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Emco: Interest, depreciation mar earnings
Oct 21, 2008

Performance summary
  • Topline grows by 25% YoY during 2QFY09, 22% YoY in 1HFY09.

  • Operating margins contract by 0.3% during the quarter owing to higher raw material costs (as percentage of sales).

  • Net profits grow by 9% YoY during the quarter. Higher interest and depreciation costs along with lackluster operating performance blemish profit growth.

Financial performance snapshot
(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Sales 1,842 2,306 25.2% 3,385 4,140 22.3%
Expenditure 1,591 2,000 25.7% 2,932 3,594 22.6%
Operating profit (EBDITA) 251 307 22.3% 452 546 20.6%
Operating profit margin (%) 13.6% 13.3%   13.4% 13.2%  
Other income 0 0   0 0  
Interest 74 105 42.6% 120 160 33.2%
Depreciation 18 39 110.8% 36 76 114.2%
Profit before tax 159 163 2.9% 296 309 4.4%
Tax 55 50 -8.9% 103 96 -6.7%
Profit after tax/(loss) 104 113 9.1% 194 213 10.3%
Net profit margin (%) 5.6% 4.9%   5.7% 5.2%  
No. of shares (m)         58.8  
Diluted earnings per share (Rs)         11.1  
P/E ratio (x)         4.8  

What has driven performance in 2QFY09?
  • Emco’s topline grew by 25% YoY during the quarter. For the half year period, the growth stood at 22% YoY. During FY08, the company acquired Vadodara (Gujarat) based Urja Engineers Ltd. (UEL), a transmission line company for its initiative towards backward integration. As such on a YoY basis, the results are not comparable. At the end of the quarter, Emco had an order backlog of Rs 13 bn (nearly 1.4 times its FY08 sales).

  • Operating margins contracted by 0.3% YoY during the quarter owing to higher raw material costs. For 1HFY09, operating margins contracted by 0.2% YoY.

  • Emco’s net profits grew by 9% YoY during the quarter and 10% YoY for 1HFY09. Profits during the quarter were hampered by a contraction in operating margins. High interest and depreciation costs led to further erosion in margins. Net profit margins for the quarter stood at 4.9% as compared to 5.6% in 2QFY08.

What to expect?
    At the current price of Rs 53, the stock is trading at a multiple of 3.4 times our estimated FY11 earnings. We shall update this analysis post the management conference call that is scheduled for tomorrow evening.

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