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Emco: Holding on amidst intense competition

Jan 28, 2010

Performance summary
  • Standalone topline flat during 3QFY10 and falls 3% YoY in 9mFY10.
  • Operating margins contract by 0.5% YoY, impacted by higher employee costs as also higher costs of raw materials (both as percentage of sales).
  • Net profits grow by 22.5% YoY despite a fall in operating margins, helped by significantly lower interest expenses and a lower effective tax rate.

Financial performance snapshot
(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Sales 2,079 2,081 0.1% 6,219 6,022 -3.2%
Expenditure 1,803 1,815 0.7% 5,397 5,243 -2.8%
Operating profit (EBDITA) 277 266 -4.0% 823 778 -5.4%
Operating profit margin (%) 13.3% 12.8%   13.2% 12.9%  
Other income 0 3   0 6  
Interest 116 78 -32.7% 276 242 -12.2%
Depreciation 40 46 16.4% 116 134 15.5%
Profit before tax 121 145 19.0% 431 408 -5.3%
Extraordinary income/(expense) - -   - 985  
Tax 39 44 11.7% 135 133 -1.9%
Profit after tax/(loss) 82 100 22.5% 296 275 -6.8%
Net profit margin (%) 3.9% 4.8%   4.8% 4.6%  
No. of shares       58.8 58.8  
Diluted earnings per share (Rs)*         8.7  
P/E ratio (x)*         10.4  

What has driven performance in 3QFY10?
  • Emco’s standalone topline remained flat during the quarter. A part of the reason for the same is lower realisations due to the intense competitive pressures and increased capacities that the industry has been facing in recent times. As indicated by the management, some operational issues have also caused slower execution. The company expects to make up for it in the last quarter of FY10.

  • Emco’s operating margins shrank by 0.5% YoY during 3QFY10. This was largely due to a rise in staff costs as well as a rise in raw material costs (both as a percentage of sales). Pressure on margins is expected to continue due to increased capacities by many of the players in the industry. However, other expenditure saw a fall of about 2.1% (as a percentage of sales) compared to the previous quarter.

  • Emco however, saw substantially lower interest expenses during the quarter, as also a lower effective tax rate. This offset the negative impact of the fall in operating margins thus leading to a 22.5% YoY growth in the company’s bottomline.

What to expect?
At the current price of Rs 90, the stock is trading at a multiple of 8.7 times our estimated FY12 earnings. The company’s current order book stands at Rs 15 bn, which is a year-on-year increase of 19%. This includes about 32% of transformer orders, 2% of meter orders, and another 66% from the projects business wherein the company executes turnkey substations.

As indicated by the management, inquiries for new orders from customers are currently at the same level as last year, but how much they will grow from here on is not clear at this point of time.

The company’s nine month performance is in line with our estimates. However, at the current level, we have a cautious view on the stock.

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