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Emco: T&D cycle in turmoil - Views on News from Equitymaster

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Emco: T&D cycle in turmoil
Mar 5, 2012

Emco has announced its third quarter financial results for 2011-2012 (3QFY12). The company has reported 35.8% YoY and 74.3% YoY decline in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Standalone topline declined 35.8% YoY during 3QFY12.
  • The company's operating profits declined 31.6% YoY in 3QFY12. However, operating margins increased by 50 bps to 8.5%.
  • The net profits of the company declined 74.3% YoY in 3QFY12 due to muted performance at the operating level, rise in depreciation expenses and fall in other income.


Standalone financial performance
(Rs m) 3QFY11 3QFY12 Change 9MFY11 9MFY12 Change
Sales 3,037 1,949 -35.8% 7,126 5,808 -18.5%
Expenditure 2,795 1,783 -36.2% 7,413 5,258 -29.1%
Operating profit (EBDITA) 242 165 -31.6% (287) 551  
Operating profit margin (%) 8.0% 8.5%   -4.0% 9.5%  
Interest (net) 115 94 -18.7% 318 329 3.5%
Depreciation 45 51 12.9% 137 151 10.2%
Other income 1 - -100.0% 2 4 122.4%
Profit before tax 83 21 -74.9% (740) 74  
Tax 28 7 -76.2% (249) 24  
Profit after tax/(loss) 55 14 -74.3% (491) 50  
Net profit margin (%) 1.8% 0.7%   -6.9% 0.9%  
No. of shares (m)         65.1  
Basic & diluted earnings per share (Rs)         0.8  
P/E ratio (x)*         23.3  
* On a trailing 12 months basis

What has driven performance in 3QFY12?
  • Emco's standalone topline declined by 35.8% YoY during the quarter due to execution delays. Slowdown in the power sector and increasing competitive pressures in the transmission & distribution (T&D) space has impacted the overall top-line growth of the company.

  • The operating profits of the company declined 31.6% YoY during the quarter. However, operating margins improved to 8.5% during 3QFY12 from 8.0% in 3QFY11 due to decline in raw material expenses (adjusted for stock in trade) as a percentage of sales. Raw material expenses declined from 80.6% in 3QFY11 to 76.7% in 3QFY12. However, staff costs increased substantially from 3.9% in 3QFY11 to 7.1% in 3QFY12.

  • The net profit of the company declined 74.3% YoY due to muted performance at the operating level, rise in depreciation expenses and fall in other income.

What to expect?
Investment slowdown in the Indian T&D space due to delays in off take of power projects has been the biggest concern for the company. The T&D capex cycle follows the power project cycle (involves the boiler, turbine and generator island of a power portfolio). However, investments in the project cycle itself are lagging due to environmental concerns and thus we believe it would take a while before the investments in the T&D space picks up. This would hurt the order pipeline of the company. Further rising competitive intensity in the industry due to overcapacity is also impacting realisations. Working capital issues will also keep the balance sheet under pressure. In light of these factors, we maintain our negative view on the stock.

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