ISGEC HEAVY ENGINEERING LTD (ISGEC) Q2 FY22 Earnings Concall Transcript

ISGEC HEAVY ENGINEERING LTD (NSE: ISGEC) Q2 FY22 Earnings Concall dated Nov. 17, 2021.

Corporate Participants:

Abhineet Anand — Investor Relations

Aditya Puri — Managing Director

Kishore Chatnani — Whole Time Director and Chief Financial Officer

Analysts:

Vishal Prasad — VP Capital — Analyst

Deepesh Agarwal — UTI AMC — Analyst

Shruti Nayak — Bliss Consultants — Analyst

Yojna Bhatia — Individual Investor — Analyst

Aryan Mehta — Mehta Consultant — Analyst

Manish Goyal — Enam Holdings — Analyst

Ankit Sancheti — Kotak Asset Management — Analyst

Anshul Saigal — Kotak AMC — Analyst

Nishit Shah — Aequitas Wealth — Analyst

Digant Haria — GreenEdge Wealth — Analyst

Shiva — Individual Investor — Analyst

Presentation:

Operator

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.

Abhineet Anand — Investor Relations

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 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 remark regarding the results and the recent outlook by Mr. Aditya Puri, post which we’ll have the Q&A session.

I hand it over to Mr. Aditya Puri for the opening remark. Over to you, sir.

Aditya Puri — Managing Director

Good afternoon, everyone, and thank you for joining us on our earnings conference call. I hope that all of you and your loves ones are all well as safe. This is our seventh Investor Conference Call and we look forward to a fruitful interaction. We’ve also uploaded our presentation on BSE, NSE and 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 know, we are a diversified heavy engineering company in engaged in manufacturing…

Abhineet Anand — Investor Relations

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

Aditya Puri — Managing Director

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

Abhineet Anand — Investor Relations

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

Aditya Puri — Managing Director

Yeah, so as you know, we are a diversified steady engineering company engaged in the 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 distilleries, oil and gas, automobile components, steel, cement, chemicals railways and defense. Our presence across multiple industries and geography helps us to spread any sectorial or geographical risk.

Let me now talk about consolidated financial results for the second quarter of this financial year. The total consolidated revenue for Q2 of FY ’22 is rupees INR1,379 crores, which is about 2.5% higher compared to INR1,352 crores for Q2 of FY’21. The total consolidated revenue for H1 of FY’22 is INR2,513 crores, which is 3.5% higher compared to INR2426 crores for H1 of FY’21. The consolidated EBITDA for Q2 of FY ’22 at INR50 crores is however lower compared to rupees INR148 crores for Q2 of FY2’1. The consolidated EBITDA of H1 of FY’22 at INR103 crores is also lower compared to INR244 crores for H1 of FY’21. The consolidated profit after tax for Q2 of FY’22 is INR10 crores is compared to INR78 crores for Q2 of FY ’21. The consolidated profit after tax for H1 of FY ’22 is INR24 crores as compared to INR120 crores for H1 of FY’21.

The profitability has been sharply lower due to; A, in terms of commodity price increase, the time and cost overruns in EPC projects due to impact of COVID related disruptions coupled with a 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 cost, 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 for 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 transport and electrical panels because of increase in copper and aluminum prices.

With commodity price hikes continuing, the future looks uncertain. We also faced difficulties in having adequate skilled 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 air fares 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 restore normal salaries in December last year, so salaries are higher for this quarter as well as half year.

During H1, ISGEC Hitachi Zosen sales and profit was impacted as dispatches from large equipments is deferred by customers as they could not arrange shipping. The equipment has been ready for some time now and the customer and also paid full advance with revenue and profits will be booked only after this lifted and 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 the 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 books for Q2 of FY’22 is INR849 crores compared to INR1,396 crores of orders booked in Q2 of last year. The consolidated order booking for H1 of FY’22 is INR3,215 crores compared to INR1,922 crores for H1 of last year. The orders in hand as on 30th September 2021 are INR7,518 crores as against INR6,761 crores as on 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 INR926 crores for export orders, which is just over 12%. The order book for Isgec Hitachi is also, it has INR537 crores of orders as on 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 as increase in material cost, variation in freight and changes in design, however, given the unprecedented increase in material costs in labor cost per site and the extra time for project execution due to COVID related disruption, the contingency certainly have not proved enough. The situation will continue for some time as some of the longer duration orders presently under execution which were booked before the increase in the commodity prices. So the new orders we have taken into account higher contingency and margins on costsa.

Regarding the Cavite Biofuels 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’ve given special emphasis on vaccinations and also organized some camps for vaccination at our offices and factories. 99.55% of the eligible manpower, our employees and contracted workers have received the second and my colleagues will be happy to answer any questions.

Questions and Answers:

Abhineet Anand — Investor Relations

Thank you very much. [Operator Instructions] The first question is from the line of Vishal Prasad from VP Capital. Please go ahead.

Vishal Prasad — VP Capital — Analyst

Hi, good evening. I have two questions. So the first one is, if I look at what had happened in our Philippines project, we as a company must have had internal meetings as consolidation. Could you share why did we get into such a situation? Could also share the learning stand? Is there anything we have done to avoid getting into such a situation in the future?

Aditya Puri — Managing Director

As far as the Philippine project is concerned, as — I do know — we’ve been talking about it in the earlier conference calls, but the project as well as supply concerns was very much completed. In fact, more than 50% — more than 95% of the supplies were at the site. The. The company was basically, I don’t want to say, but was a private equity company which decided close it’s fund in the Philippines and because this project was still a little while ago — a little while 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’re 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 or there were weakness in that site, but they were not significant. The main reason was that the person did not want to run the cut.

Vishal Prasad — VP Capital — Analyst

Right, sir, generally, when we look at private equity, we have a mandate of six, seven years, that’s the fund there is and then they have to return in the back to the investors. So did we our end due to the due diligence while taking up the project?

Aditya Puri — Managing Director

So we did not earn, but the point is that they made good money on that project and decided to exit, okay, include the funds.

Vishal Prasad — VP Capital — Analyst

Okay. And the second question that I have is, if I look at the company, I mean for last 10, 15 years, we have been very 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 few years back. So, could you share your thought process behind we not looking for getting into new domains or getting some — building some capability in new areas in manufacturing?

Aditya Puri — Managing Director

Yes, yes, I can certainly share. So we’ve been doing marginal investments to increase the manufacturing capacity as and when demand is picking up. I have to say that the manufacturing facilities are pretty full. So, certainly expansions that we had done, spent marginal amounts of money, so therefore you may not know about them. There were marginal amounts with 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 output.

Vishal Prasad — VP Capital — Analyst

Okay. And the last question is on the EPC. So generally, I mean, in our country there are few good years and then the EPC contractors, they suffer because of one reason or the other and we have been generally prudent with our projects, but is — when you think about risk, what kind of risk you think and how do you try to mitigate it so that we don’t get into a situation where we are into a soup?

Aditya Puri — Managing Director

So as far as risks are concerned, for any project which is above a certain size and that size is not very large. We look at a lot of risk including — we look at a lot of factors including the financial status of the potential buyer 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 timelines 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 contingency for unknowns. But the sort of hikes which we are seeing in the project business — in the commodity business and EPC is a lot dependent on commodities — commodities, has been quite unprecedented and has been quite, we could not have foreseen.

Vishal Prasad — VP Capital — Analyst

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

Aditya Puri — Managing Director

One of the things that we have implemented is much –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 project 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.

Vishal Prasad — VP Capital — Analyst

Thank you, sir. Thank you so much.

Operator

Thank you. [Operator Instructions] The next question is from the line of Deepesh Agarwal from UTI AMC. Please go ahead.

Deepesh Agarwal — UTI AMC — Analyst

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

Aditya Puri — Managing Director

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

Deepesh Agarwal — UTI AMC — Analyst

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 out there?

Aditya Puri — Managing Director

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

Deepesh Agarwal — UTI AMC — Analyst

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

Aditya Puri — Managing Director

No, I, so — the ordering — the order book in Q1 was huge, where a lot of this EPC contracts and other contracts you give the bid and the prices could be opened much later, the bids could be open 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 it’s been a conscious decision to keep order booking slightly lower in this quarter.

Deepesh Agarwal — UTI AMC — Analyst

Okay. And sir, lastly, actually, since last couple of quarters you have been highlighting that you will start a construction on the Philippines project again. So what are finally the timelines 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? Because when I see capital employed of this under construction project, that’s just INR110 crores. So just figuring out what is the total exposure for ISGEC?

Aditya Puri — Managing Director

So as far as the Philippines project is concerned, as I had said last time and between last time and this time the changes with 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 pricing has got delayed. But we do hope that in the next 30 days to 45 days we would be able to start construction. And the timelines are that after we start [Technical Issues] we should be able to compete.

Deepesh Agarwal — UTI AMC — Analyst

Okay.

Kishore Chatnani — Whole Time Director and Chief Financial Officer

Let me, let me tell you, so you were asking about the balance sheet. Our Annual report, its a breakup there. But I think [Technical Issues] 31st of March the value of [Technical Issues] under construction was [Technical Issues] But if you’re asking about our exposure [Technical Issues] loan is old, about INR254 crore by this company [Indecipherable]

Deepesh Agarwal — UTI AMC — Analyst

That is sitting in receivables, right.

Kishore Chatnani — Whole Time Director and Chief Financial Officer

That is sitting in receivables. That’s right.

Deepesh Agarwal — UTI AMC — Analyst

Okay, INR726 crores of the INR254 is receivables and you would be having some debt on this project, right.

Kishore Chatnani — Whole Time Director and Chief Financial Officer

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

Deepesh Agarwal — UTI AMC — Analyst

Understood. And what would be the final price after completion from this INR726 crores is expected price?

Kishore Chatnani — Whole Time Director and Chief Financial Officer

That is a function of the [Technical Issues] long back. Now we are still exploring the market. So, ideally we would like above $100 million, but it has to be seen. 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 three situations as to when we can find a serious buyer.

Deepesh Agarwal — UTI AMC — Analyst

Understood. Thank you and all the best.

Operator

Thank you. The next question is from the line of Shruti Nayak from Bliss Consultants. Please go ahead.

Shruti Nayak — Bliss Consultants — Analyst

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

Aditya Puri — Managing Director

So, Hitachi Zosen has not, okay, let me put it to you. The financial figures of Hitachi Zosen is not being good. And the primary reason for that is being that three major customers have not been able to ship out the goods. The goods are ready. We’ve been paid for. But they’ve not been able to ship out the goods and therefore the revenue and the profit is not been booked. So that is regarding ISGEC Hitachi Zosen.

As regards [Indecipherable] also face problems because of the slowdown in the automotive sector not because of demand, but because of shortage of ships in the — in North America. But, so there was a small loss in this quarter. But going forward, we do not expect any — we expect positive EBITDA.

Shruti Nayak — Bliss Consultants — Analyst

Thank you so much, sir. And another question is like, what would be our market share in this sugar distillery business in domestic market?

Aditya Puri — Managing Director

Maybe about 15% or so.

Shruti Nayak — Bliss Consultants — Analyst

All right. And one more last question, sir. Like, 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 cells hydrogen or some greener technology?

Aditya Puri — Managing Director

Yeah, we are evaluating. We are evaluating fuel cell, evaluating energy storage in various forms. We are evaluating on that. It’s — the technological developments, you will hear about it in the newspapers that where to position is we are working on that.

Shruti Nayak — Bliss Consultants — Analyst

Thanks, sir. Thank you so much and all the best for the future quarters.

Aditya Puri — Managing Director

Thank you.

Operator

Thank you. [Operator Instructions] The next question is from the line of Yojna Bhatia, an Individual Investor. Please go ahead.

Yojna Bhatia — Individual Investor — Analyst

Hello, am I audible.

Aditya Puri — Managing Director

Yeah, yeah.

Yojna Bhatia — Individual Investor — Analyst

So my question on basically coming back to this commodity price increase, what we had understood from the last call was that Q1 was a subdued quarter and you know by next quarter and for the rest of the year we will be expecting to come back to 12%, 13% kind of margins in the manufacturing segment and 70% 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 more that below one on the fresh orders that you are booking right now, how are you placed in terms of any future commodity price hikes? Because if we are indeed in a commodity super cycle that is being called, then we are going to 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 a lot of companies in the sector but 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?

Aditya Puri — Managing Director

So I’ll take your second question first. We are also trying to renegotiate with with customers, but we have not taken any credit for that and I’m not sure how much success we will get over there. It also depends upon customer to customer, but I don’t know how many customers actually renegotiated 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 you know there is gap in to be frank about the extent of the hike. People are saying that its probably leveled out now or there’s going to be only a very marginal increases before there’s going to be a fall. But one never knows, never knows how it’s going to be. So this is a real problem in the capital goods sector that we are grasping with frankly. So is it this is a problem. But as of now the new orders that we are taking are at an increased price and covering the [Indecipherable]

Yojna Bhatia — Individual Investor — Analyst

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

Aditya Puri — Managing Director

So we have started asking customers as some customers have increased — had agreed to a steel price escalation in the contract, 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 clauses incorporate.

Yojna Bhatia — Individual Investor — Analyst

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

Aditya Puri — Managing Director

Q3, yes, certainly. Q4, I can’t say just now. But Q3, yes.

Yojna Bhatia — Individual Investor — Analyst

Okay, Sure. Thank you.

Operator

Thank you. [Operator Instructions] The next question is from the line of Aryan Mehta from Mehta Consultant. Please go ahead.

Aryan Mehta — Mehta Consultant — Analyst

Yeah, good afternoon.

Aditya Puri — Managing Director

Good afternoon.

Aryan Mehta — Mehta Consultant — Analyst

Can you just 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 then would be lagging?

Aditya Puri — Managing Director

So, lagging could possibly be automobile, automobiles. 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.

Aryan Mehta — Mehta Consultant — Analyst

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

Aditya Puri — Managing Director

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

Aryan Mehta — Mehta Consultant — Analyst

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?

Aditya Puri — Managing Director

I think private will sort of, I’ll not say dominate, but the ratio will probably — private sector investment should improve — the share of private sector investment should improve.

Aryan Mehta — Mehta Consultant — Analyst

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?

Aditya Puri — Managing Director

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

Aryan Mehta — Mehta Consultant — Analyst

Okay, sure. Thank you. All the best.

Aditya Puri — Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Manish Goyal from Enam Holdings. Please go ahead.

Manish Goyal — Enam Holdings — Analyst

Yeah. Thank you so much. Continuing on the order pipeline, would it be able to quantify like how big is the order pipeline in value terms and which are the largest segments within that?

Aditya Puri — Managing Director

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

Kishore Chatnani — Whole Time Director and Chief Financial Officer

Fertilizers, cement, fertilizers. Yeah, yeah.

Manish Goyal — Enam Holdings — Analyst

No, sir, what I was trying to probably try to get a perspective was in terms of value terms how would you see that the pipeline order value and how would it compare with the last year? Like, just to get a sense that what kind of growth is there in the order pipeline.

Aditya Puri — Managing Director

So right now, right now our order book — the figures are risen about INR1,000 crores more than at the end of the year, right, Kishore?

Kishore Chatnani — Whole Time Director and Chief Financial Officer

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

Aditya Puri — Managing Director

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 inquiry some exports have also gone up.

Manish Goyal — Enam Holdings — Analyst

Yeah, 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 do we see that going forward like for the export market?

Aditya Puri — Managing Director

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 should catch up as more and more countries are allowing us to enter, 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 have posted one person to Southeast [Indecipherable] very difficult for us to — for him to commute — for the person, for people to commute. So we now stationed somebody there. And for the other areas also, we will be coming out — we are deciding a strategy as to or we are deciding a strategy as to how to increase exports.

Manish Goyal — Enam Holdings — Analyst

Right, sir. Thank you so much.

Operator

Thank you. [Operator Instructions] Next question is from the line of Ankit Sancheti from Kotak Asset Management. Please go ahead.

Ankit Sancheti — Kotak Asset Management — Analyst

Yeah, hi, sir. 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 RN[Phonetic]

Aditya Puri — Managing Director

Yeah, so your point is valid. Your second point is valid that even though we want to change it, we would like to minimize our risk. But, so there are two spectrums to it. One spectrum to it is hat projects which you would have normally taken, under normal circumstances you would have taken — right now some of the projects you do not take because you think the risk reward is not in our freezer. And the other thing I think is that you try and get customers to sort of incorporate escalation clause in their contract. But this is, as you said, the buying behavior of — the buying behavior of the customer and the selling behavior of people like us have to change. So we 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.

Ankit Sancheti — Kotak Asset Management — Analyst

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

Aditya Puri — Managing Director

Yes, products, yes. You’re right.

Ankit Sancheti — Kotak Asset Management — Analyst

So at least on those orders we would have been able to minimize the impact because at least in those orders [Speech Overlap]

Aditya Puri — Managing Director

It is less. The impact is less on those orders. Also because the…

Ankit Sancheti — Kotak Asset Management — Analyst

Maybe because the execution cycle is lower for those orders — equipment orders you make and sell?

Aditya Puri — Managing Director

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 order is also lower.

Ankit Sancheti — Kotak Asset Management — Analyst

Okay. My second question was with respect to and 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 INR13 crores of negative value which is attributable to that plant in this quarter and then the segment results about INR17 crores of negative EBIT because of that. So how does the accounting happens 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 how this is going to shape up in next few quarters till the time your execution of construction of that has not happened? Thanks.

Aditya Puri — Managing Director

So let me answer that, please. So firstly — firstly, currently construction is not going on, but there are certain expenses which are being incurred relating to salaries or some people we have there, then security and safety, insurance and those kind of expenses are there, which we are charging off to — 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 [Indecipherable] to dollar to rupee and so on. So, and that — that can come close to the negative. That you are right. What we — once we start completing the plant, we are to capitalize to whatever further investments are made for plant and 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…

Ankit Sancheti — Kotak Asset Management — Analyst

Yeah, so it partially answered my query. But just extending that point. So if I look at the last quarter, the June quarter, we had minus INR6 crores of or a loss of INR6.5 crores and this quarter it has increased to INR17.5 crores. So the employee cost, the salary cost and all the other associated [Speech Overlap]

Aditya Puri — Managing Director

It is largely — it is largely forex variation.

Ankit Sancheti — Kotak Asset Management — Analyst

Okay, it’s largely forex variations, okay.

Aditya Puri — Managing Director

[Speech Overlap] it’s not actually a cash loss, it’s an accounting loss.

Ankit Sancheti — Kotak Asset Management — Analyst

Okay. And second question is on unallocated expenses. Again, they have increased materially on a QoQ basis from INR2 crores to INR14 crores. What is I’m missing here?

Kishore Chatnani — Whole Time Director and Chief Financial Officer

Pardon me, you’ll have to help me understand what is it that you’re talking about.

Ankit Sancheti — Kotak Asset Management — Analyst

So I’m just trying to understand what has led to such a sharp jump in unallocated costs on a quarter-on-quarter basis. Some INR2 crores, INR2.5 crores in Q1 to INR14.5 crores in Q2.

Kishore Chatnani — Whole Time Director and Chief Financial Officer

I’m not able to correlate what exactly you are talking about. So on some of the results, which page of the results you are looking at?

Ankit Sancheti — Kotak Asset Management — Analyst

So, sir, I’m looking at Page number 16, the segmental reporting which happened, on which we have unallocated expenses. Yeah, yeah, absolutely. For this quarter only, for Q2 FY’22. If you look at EBIT.

Kishore Chatnani — Whole Time Director and Chief Financial Officer

Maybe you can give me a few minutes to look at that and come back, maybe we can answer that question a little later in the call.

Ankit Sancheti — Kotak Asset Management — Analyst

Sure, sure. That’s all from my side. Thank you very much sir.

Operator

Thank you. [Operator Instructions] The next question is from the line of Anshul Saigal from Kotak AMC. Please go ahead.

Anshul Saigal — Kotak AMC — Analyst

Thanks for taking my question. Regarding the raw material cost impact that we have spoken off during the call, if you 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. Now is that again, I mean while in EPC on can understand that it’s long cycle so, 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?

Aditya Puri — Managing Director

It’s basically raw material and also manufacturing, it also impact — if you see the half yearly results, its 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 absorption will be better and to that extent margins will be better. Steel price hike, again it’s unpredictable, but overhead recovery would be much better in Q3 and Q4.

Anshul Saigal — Kotak AMC — Analyst

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

Aditya Puri — Managing Director

In fact, unfortunately everything is fixe price.

Anshul Saigal — Kotak AMC — Analyst

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

Aditya Puri — Managing Director

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

Anshul Saigal — Kotak AMC — Analyst

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

Aditya Puri — Managing Director

So I’ll just answer that question for you also that all our products in manufacturing or let me put it 95%, between 90% and 95% are all engineered to order. There is nothing that, that we can — there is 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 say that given will the quantities increase from just order this much, it doesn’t happen that unfortunately.

Anshul Saigal — Kotak AMC — Analyst

Got it. My second question is that all of our INR86,000, yeah, INR86,000 crore revenues in EPC, how much is, I mean would boiler be about, sorry this is INR867 crores, INR867 crores, of that would boilers be about INR200 crores to INR220 crores for the current quarter?

Aditya Puri — Managing Director

Yeah, its something like that.

Anshul Saigal — Kotak AMC — Analyst

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 margins in EPC, in the in the actual EPC business we would have incurred a significant loss?

Aditya Puri — Managing Director

So boilers also, we do not manufacture more than 15% of the boiler, the rest is all like back any other project. It’s not that the boiler is manufactured in Indecipherable] manufacturing unit, some pressure parts are done. But the rest is all outsourced.

Anshul Saigal — Kotak AMC — Analyst

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 we are even at this time making 8% margins.

Aditya Puri — Managing Director

So those pressure vessels are the only thing that we manufacturer, which is about 15% of the value of the boiler. The rest are not fabrications. Those are all bought out. So it could be fans, motors, structures, erections, all those.

Anshul Saigal — Kotak AMC — Analyst

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 [Speech Overlap]

Aditya Puri — Managing Director

No it’s not like manufacture. It’s not like that we are manufacturing the old boiler.

Anshul Saigal — Kotak AMC — Analyst

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

Aditya Puri — Managing Director

Right, so we are looking at what value add hydrogen could provide or batteries or the energy storage of other forms other than battery. Then energy saving, you know there’s much of energy saving and also the way the buying behavior is going to change because at sites becoming very difficult to work. So are people going to do more work-in-shops. So we are looking at that. How is digitization going to affect our products. We are looking at we have to place this at the right place, right thing because a lot of these things are very nascent, the world over 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 ourselves.

Anshul Saigal — Kotak AMC — Analyst

All right, I’ll come back in the queue. Thank you.

Operator

Thank you. The next question is from the line of Nishit Shah from Aequitas Wealth. Please go ahead.

Nishit Shah — Aequitas Wealth — Analyst

Good evening, sir.

Aditya Puri — Managing Director

Good evening.

Nishit Shah — Aequitas Wealth — Analyst

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?

Aditya Puri — Managing Director

We are very proactively trying to get labor organized, transport organized, vaccinations if they’ve not been vaccinated before they come to the site. So labor which used to be generally available contractors who used to have labor, we have seen that suddenly 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, where we have to pay people more. We have to get more people to make up for the lost time and generally speaking the scarcity has and will create some problems in the times to come.

Nishit Shah — Aequitas Wealth — Analyst

So is it improving?

Aditya Puri — Managing Director

It’s improving. It is improving. It is definitely.

Nishit Shah — Aequitas Wealth — Analyst

Okay, okay, thank you.

Operator

Thank you. The next question is from the line of Digant Haria from GreenEdge Wealth. Please go ahead.

Digant Haria — GreenEdge Wealth — Analyst

Yeah, hi sir. My question is, sir, in terms of — we are running full on order book and probably like, you know, 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 negligible profits. That’s my question number one. And question number two is that in the new orders what kind of inflation are we building. Like you know, if let’s say the steel prices and everything goes up even more from here and we bid orders based on today’s steel prices, maybe even the future order books we don’t see meaningful accretion to our EBIT or profit? So yeah, these are two questions from my side. Thank you.

Aditya Puri — Managing Director

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 see what to do. But I don’t think that is a very prudent strategy to adapt. 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 — there is a point — there is a tipping point when 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 is happening. Is it just pent-up demand after the pandemic and that’s causing it or is it because the excess liquidity that various governments have been — have pumped into the economy. Once that effect weans out, commodity prices will fall.

So like nobody expected them to rise at the start. Nobody is talking about a fall right now, but it might fall also. So whilst next one or two quarters the maintenance is 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.

Digant Haria — GreenEdge Wealth — Analyst

Right sir, just one follow-up to this that, let the commodity inflation and labor inflation both is not in your hands. Like you know, you cannot be held for it in anyway because it’s not in your hand. But let’s say that you know if both of these things stabilize in the future, like you know, have we, has ever operations and has over learning and our execution skills improved in most of our areas that we can see 6% EBITDA margins in EPC business and maybe 10%, 12% in our product business? If these two external factors were to stabilize.

Aditya Puri — Managing Director

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

Digant Haria — GreenEdge Wealth — Analyst

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

Aditya Puri — Managing Director

[Speech Overlap] things improve, the margins improve. Yes, margins improve.

Digant Haria — GreenEdge Wealth — Analyst

Okay, okay, sir. Okay, sir. Thank you. All the best.

Operator

Thank you. The next question is from the line of Shruti Nayak from Bliss Consultant. Please go ahead.

Shruti Nayak — Bliss Consultants — Analyst

Hi, sir. So just saw that your working capital have [Indecipherable] into higher share of government sector orders. So what is your thought process on the same and will the working capital decline in future?

Aditya Puri — Managing Director

The working — Kishore would you like to answer this?

Kishore Chatnani — Whole Time Director and Chief Financial Officer

Yes, yes, Ma’am your observation is right. We have more working capital now because of higher PSU orders. So earlier if you — if you remember maybe about two 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 most of these projects, the payments are linked to milestones. So even though we spend money in cement, steel and all the other material supply to the site, the payments become due once we complete certain milestones. So as of now we have certain projects which are large value projects and which are at an advanced stage of implementation, where I mean, these milestones payments have become very large. So in normal terms we would not have taken the same tailwinds 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 — there is the situation where we are borrowing from banks. Of course, all the — all the interest cost will always factor in you knew, but when we took those products that there will be some amount of cash flow — some amount of working capital increase. Of course, because of this COVID and some stretch on these project implementation timeline, it has got a little denounced.

Shruti Nayak — Bliss Consultants — Analyst

All right, sir. Thank you.

Operator

Thank you. The next question is from the line of Shiva [Indecipherable] an Individual Investor. Please go ahead. Sir, this is Shiva.

Aditya Puri — Managing Director

Hello.

Shiva — Individual Investor — Analyst

My question is related to that — these ethanol, I think is supposed to start from the end of November. So what is the revenue and profitability expected in this quarter from that ethanol plant. And the second question is regarding the margins, like what kind of margins we are expecting in Q3, similar to Q2? Or maybe, also maybe EBITDA maybe improved in this quarter. Q3 may slightly better than Q2?

Aditya Puri — Managing Director

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 exercise license to come which we expect would come soon. Kishore, can you help we with the revenue. We will not be able to tell you the profit, but the revenue from one month’s operation.

Kishore Chatnani — Whole Time Director and Chief Financial Officer

For the, that’s right. For the ethanol plant which will start hopefully soon, maybe in about two weeks time. In this quarter will be very small for that — for that — for that plant. So that we will not really expect any revenue this quarter.

Shiva — Individual Investor — Analyst

But yearly, not nearly a quarter, how much maybe from the next year onwards we could expect?

Kishore Chatnani — Whole Time Director and Chief Financial Officer

Yearly revenue is about INR200 crores.

Shiva — Individual Investor — Analyst

Sir, regarding margins you said Q3 might not be similar to Q2 and maybe Q4 onwards we could see some improvement?

Aditya Puri — Managing Director

We are hopeful to see some improvement, yes.

Shiva — Individual Investor — Analyst

Okay, okay, thank you.

Operator

Thank you. The next question is from the line of Yojna Bhatia, an investor. Please go ahead.

Yojna Bhatia — Individual Investor — Analyst

Hi. My question was that now that commodity price inflation is something which is affecting the entire sector. But if I look at the operating margin loss two quarters, we are at the lower end of the of the range. The rest of the sector is largely starting from 6% 7% till 12%, 13%. So why is it so that we are more affected compared to the rest of the sector? Wanted to hear you thoughts on that.

Aditya Puri — Managing Director

So we have done more work in the EPC segment that we’ve been in the past few years. And also as I said earlier that we got into some new businesses which are new on the [Indecipherable] 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.

Yojna Bhatia — Individual Investor — Analyst

Okay. Thank you.

Operator

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

Aditya Puri — Managing Director

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.

Operator

[Operator Closing Remarks]