of FY '22 is INR 24 crores as compared to INR 120 crores for H1 of FY '21. The profitability has been sharply lower due to, a, impact of commodity price increase; b, time and cost overruns in EPC projects due to the impact of COVID-related disruptions coupled with shortage of skilled manpower; c, sharp increase in freight cost both for purchase of materials and supply of goods to customers; and d, normal employee costs. As you know, last year, we had salary cuts. The major impact is due to increase in the commodity prices. As you may know, steel prices of steel structures and fabrications are about 25% higher in H1 this year as compared to H2 of last year. Similarly, stainless steel item prices are 30% higher during H1 of this year compared to H2 of last year. There has been a sharp increase in the price of motors, cables, accessories, charge ports and electrical panels because of increase in copper and aluminum prices. With commodity price highs continuing, the future looks uncertain. We also see difficulties in having adequate skill power at project sites in spite of offering higher compensation and arranging transport and other facilities. Some difficulty continues in the current quarter also. Travel has picked up compared to previous quarters, and airfares have also gone up. Therefore, travel costs have also gone up compared to last year. As you know, last year, we had salary cuts in Isgec Engineering Limited and Isgec Hitachi Zosen Limited, but we've restored normal salaries in December last year. So salaries are higher for this quarter as well as half year. During H1, Isgec Hitachi Zosen's sales and profit was impacted as dispatch of some large equipment was deferred by customers as they could not arrange shipping. The equipment has been ready for some time now, and the customer has also paid full advance. The revenue and profit will be booked only after the equipment is billed to the customer. In case of Saraswati Sugar Mills, the year is looking good. However, sales and profits have been lower during H1 as export quotas were completed in earlier quarters. Therefore, total sugar sales are lower. All of the above factors contributed to lower profitability. I will now talk about the order booking. The consolidated order book for Q2 of FY '22 is INR 849 crores compared to INR 1,396 crores of orders booked in Q2 of last year. The consolidated order booking for H1 of FY '22 is INR 3,215 crores compared to INR 1,922 crores for H1 of last year. The orders in hand as of 30th September 2021 are INR 7,518 crores as against INR 6,761 crores as of 30th September 2020. The order book position is very satisfactory. Of our consolidated order book, 80% is for the project business and 20% for the product business. The order book includes INR 926 crores for export orders, which is just over 12%. The order book for Isgec Hitachi Zosen is also good. It has INR 537 crores of order as of 30th September 2021. Order booking for H1 is good, and the overall demand trend is encouraging as the inquiry position is very good. Of our order book, about 40% is from PSUs. These orders have price variation clause, and the price increase for some of the materials can be passed on to the customers. For the rest of the book, we have fixed price contracts from customers. While we keep contingency for unforeseen situations such an increase in material cost, variation rate and changes in design, however, given the unprecedented increase in material costs and labor costs for the sites and the extra time for project execution due to COVID-related disruption, the contingency certainly have not been enough. The situation will continue for some time with some of the longer duration orders presently under execution, which were booked before the increase in the commodity prices. For the new orders, we have taken into account higher contingency and margins on costs. Regarding the Cavite Biofuel ethanol project in the Philippines, we are on track to restart construction for the completion of the plant. We continue to think it's a good business and will be profitable to run, though we will keep the option of selling it when it is complete. We have given special emphasis on vaccinations and also organized some plans for vaccination at our offices and factories. 99.55% of the eligible manpower, our employees and contractor workers, have received the second dose. I and my colleagues will be happy to answer any questions.

[Operator Instructions] The first question is from the line of Vishal Prasad from VP Capital.

I have 2 questions. So the first one is if I look at what happened in our Philippine project, we as a company must have had internal meetings discussing this situation. Can you share why did we get into such a situation? Can you also share the leveling plan? Is there anything we have done to avoid getting into such a situation in the future?

So as far as the Philippine project is concerned, I don't know -- we've been talking about it in the earlier conference calls. But the project as well as supplies concerned was very much completed. In fact, more than 60% -- more than 95% of the supplies were at the site. The company was basically -- I don't want to say, but it was a private equity company which decided to close its fund in the Philippines. And because this project was still a little while ago and they had made good money on their other projects, they decided to encash the bank guarantees and close the project as far as they are concerned. So I think one learning is that we will not be sort of going after projects which are purely private equity fund. It has to be a long-term promoter who will be in the project. As far as the project itself is concerned, yes, there might have been some weaknesses on the inject site, but they were not significant. The main reason was that the person didn't want to run the project.

Right. So generally, when you look at private equity, they have a mandate of 6, 7 years, what fund there is and when they have to return it back to the investors. So did we earn any [ deliverables ] while picking up the project?

So we did not earn. But the point is that they made good money on their project and decided to exit and close the fund.

Okay. And the second question that I have is, if I look at the company, I mean for the last 10, 15 years, we have been getting strong in manufacturing. But over the last 10 years, we have primarily focused on EPC and manufacturing is at the same level where it was a few years back. So could you share your thought process behind you not looking for getting into more domains or getting some -- building some capability in the areas in manufacturing?

Yes, yes. I think I can share. So we've been doing marginal investments to increase the manufacturing capacity. And as and when demand is picking up, I have to say that the manufacturing facilities are pretty full. So certain expansions that we had done spent marginal amounts of money. So therefore, you may not know about them. They were marginal amounts, but some increase in turnover for next year from manufacturing can certainly be -- can be expected. And we, as a group, are also looking at investments in manufacturing so as to increase the manufacturing outlook.

Okay. And the last question is on EPC result. Generally, in our country, there are a few good years and then the EPC [ players ], they suffer because of one reason or another. We have been generally prudent with our projects. But when we think about risk, what kind of risk do you take? And how do you try to mitigate it so that we don't get to a situation where we are into a soup?

So as far as risks are concerned for any project, which is above a certain size, and that size is not very bad, we look at a lot of risks including -- we look at a lot of factors including the financial status of the potential buyers or the potential customer, let me put it that way, his financial arrangements, our technical capabilities, our engineering capabilities, our capability to execute the project within -- the costing of the project, the time line of the project and if there are any technological risks associated with the project. Is it a repeat sort of project? Is it a new project? We look at that. And we also then keep a contingency for unknowns. But the sort of hike that we are seeing in the project business -- in the commodity business, and EPC is a lot dependent on commodities, has been quite unprecedented and has been quite -- we could not have foreseen.

Right. So sir, whatever has happened in the past with other companies, is there anything that we have learned from them and we have implemented in our company so that we don't get into a problem?

So one of the things that we have implemented is quicker in the implementation of the projects and to do more engineering upfront so that ordering can be done very fast after the project is awarded and to monitor the projects very closely and to be very clear on certain clauses that the customer delays will cause delays to us and they need to be compensated by the customer.

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

Sir, my first question is, by when do you expect this commodity headwind to be behind us in terms of margin?

So you see, the point is that we are taking orders on the basis of new commodity pricing. We're keeping a slightly higher contingency also. But this commodity price hike is happening. How long it sustain for, we cannot say at this point in time. So the orders that we are taking -- we've taken in Q2 are based on higher commodity pricing. But I hope there is not yet another shock that might happen. So I would say that it would take a little while, 1 quarter or 2 quarters for it to -- at least 1 or 2 more quarters for it to stabilize.

So would it be fair to say FY '23 should be a normal year for us in margin and we could be doing something like 8.5% or 9% margin outcome?

It should be a normal year. It should be a normal, yes.

Okay. And sir, second question was actually if I look at your ordering for the quarter, this seems to be a quite weak number, especially when there was a strong ordering momentum in the industry for your segment. Any particular reason for your market share loss on orderings?

No. So the order book in Q1 was huge. So a lot of the EPC contracts and other contracts, you get the bid and the prices could be open much later -- the price bids could be opened much later. So we have taken orders on the basis of our comfort level to execute the projects. And we have enough orders in all our segments to execute comfortably for the foreseeable future. So as it's been a conscious decision to keep order booking slightly lower in this quarter.

Okay. And sir, lastly, actually, since last couple of quarters, you have been highlighting that you will start construction on the Philippines project again. Sir, what are finally the time lines in terms of starting of the construction and completion of the project? And also, can you share with us what is your balance sheet exposure to this project from a consolidated level? So when I see capital employed of this under construction project, that's just INR 110 crores. So just figuring out what is the total exposure for Isgec.

Okay. So as far as the Philippines project is concerned, as I had said last time -- between last time and this time, the change is that COVID continued in the Philippines. In fact, a lot of our own employees, including the head of our unit, was impacted by COVID. So that's why things got delayed, but we do hope that in the next 30 to 45 days, we would be able to start construction. And the time lines are -- after we start construction, 10 to 12 months, we should be able to complete the construction.

Yes. Let me tell you -- you are asking about the balance sheet. Our annual report gives the breakup there. But I think that the 31st of March, the value of the plant under construction was INR 726 crores. But if you are asking about our exposure, it was -- stand-alone is about INR 254 crores by this company, Cavite Biofuel.

That is sitting in receivables, right?

That's sitting in receivables. That's right.

Okay. So INR 726 crores, of which INR 254 crores is receivables, and you would be having some debt on this project, right?

Yes, we do have some $38 million worth of debt.

Understood. And what would be the final price after completion of this INR 726 crores, the expected price?

That is a function of the market. If we did not have COVID, we could have sold it long back. Now we are still exploring the market. So ideally, we would like above $100 million, but that's to be seen. When we -- it will depend on when we are able to sell it, which means if it gets sold before the construction starts or after the construction starts or when it's completed. It will really be dependent on those 3 situations as to when we can find a serious buyer.

The next question is from the line of [ Shruti Naik ] from [ Bliss Consultant ].

I wanted to ask how has been the performance of Hitachi Zosen, Canadian entity, in this quarter.

So Hitachi also has not -- okay. Let me put it to you this way. The financial future of Hitachi also has not been good. And the primary reason for that has been that 3 major customers have not been able to ship out the goods. The goods are ready. We've been paid for. But they're not being able to ship out the goods, and therefore, the revenue and the profit has not been booked. So that is regarding Isgec Hitachi Zosen. As regards Eagle, Eagle also faced problems because of the slowdown in the automotive sector. It's not because of demand but because of a shortage of chips in North America. So there was a small loss in this quarter. But going forward, we do not expect any -- we expect positive EBITDA.

And another question is like, what would be your market share in this sugar, distillery business in domestic market?

Maybe about 15% or so.

All right. And one more last question, sir. Can you throw some light on our initiative on the green side, like so how we are looking at turning the company into a more greener company? And are we looking at fuel cell hydrogen or some greener technology?

Yes. We are evaluating. We are evaluating future green -- evaluating energy storage in various forms. We are evaluating on that. The technological developments, you'll hear about it in the newspapers. But where to position Isgec, we are working on that.

[Operator Instructions] The next question is from the line of [ Yashuna Bhatia ], an individual investor.

Am I audible?

Yes, yes.

Sure. So my question was basically coming back to this commodity price increase. What we had understood from the last call was that Q1 was a subdued quarter, and by next quarter and for the rest of the year, we were expecting to come back to 12%, 13% kind of margins in the manufacturing segment and 7% to 8% in the EPC segment. But Q2, again, has been subdued. And from what I hear on the call today, it is likely to be so for the rest of the year. So my question was that, one, on the fresh orders that you are booking right now, how are you placed in terms of any future commodity price hike? Because if we are indeed in a commodity super cycle as it has been called, then we're going run into a similar problem next year as well. And my second question was that on the existing orders itself, what we hear from other companies is that they have been able to renegotiate the order terms with the customers and at least partly able to pass on the commodity increase. So why isn't that the case for us as well?

So I'll answer your second question first. We are also trying to renegotiate with customers. We have not taken any credit for that, and I'm not sure how much success we'll get over there. It also depends upon customer to customer. But I don't know how many customers actually renegotiate a fixed price contract. And as far as the commodity price cycle is concerned, I sort of do understand that this cycle may continue for a while. So we are being cautious to take orders at higher margins, keeping higher contingency. But given there is a gap increase, to be frank about the extent of the hike, people are saying that it's probably leveled out now or they're going to be only very marginal increases before there's going to be a fall, but one never knows how it's going to be. So this is a real problem in the capital goods sector that we are grappling with, frankly. So this is a problem. But as of now, the new orders that we are taking are at an increased price and covering the hike that we have.

So are you saying that the new orders continue to be fixed price, and if there was such an increase in commodity, we'll be in a similar problem again?

So we have started asking customers, and some customers have increased -- had agreed to a steel price escalation in the contracts. But it's going to be -- the private sector is going to change slowly for it, slowly. But wherever possible, we are trying to get these losses incorporated.

Okay. And just a last clarification. So Q3 and Q4, you expect margins to be subdued only?

Q3, yes, certainly. Q4, I can't say this now. But Q3, yes.

[Operator Instructions] The next question is from the line of Aryan Mehta from Mehta Consultants.

Can you share some -- throw some light on what are the kinds of segments or industry from where we will see good order inflows and also which of them would be lagging?

So lagging could possibly be automobile. Automobile is one which is likely to lag. But power, steel, cement, railways, I think these are the segments -- and actually, all metals, these are the segments, I think, where growth can possibly come from.

Okay. And how is the order booking for the FGD segment going on? Can you share some details or numbers on that?

FGD segment, we haven't had any major orders in the last quarter. But there are inquiries for air solution control equipment and -- which may be FGD or maybe some derivative of other pollution control equipment, which are likely to be finalized soon.

Okay. And also coming to like the government and private sector. So how do you see a mix change as private capital expenditure is expected to increase with like the economy is growing? So your views on that.

I think private will sort of -- I'm not saying dominate, but the ratio will probably -- private sector investments should improve. The share of private sector investments should improve.

Okay. Okay. And my last question would be related to joint venture. So I mean in the current year, how do you expect them to perform?

We expect -- for the year-end, we expect them to perform reasonably well. Eagle will show a slight loss for the year. But otherwise, all of them should perform well.

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

Continuing on the order pipeline, would you be able to quantify like how big is the order pipeline in value terms and which are the larger segments within this?

Sure. The order pipeline is good for power, steel, cement, railways. It's also good from oil and gas, refineries. And a lot of inquiries from them. The inquiry flow is pretty large at this point in time. Kishore, would you just like to add anything there?

Sir, fertilizers, cement.

Fertilizers, yes, yes, yes.

Okay. Sir, what I was trying to -- probably try to get a perspective was in terms of new terms, how would you see that, the pipeline order value? And how would it compare with the last year? Just to get a sense that what kind of growth is there in the order pipeline.

So right now, our order book, if the figures are right, is about INR 1,000 crores more than at the end of the year. Right, Kishore?

Order book, right sir, but he is probably wanting to know about the pipeline.

Pipeline is also -- I would say, would be about 10%, 15% higher than the corresponding period of last year. The pipeline is higher, and pipeline in terms of inquiries from exports have also gone up.

Yes. In fact, that was my follow-up question because, sir, in recent past, we have been seeing that export order book as well as export revenue has been on declining curve. So how do we see that going forward?

So going forward, we see in the next couple of quarters, maybe beginning Q4, already we booked some export orders. But beginning Q4, I think the momentum would catch up as more and more countries are allowing us to enter now, including the U.S. and a lot of other countries. So we are just in the process of now beginning to send our people abroad for marketing efforts. So for instance, we posted one person [ in the U.S. ], but it's very difficult for us to -- for him to commute -- for the person -- for people to commute. So we've now stationed somebody there. And for the other areas also, we would be coming out -- we are deciding a strategy as to how to increase exports.

[Operator Instructions] Next question is from the line of Ankit Sancheti from Kotak Asset Management.

Two questions from my side. The first question is regarding your order book. You mentioned that 40% of orders do have a price variation clause. But typically, even those orders will not be sufficient. And we have seen in the past that even with price variation clause, there is still something which is not covered, and one needs to absorb that. And on top of it, you have 60% contracts which are fixed price contracts. So while we can't do about the backlog, but strategically speaking, over the next couple of years, do you want to change that mix to a more dynamic model where we can have more price variation clause orders? Or the structure of industry doesn't allow you to change the mix and it will remain -- and ultimately, we have to bear either the benefit or the cost of RM?

Yes. So your point is valid. Your second point is valid that do we want to change it, we would like to minimize our risk. So there are 2 spectrums to it. One spectrum to it is that projects which you would have normally taken under normal circumstances, you would have taken. Right now, some of those projects you do not take because you think that the risk involved is not in our favor. And the other thing you need to try and get customers to sort of incorporate escalation clause in their contract. But this is -- as you said, the buying behavior of the customer and the selling behavior of people like us has to change. And so we've started doing it. We've got some success. And hopefully, more -- our competitors will also ask for it and we may be able to persuade our customers to accept it.

Okay. And just trying to understand on the order backlog itself, 20% are typically equipment order is what you mentioned. Is that right?

Yes, product. Yes, you're right.

So at least on those orders, we would have been able to minimize the impact because -- at least in those...

There's some impact, but it is less. The impact is less on those orders. Also because...

Because the execution cycle is lower for those orders, equipment order if you make and sell?

The execution cycle is also lower. And because there is a lot of manufacturing involved in it, the material cost as a percentage of the orders is also lower.

Okay. My second question was with respect to -- and it is just trying to understand how the reporting happens from an accounting perspective. So when I see your consolidated results, obviously, we are going to start constructing that ethanol plant. So just trying to understand. If I look at the segment revenue, there is INR 13 crores of negative value, which is attributable to that plant in this quarter. And then the segment results reports INR 17 crores of negative EBIT because of that. So how does the accounting happen for this plant? Because progressively, once we start constructing this plant, are we going to incur -- continue to provide for losses for the same till the time it is eventually sold out? Or ideally, can we capitalize this plant and then book a net profit or loss at the end, whether it gets sold or it doesn't get sold? So just trying to understand from an accounting perspective how this is going to shape up in the next few quarters till the time your execution of construction of that plant happens.

Let me answer that, please. So firstly, presently, construction is not going on. But there are certain expenses which are being incurred relating to salaries of some people we have there and security, safety, insurance. And those kind of expenses are there, which we are charging off to -- so some of that loss that you're talking about is because of that. The other major part of loss is because of the change in the exchange rate between Philippine peso to dollar to rupee and so on. And that can come positive or negative. But you're right, once we start completing the plant, we are able to capitalize whatever further investments are made for implanting machinery and construction. And because today, there is no construction happening, so even the salaries and all the other overheads that we are incurring, we are charging to P&L. We are not capitalizing that. I hope I...

Yes, yes. So it partially answers my query. But just extending that point, so if I look at the last quarter, the June quarter, we had minus INR 6 crores -- or a loss of INR 6.5 crores. And this quarter, it has increased to INR 17.5 crores. So the employee cost, the salary cost and all other...

It is largely ForEx variation.

Okay. It's largely ForEx variation.

It's an accounting loss. It's not actually a cash loss. It's an accounting loss.

Okay. And second question is on unallocated expenses. Again, they have increased mathematically on a Q-o-Q basis from INR 2 crores to INR 14 crores. What am I missing here?

You will have to help me understand. What is it that you're talking about?

So I'm just trying to understand. What has led to such a sharp jump in unallocated cost on a quarter-on-quarter basis from INR 2 crores, INR 2.5 crores in Q1 to INR 14.5 crores?

I was not able to correlate what exactly you're talking about from the results. Which page of the results you're looking at?

So I am looking at Page #16, the segmental reporting which happened, on which we have unallocated expenses.

For this quarter?

Yes, yes, absolutely, for this quarter only, for Q2 FY '22.

Okay. Give me a few minutes to look at that and come back. Maybe we can answer this question a little later in the call.

Sure, sure. That's all from my side.

[Operator Instructions] The next question is from the line of Anshul Saigal from Kotak AMC.

Regarding the raw material cost impact that we have spoken of during the call, if we look at the EPC business, that's a long cycle business, while the manufacturing business is a short cycle business. And even in manufacturing, on a year-on-year basis and also on a quarter-on-quarter basis, we are seeing a meaningful impact on margins. Is that again -- I mean, while in EPC one can understand that it's long cycle, and plus we have fixed price contracts, so there will be variation, but in manufacturing, is it only raw material? Or there is also other costs which have gotten added?

It's basically raw material and also manufacturing is also -- if you see the half yearly results, it's also impacted because the turnover was lower because of COVID and oxygen not being available and all those other factors. So the turnover has started picking up in the second quarter. In Q3, Q4, the turnover should be good. So at least the overhead adoption will be better. And to that extent, margins will be better. Steel price hike again is unpredictable, but overhead recovery would be much better in Q3 and Q4.

How much of our contracts in manufacturing are fixed price? Do we have some room to pass on raw material costs?

Manufacturing, unfortunately, everything is fixed cost. Manufacturing is fixed.

And as we book an order, we don't book back to back our raw material?

So our policy is that as you book an order, you try and order as quickly as possible. But what happens is that the -- a certain amount of engineering has to be done before ordering can be done. So that time lag is there. But as soon as the engineering is completed, as I said earlier also, we are trying to expedite the orders.

Okay. The question arose mainly because of the time line of execution of these orders, which is probably under 12 months, maybe even 8 to 10 months. And still, there is a significant impact. So that's really where I was coming from. Anyway...

So I'll just answer that question for you also. All our products in manufacturing -- or let me put it 95% or between 90% and 95% are all engineered to order. There is nothing that we can -- there's a very small segment where we can keep stock or we know what to exactly order on the day we get the order, and just so that you know, the quantities increase from [ just order ]. It doesn't happen, unfortunately.

Got it. My second question is that of our INR 8,600 crore revenues in EPC, how much is -- I mean would boiler be about -- sorry, this is INR 867 crores. Of that, would boilers be about INR 200 crores, INR 220 crores?

Yes, something like that. Yes, yes, yes.

Now in which case -- I mean that means that in the EPC, we've incurred a significant loss. Would that be a fair assumption on account of raw material? Because I'm assuming that in boilers, we would be making somewhat similar to manufacturing margins. And what that means is that in EPC, I mean, given that we have only about 1% EBIT margin in EPC, in the actual EPC business, we would have incurred a significant loss.

So boilers also, we do not manufacture more than 15% of the boilers because [ it's all like ] by taking out the project. It's not that the boiler is manufactured in our -- or in any of our manufacturing unit. Some pressure parts are done, but that is all outsourced.

Correct. But it's all fabrication, right, like the pressure vessels, which we have in manufacturing. So it would be more or less all fabrication. And in manufacturing, you are, even at this time, making 8% margins.

So those pressure vessels are the only thing that we manufacture, which is about 15% of the body of the boiler. The rest are not fabrications. Those are all bought out. It could be fans, motors, structures, erection, cable, all those.

Okay. And so you're saying that even on that count, there has been a price escalation, which has not been passed on to the...

Exactly, yes. It's not like manufacturing. It's not like that we are manufacturing the whole boiler, yes.

Okay. And my final question. Can you just throw some light on our -- on the future technologies, say, batteries, hydrogen, et cetera? What are we -- what is the strategy on that? I did read in the annual report that we are targeting some of these technologies, and we are actually kind of working around the strategy on these technologies.

Right. So we are looking at what value-add hydrogen could provide or batteries or energy storage of other forms other than batteries, then energy savings, the investments in energy savings and also the way the buying behavior is going to change because at sites, it's becoming very difficult to work. So are people going to do more working shops? So we are looking at how digitization is going to affect our products. We are looking at it, and we will -- we have to place Isgec at the right place, the right thing because a lot of these are very nascent in the world overall also. And so we cannot be paying a very high amount to get a technology which we are not -- which the world is not very sure of. But we are regularly having technology meetings to see what's going on in the world and where we can place assets.

The next question is from the line of Nishith Shah from Aequitas.

Sir, I want to understand this point about shortage of skilled labor. So how are we dealing with this? And what kind of cost increase are we seeing over here?

So we are very proactively trying to get labor, organized transport, organized vaccinations -- vaccinated before they come to the site. So labor, which used to be generally available contractors, we used to have labor. We have seen that currently, people have -- got used to staying at their native places, and less number of them are willing to come to site to work. So basically, we are seeing -- I can't quantify the number for you right now, but we are seeing that we have to pay people more. We have to get more people to make up for the lost time. And generally, the scarcity has and will create some problems in the times to come.

So is it improving?

It's improving. It is improving. It is definitely improving.

The next question is from the line of Digant Haria from GreenEdge Wealth.

Sir, my question is, sir, in terms of -- see, we are running full on order book. And probably, like we are seeing the worst of commodity inflation and labor inflation. So can it be the case that maybe next 12 months, like we just operate at very low EBITDA margins and near or negligible profit? That's my question number one. And question number two is that in the new orders, what kind of inflation are we building? Like let's say the steel prices and everything goes up even more from here and we build orders based on today's steel prices, maybe even the future order books, we don't see meaningful accretion to our EBITDA or profit. So yes, these are 2 questions from my side.

So this is really a dilemma that we are also facing. And therefore, we are being a little more selective in booking orders. So one thing is to say that you don't book orders now, let the cycle stabilize, and then we'll see what to do. But I don't think that is a very -- too good strategy to adopt. So there is a little bit of the risk involved in taking orders at this point in time. But we are hopeful that the commodity price hike -- see, there is a point -- there is a tipping point where the economy will not be able to sustain these or the world will not be able to sustain these commodity price hikes. There is no very clear explanation as to why it is happening to the extent that it is happening. Is it just pent-up demand after the pandemic and that's causing it? Or is it because of the excess liquidity that various governments have been -- have pumped into the economy? Once that effect moves out, commodity prices will fall? So like nobody expected them to rise this fast. Nobody is talking about a fall right now, but it might fall also. So while the next 1 or 2 quarters has been uncertain, my own feeling is that this cycle should reverse itself soon, but that is just my own personal gut feel. But yes, there is an element of risk in taking orders right now.

Right, sir. So just one follow-up to this that, let's say, commodity inflation and labor inflation, both is not in your hands, like you cannot be held for it in any way because it's not in your hands. But let's say that if both of these things stabilize in the future, like have we -- has our operations and has our learning and our execution still improved in most of our areas that we can see 6% EBITDA margins in EPC business and maybe 10%, 12% in our products business if these 2 external factors were to stabilize?

Yes, things will certainly improve -- certainly improve. And as far as the labor price inflation is concerned, it's more at sites at remote locations because people do not want to leave where they are. As far as our factories and all are concerned, we are not facing any significant inflation or shortages of labor.

Okay. Okay. Okay. I get it, that if things improve, we will see those 6% and 12%, which generally is our...

We will see things improve, the margins improve, yes, margins improve, yes.

The next question is from the line of [ Shruti Naik ] from [ Bliss Consultant ].

Sir, just so that your working capital has elongated due to higher share of government sector orders, so what is your thought process on the same? And will the working capital decline in the future?

Kishore, would you like to answer this?

Yes. Your observation is right. We have more working capital now because of higher PSU orders. So earlier, if you remember, maybe about 2 quarters ago, the order book was 50% -- nearly 50% was from PSUs. The percentage of order book from PSUs has declined to about 40%. But there are certain projects, and in most of these projects, the payments are linked to milestones. So even though we spend money in cement, steel and all the other materials supplied to the sites, the payments become due once we complete certain milestones. So as of now, we have certain projects which are large, early projects and which are at an advanced stage of implementation where, I mean, the milestone payments have become very large. So in normal terms, we would not have taken the same payment terms from private customers, but from PSU companies, we certainly know that the money is there and they will pay. So there is no issue about safety. But yes, there is a situation where we are borrowing from banks. Of course, all the interest costs were always factored into those projects, but there will be some amount of cash flow -- working capital increase. Of course, because of this COVID and some stretch on these project implementation time lines, they got a little more pronounced.

The next question is from the line of [ Shiva Mosamala ], an individual investor.

My question is related to the ethanol, which, I think, we were supposed to start from end of November. So what is the revenue and the profitability expected in this quarter from that ethanol plant? And the second question is regarding the margin. Like what kind of margins you are expecting in Q3? Is it similar to Q2? Or maybe overall performance maybe improved in this quarter? Q3 may be slightly better than Q2?

Q3, I will not be able to tell you exactly. But as far as the ethanol plant is concerned, the plant is all ready. We are just waiting for one excise license to come, which we expect should come soon. Kishore, can you help me with the revenue? We will not be able to tell you the profit, but the revenue from that operation.

For the ethanol plant, which will start hopefully soon, maybe in about few weeks' time, so this quarter, it will be very small for that plant. So we would not really expect any revenue this quarter.

Yearly, not really a quarter. Like how much revenue from the next year onwards we could expect?

Yearly, we could give you. Yearly, we could tell you.

Yearly revenue is about INR 200 crores.

Yes. Sir, regarding margins, you said that Q3 might not be similar to Q2. And maybe Q4 onwards, we could see some improvement.

Yes, we're hopeful to see some improvement, yes.

The next question is from the line of [ Yashuna Bhatia ], an investor.

So my question was that the commodity price inflation is something which is affecting the entire sector. But if I look at the operating margins last 2 quarters, we are at the lower end of the range. The rest of the sector is largely starting from 6%, 7% to 12%, 13%. So why is it so that we are more affected compared to the rest of the sector? I wanted to hear your thoughts on that.

So we've done more work in the EPC segment than we did in the past few years. And also, as I said earlier, we got into some new businesses which are new on the learning curve like FGDs and other businesses. And the new orders in these segments are at better margins. So we do hope that barring commodity price increase, we would be able to perform better.

As there are no further questions, I now hand the conference over to the management for their closing comments. Over to you, sir.

Thank you. Thank you, everybody, for being here. And thank you for attending the conference, and we do look forward to virtually meeting you again after the third quarter. Thank you and stay safe.

Thank you. Ladies and gentlemen, on behalf of Isgec Heavy Engineering, that concludes this conference. Thank you all for joining us, and you may now conclude your -- disconnect your lines.

Thank you.