>ICSA LIMITED: Ready to takeoff

We recently had a conference call with the management of ICSA (India) Ltd. to have an understanding of i) the corporate strategy for their new SMART meters manufacturing facility, ii) new product development, and iii) recent developments within the T&D industry, specifically RAPDRP. ICSA is bullish on the demand potential of the SMART meters facility with peak revenue potential of Rs.1000–1500mn in the next 3-4 years. ICSA is also bullish on Power Quality Management Systems (PQMS), designed to monitor interruptions, durations, voltages etc., at each distribution transformer level. Near-term triggers to the stock include possible order inflow from high margin ESS business from Q3 FY11 onwards, fruition of which could provide an upside to the current order book of Rs.18bn. We reiterate our BUY rating on the stock with a price target of Rs.239/share.

■ Strengthening SMART meter capacity
ICSA has set-up SMART meters manufacturing facility in Andhra Pradesh with a total capacity of 150,000 meters/month at a cost of Rs.260mn. SMART meter is a combination of energy meter and a communication device, which would form a part of smartgrids network in the country. ICSA sees immense demand potential for these meters going forward. Presently, the company is planning to produce energy meters and other embedded solutions like RTU and IAMR in this facility, which would be supplied to its distribution utilities. The company is looking for revenue of ~Rs.1,000–1,500mn/year from this business unit at the peak, which is expected to happen in the next 3–4 years. The company is expecting margins of ~10–12% for energy meters and ~20%+ for SMART meters.

■ Product pipeline getting stronger with Power Quality Management System (PQMS)
ICSA has recently completed a pilot project for installation of a power quality management system (PQMS). PQMS has been designed specifically to monitor interruptions, durations, voltages etc., at each distribution transformer level. This equipment would help to improve power quality. The company expects immense potential for this new product going forward.

■ Expects orders inflow for high margin ESS business by Q3FY11 onwards under RAPDRP
The company is maintaining the same guidance in terms of orders inflow for its high margin ESS business from System Integrators by Q3FY11 onwards under RAPDRP. For SCADA solutions, the company is expecting floatation of tenders after one and a half month. Currently, the company has placed bids for projects worth ~Rs.2bn for ESS business (other than SCADA solutions) and ~Rs.8bn for overall ESS and SCADA solutions. These above said orders are not part of the opportunities available under RAPDRP.

■ Looking for other opportunities available in Oil & Gas and Water segment
ICSA is considering a business opportunity of Rs 16–17bn for its product Intelligent Cathodic Protection System (iCap) from the oil and gas segment in the next 2–3 years. Apart from this, the company is looking for a business opportunity of Rs.21–22bn for its products Intelligent Automatic Water Meter Reading and Agricultural Load Management System from water and irrigation segment in the next 2–3 years.

■ Maintain “BUY”, with a price target of Rs.239/share
We expect a subdued performance in 1Q FY11 – net sales of Rs.3bn, down 2% Y-o-Y and PAT of Rs.247mn, down 27% Y-o-Y. However, we maintain our full year estimates for revenue and PAT despite subdued 1Q as we expect 2H FY11 to be much better than 1H, since generally 60% of revenues get booked in 2H. We thus maintain our BUY rating on the stock with a price target of Rs.239/share.

To read the full report: ICSA LIMITED