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ICSA: An overview - Views on News from Equitymaster

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ICSA: An overview
Sep 22, 2008

Brief background:
ICSA is focused on providing technology solutions to the power sector in identifying transmission and distribution (T&D) losses and monitor power consumption. It also provides remote monitoring applications to multiple sectors like oil & gas, mining, irrigation, transport and water utilities. It has developed innovative products for power utilities in the field of energy management, energy audit and control applications. The company was incorporated in the year 1994 and is headquartered at Hyderabad.

Let us see the financial performance of the company in the last five years i.e. between FY04 and FY08.

(Rs m) FY04 FY05 FY06 FY07 FY08
P&L          
Net sales 60 215 811 3,325 6,707
Operating profit 5 50 201 805 1,804
OPM (%) 9% 23% 25% 24% 27%
Net profit 4 37 151 589 1,111
NPM (%) 6.4% 17.3% 18.6% 17.7% 16.6%
Balance sheet          
Total Equity 57 98 429 944 3,403
Total Debt 7 4 38 1,460 2,014
D/E (x) 0.1 0.0 0.1 1.5 0.6
Working cap 59 71 420 1,452 4,057
% sales 98.3% 33.0% 51.8% 43.7% 60.5%
NFA 6 37 63 107 917
Sales/NFA (x) 10 6 13 31 7
Ratios          
RONW 6.8% 38.0% 35.2% 62.4% 32.7%
ROIC 6.0% 34.6% 31.0% 41.1% 26.1%
Interest coverage 16.0 102.0 184.6 13.6 6.8
P/E* (x) 10.7 25.3 24.0 14.0 13.8
* Source: CMIE

Profit and loss account:

  • The company managed to grow its sales at a stupendous CAGR of 225%, backed by increased investment in the domestic T&D sector. To put things in perspective, capacity added during the 10th five-year plan was 225% over the 9th five-year plan and the company was able to capitalize on this opportunity through its various products. It should be noted that the company was coming off a very low base and hence, the strong show on the topline front. Also, the highly scalable nature of its business model seemed to have worked in its favour.

  • The operating profit margins of the company expanded from 9% in FY04 to 27% in FY07. The operating profits grew at a CAGR of 326% during the same period, higher than the topline growth. This was brought about by a consistent reduction in cost material consumed, one of the key cost components of the company, which accounted for 67% of the company’s total revenues in FY08.

  • The bottomline growth of the company came in slightly lower than the operating profit. It grew at a CAGR of 312%, as the company has increased its debt substantially in FY07 and FY08, which resulted in higher interest outgo.

Balance sheet:

  • The company’s debt equity ratio increased from 0.1 in FY04 to 1.5 in FY07. However, in FY08 it reduced to 0.6 as some of the FCCBs, which were issued by company in FY07, got converted, resulting into an increase in net worth and a simultaneous reduction in debt.

  • The working capital (cash excluded) of the company grew at lower rate as compared to the topline. It grew at a CAGR of 188%. The debtors days, a key constituent of the company’s working capital have been reduced from 267 days in FY04 to 174 days in FY08.

Cash flows:

  • The company has invested around Rs 4.9 bn in working capital between FY04 and FY08.

  • The company has invested around Rs 972 m in fixed assets between FY04 and FY08.

  • The significantly higher working capital investments as opposed to fixed assets indicates that the company is highly working capital intensive as opposed to being fixed capital intensive. Furthermore, the company’s bargaining power with respect to its customers seems to be on the lower side as while its debtor days have reduced over the years, it still stood in the region of 6 months in FY08. This has put a lot of strain on its cash flows, necessitating fund raising despite the strong bottomline show.

Future prospects: The power generation capacity in India is expected to increase substantially on account of the government’s efforts to reduce the present demand and supply mismatch. Also, many of private sector players have entered the power generation sector to capture the emerging opportunity in the sector. This has made the government to increase its investments in T&D sector, an area addressed by ICSA. Moreover, with energy audit becoming mandatory for Indian power utilities, it would create substantial growth for the company independent of additional power infrastructure. The company is also targeting other sectors like the oil & gas sector through introduction of new products.

The working cycle of the company could be adversely affected if it continues to work with government power sector utilities as most of them are running in losses. Moreover, the inability of the company to innovate technology intensive solutions on a consistent basis could hurt growth in the long run.

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