International Combustion - Dark Horse

International Combustion Became Debt Free, Margins Improved

The revenues of International Combustion India Ltd (ICIL) grew by 15.6% year on year (yoy) to Rs24.1 crore in Q4FY2007. The revenues of the heavy engineering division (HED) grew by 24.8% yoy to Rs18.4 crore while that of the geared motor and geared box division (GMGBD) declined by 5.1% yoy to Rs5.9 crore. However, on a sequential basis the GMGBD's top line grew by 61.2%.

The operating profit margin (OPM) of the company improved by 280 basis points yoy to 20.3% in Q4FY2007, in line with our estimates. The margin expansion was driven by a lower raw material cost as the raw material cost as a percentage of sales ratio declined to 51% from 56.3% yoy. Consequently, the operating profit grew by 34.6% to Rs4.9 crore.

The margin of the HED improved by a whopping 1,340 basis points yoy to 32.6% while that of the GMGBD declined by 1,800 basis points to 14.7%. The GMGBD's margin declined largely because the company started manufacturing the B2000 series of geared motors and gear boxes in this year. It has made huge investments in the B2000 series project the results of which will get reflected in its FY2008 numbers.
The interest cost declined by 7.7% yoy to Rs0.1 crore as the company repaid its entire debt and became a debt-free company in this year. Consequently, the net profit grew by a strong 47.4% yoy to Rs2.8 crore.

The outstanding order book stood at Rs56 crore out of which the HED's order book stood at Rs48 crore with the GMGBD accounting for the balance Rs8 crore.

ICIL is currently trading at a price/earnings ratio (PER) of 6.8x its FY2008E earnings and 4.2x its FY2008E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). Considering the strong order backlog and the expansion plans of its key user industries such as steel, sugar and cement, it remains a good buy.