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Emco: Return to profitability - Views on News from Equitymaster

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Emco: Return to profitability

Jan 28, 2011

Emco has declared its 3QFY11 results. The company has reported 46% YoY growth in sales while its net profits have declined by 46% YoY. Here is our analysis of the results.

Performance summary
  • Standalone topline grows by 46% YoY during 3QFY11 and 18% YoY for 9mFY11.
  • Operating profits fall by 9% YoY during 3QFY11. However, the company returned to profitability during 3QFY11 after recording operating losses for the first two quarters of FY11.
  • During 9mFY11, it has an operating loss of Rs 287 m as compared to an operating profit of Rs 778 m for 9mFY10.
  • Net profits decline by 46% YoY during the quarter, led by weak operating margins and a sharp increase in interest costs.

Standalone financial performance: A snapshot...
(Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Sales 2,081 3,037 46.0% 6,022 7,126 18.3%
Expenditure 1,815 2,795 54.0% 5,243 7,413 41.4%
Operating profit (EBDITA) 266 242 -8.9% 778 (287)  
Operating profit margin (%) 12.8% 8.0%   12.9% -4.0%  
Other income 3 1   6 2  
Interest 78 115 48.2% 242 318 31.3%
Depreciation 46 45 -2.3% 134 137 2.3%
Profit before tax 145 83 -42.7% 408 (740)  
Tax 44 28 -35.9% 133 (249)  
Profit after tax/(loss) 100 55 -45.6% 275 (491)  
Net profit margin (%) 4.8% 1.8%   4.6% -6.9%  
No. of shares (m)       58.8 65.1  
Diluted earnings per share (Rs)*         (6.3)  
P/E ratio (x)*         NA  
* On a trailing 12 months basis; # Excluding extraordinary items

What has driven performance in 3QFY11?
  • Emco’s standalone topline grew by 46% during the quarter. The projects business wherein the company executes turnkey substations accounted for 64% of the revenue whereas the transformers and meters division accounted for 34% and 2% share in revenue respectively.

  • Emco’s operating margins contracted to 8% during 3QFY11 as compared to 12.8% in 3QFY10. However, it must be noted that the operating margins have turned positive as compared to the first two quarters of this fiscal. The operating margins for 9mFY11 stand at -4%.

  • The management agrees there is a pricing pressure causing lower realisations. However, the company is said to be opting for orders with reasonable margins. A strong order book position along with the increase in customer inquiries for new orders has given leg room to the management to take orders with reasonable margins.

  • Order inflows for the quarter stood at Rs 2.5 bn. At the end of December 2010, Emco’s order backlog was Rs 9.1 bn which is nearly 84% of the trailing 12-month sales. Based on the increase in the number of customer inquiries for new orders, the management expects to record healthy order inflows in the next two quarters.

What to expect?
At the current price of Rs 65, the stock is trading at a multiple of 7.2 times our estimated FY13 earnings. The company’s current order book stands at Rs 9.1 bn. 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, the inquiries for new orders from customers have shot up and thus the management expects to record higher order inflows in the next two quarters. The company desires to venture into the 765 kV transformer segment and the high voltage switchgear segment. It is said to be working on its plans to enter the aforesaid segments as these are envisaged to grow faster in the near future. The management is scouting for potential partners to enter these new segments.

The management agrees that pricing pressure still persists on account of excess capacity and severe competition. We maintain our cautious view on the stock.

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