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Emco: No signs of improvement - Views on News from Equitymaster

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Emco: No signs of improvement
Jun 13, 2012

Emco has announced its fourth quarter and full year financial results for 2011-2012. The company has reported 32.1% YoY and 36.7% YoY decline in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Standalone topline declined 32.1% YoY during 4QFY12.
  • The company’s operating profits declined 5.0% YoY in 4QFY12. However, operating margins increased to 10.7%.
  • The net profits of the company declined 36.7% YoY in 4QFY12 due to muted performance at the operating level, rise in depreciation & interest expenses and fall in other income.
  • The company has recommended a dividend of Rs 0.2 per share for the fiscal under consideration.
  • The standalone debt/equity ratio of the company stood at 0.71x at the end of the year.

Standalone financial performance
(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Income from operations 3,368 2,287 -32.1% 10,495 8,095 -22.9%
Expenditure 3,112 2,044 -34.3% 10,525 7,301 -30.6%
Operating profit (EBDITA) 256 244 -5.0% (30) 794  
Operating profit margin (%) 7.6% 10.7%   -0.3% 9.8%  
Interest (net) 136 175 28.2% 454 504 10.9%
Depreciation 50 52 2.3% 187 203 8.1%
Other income 14 - -100.0% 16 4 -75.5%
Profit before tax 84 17 -79.3% (656) 91  
Tax 36 (13) -137.1% (214) 11  
Profit after tax/(loss) 48 31 -36.7% (442) 81  
Net profit margin (%) 1.4% 1.3%   -4.2% 1.0%  
No. of shares (m)         65.1  
Basic & diluted earnings per share (Rs)         1.2  
P/E ratio (x)*         22.0  
* On a trailing 12 months basis

What has driven performance in 4QFY12?
  • Emco’s standalone topline declined by 32.1% YoY during the quarter due to slowdown in the power sector and increasing competitive pressures in the transmission & distribution (T&D) space. The company operates under a single segment named T&D hence the segmental breakdown of revenues is not available.

  • The operating profits of the company declined 5.0% YoY during the quarter. However, operating margins improved to 10.7% during 4QFY12 from 7.6% in 4QFY11 due to decline in raw material expenses (adjusted for stock in trade) as a percentage of sales. Raw material expenses declined from 79.1% in 4QFY11 to 73.5% in 4QFY12. However, staff costs increased from 4.3% in 4QFY11 to 5.9% in 4QFY12.

  • The net profit of the company declined 36.7% YoY due to muted performance at the operating level, rise in depreciation & interest expenses and fall in other income.

What to expect?
The T&D capex cycle has been in turmoil. That’s because the power project cycle (encompasses boiler, turbine and generator) is engulfed with issues related to environmental concerns and coal shortages. This is expected to keep the order pipeline of the company under pressure. Further rising competitive intensity in the industry due to overcapacity is expected to impact realizations. Working capital issues will also keep the balance sheet stretched. In light of these factors, we maintain our negative view on the stock.

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