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Emco: What the future holds... - Views on News from Equitymaster

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Emco: What the future holds...
Sep 4, 2008

Emco is one of the leading domestic players in the Indian power transmission and distribution front with a presence in the 132 KV to 400 KV transformers (generation, transmission, industrial and distribution), electronic meters businesses along with undertaking turnkey projects of setting up sub-stations for state electricity boards. During the period FY04 to FY08, it has grown its net sales and profits at compounded annual rates of 57% and 100% respectively. FY08 was a year of positive developments for Emco. The company invested in a coalmine in Indonesia and announced a joint venture in South Africa for the manufacture of transformers to target the fast growing African market. Further, the company also made its venture into the transmission line segment by acquiring stake in Urja Engineers, a Baroda based transmission line manufacturing company with an installed capacity of 20,000 tonnes per annum, thus, making Emco an end-to-end solution provider in the transmission and distribution (T&D) segment.

Managementís view
The above-mentioned developments are likely to have a greater significance put in the context of the emerging global scenario. Since coal is one of the critical natural resource for power generation in many countries, the company expects the strategy of investing in coalmines to pay rich dividends in the near future. Secondly, today Africa is increasingly seen as a continent with a huge, untapped potential. As such the companyís management believes that establishing their presence in the African market will not only help it de-risk its profile but will also help the company boost its numbers. Also, the acquisition of the transmission line business falls perfectly in line with its strategic objective of being an end-to-end solutions provider in the T&D segment.

The companyís transformer division continues to be the largest contributor to the topline, adding nearly 65% to the revenues. This segment grew it revenues by 25% YoY. The projects division (inclusive of transmission line business) contributed nearly 30% to the revenues, and witnessed a growth of 64% YoY. The meter division contributed the balance to the revenues and witnessed a growth of 14% YoY. Further, the exports witnessed a growth of 38% YoY, which comes as a positive news for the company.

The rising input costs continue to remain the main concerns for the company going forward, especially considering that it is a manufacturing company. During FY08, the company did feel some pressure on the input costs front, as its raw material expenses (as a percentage of sales) increased to 82% from 79% in FY07.

  • Also read - Opportunities in power transmission

    What to expect
    At the current price of Rs 115, the stock is trading at 10.5 times its trailing 12-month earnings. The investment environment in the Indian power T&D space will continue to be the main factor behind the growth of equipment manufacturers. Lately, much emphasis has been given to the T&D aspect of the power sector. Emco, which has a strong presence across the T&D value chain, has seen its fortunes soaring in the past 3-4 years.

    The power sector is the backbone of any countryís growth. While India is one of the fastest growing nations in the world, its per capita power consumption stands way below the world average. An extract from the managementís statement from the companyís annual report describes this aptly - "The per capita consumption currently stands at 606 kilowatt per hour (kwh), far below the world average of 2,429 kwh. At an 8% GDP growth, the per capita consumption of India in 2032 is estimated to be 2,643 kwh, which is just comparable to the present-day world average. Therefore, it is evident to conclude that in the interests of the burgeoning economy, the opportunities and possibilities in the power sector are unending, and what we have achieved so far is merely the beginning of what looks to me a very exciting and challenging journey."

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