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Emco: ‘Interest’ing times - Views on News from Equitymaster

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Emco: ‘Interest’ing times
Feb 19, 2009

Performance summary
  • Revenues drop by 15% YoY during 3QFY09; grow by 3% YoY in 9mFY09.
  • Operating margins contract by 0.2% YoY during the quarter.
  • Net profits decline by 46% YoY during the quarter. Apart from a poor operating performance, higher interest and depreciation costs drag profits down.


Standalone financial snapshot
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Sales 2,434 2,079 -14.6% 6,020 6,219 3.3%
Expenditure 2,106 1,803 -14.4% 5,215 5,397 3.5%
Operating profit (EBDITA) 328 277 -15.6% 806 823 2.1%
Operating profit margin (%) 13.5% 13.3% 13.4% 13.2%
Other income 0 0 0 0
Interest 69 116 67.2% 196 276 41.1%
Depreciation 23 40 73.1% 60 116 94.6%
Profit before tax 236 121 -48.5% 550 431 -21.7%
Tax 85 39 -53.4% 194 135 -30.1%
Profit after tax/(loss) 151 82 -45.7% 357 296 -17.1%
Net profit margin (%) 6.2% 3.9% 5.9% 4.8%
No. of shares (m) 58.8
Diluted earnings per share (Rs)* 10.0
P/E ratio (x)* 2.9
* On a trailing 12-month basis; adjusted for extraordinary items

What has driven performance in 3QFY09?
  • Emco’s topline decreased by 15% YoY during 3QFY09, seemingly on account of a general slowdown in infrastructure investment activity. The company’s operating profits declined by 16% YoY during the quarter. However, it only witnessed a 0.2% YoY drop in operating margins as it managed to reduce its expenses by over 14% YoY. During the quarter, raw material costs (including stock adjustments; as a percentage of sales) reduced to 71.7% as compared to 74.7% in 3QFY08. However, staff costs and other expenditure increased on a YoY basis (as a percentage of sales).

  • During the quarter, Emco’s net profits declined by 46% YoY. Apart from a poor operating performance, the company’s numbers dropped further on account of high interest and depreciation charges. Interest costs increased to 5.6% (as a percentage of sales) in 3QFY09 as compared to 2.8% in 3QFY08. On the other hand, deprecation charges increased to 1.9% as compared to 0.9% in 3QFY08.

  • For the 9mFY09 period, Emco managed to record a topline growth of 3% YoY. The company operating margins dropped marginally by 0.2% YoY. However, its net profits dropped by 17% YoY. The reason behind the same is due to higher interest and depreciation costs.

What to expect?
At the current price of Rs 29, the stock is trading at a multiple of 2.9 times its trailing 12 months earnings. The stock of Emco has tanked by 89% from its 52-week high price. The reason behind the same has been the company’s poor performance over the past few quarters. While the company has been able to maintain its revenues and operating margins, its bottomline performance has taken a major hit. We shall soon update our research report on the company, factoring the 9mFY09 numbers.

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