ION Exchange (India) | Q2FY20 Result Update, Early signs of ramp-up in SRL execution seen

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Ion Exchange (IEL) reported strong set of Q2 numbers. Early signs of ramp-up in SRL order execution was seen. Also, growth in Resins exports continues. These 2 factors led to strong surprise on the Q2FY20 Revenue/ EBITDA/ PAT.

–  Sharp decline in order wins (Q2FY20- Rs1.01bn; 68.7% YoY in H1FY20 to Rs1.94bn) coupled with marginal increase in execution (excluding large orders) led to decline in OB at Q2FY20-end to Rs7.56bn (excluding SRL order). IEL participated in tenders worth Rs50bn (30% is from Municipal segment). Mgmt. highlighted that there are 1-2 orders, where IEL stands good chance of winning (ticket size slightly lower than the SRL order). These orders should get finalized soon.

–  IEL reported 68% YoY increase in Q2FY20 consol. revenues to Rs4.09bn (v/s our estimate of Rs3.51bn). In its 11th quarter of execution, SRL for the first time crossed quarterly revenue run rate of Rs1bn (booked revenues of Rs1.20bn), indicating early signs of ramp-up. On adjusting for large orders, we expect YoY Engineering segment revenue to have grown around mid-single digit range. Engineering revenues grew 110.5% YoY to Rs2.76bn led by strong execution from SRL order and healthy opening order backlog. Also, growth momentum in export of Resins continued (as seen in FY19). Chemical & Resin segment revenues grew 16.2% YoY to Rs1,159mn. Chemical/ Resin manufacturing plants are now running at 65/ 90+% utilization.

–  Despite sharp decline in YoY gross margins (due to increased outsourcing of SRL order), Ion Exchange reported 143bps improvement in its EBITDA margins to 8.0% for Q2FY20, ahead of our expectation of 6.9% (reported Rs329mn of EBITDA v/s our estimate of Rs243mn), due to better control over other expenses (as % of sales declined from 16.5% a year ago to 12.0% in Q2FY20). Notably, at the segment level Chemical and Resin segment reported EBIT margins expansion (at 14.5% in Q2FY20 v/s 11.7% in Q2FY19). Improvement in Q2FY20 segment margins is due to shift with in the segmental revenue mix, where Resin contributed 60% to segment revenues (v/s 50% in Q2FY19).

–  Strong operating performance, decline in finance expenses (-16.2% YoY), lower tax rate (21% Q2FY20) resulted in robust PAT growth of 126.9% YoY to Rs257mn (net margins improved from 4.6% in Q2FY19 to 6.3% in Q2FY20).

Outlook and valuation: We expect the current quarter’s strong performance to continue for next 3-4 quarters on the back of execution of SRL and other large orders. We expect the increased traction in other large orders in next 2 quarters, which should put the company’s revenue growth in a higher growth trajectory (mgmt. maintained its 50% top-line growth for FY20E). Also, the upcoming capex in Chemicals and Resins segment should help IEL grow its cash generating potential from the business. We intend to come out with a detailed note post meeting the management, where we intend to get more clarification on the numbers.