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Emco Ltd.: Maintains the momentum - Views on News from Equitymaster
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Emco Ltd.: Maintains the momentum
Oct 22, 2007

Performance summary
  • Topline grows 41% YoY in 2QFY08

  • Operating margins expand marginally, largely due to lower raw material costs.

  • Net profits grow by 19% YoY during 2QFY08, impacted by higher tax and interest outgo.

  • 1HFY08 sales and net profits record growth of 40% YoY and 20% YoY respectively.

Financial performance snapshot
(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Sales 1,305 1,842 41.1% 2,410 3,385 40.4%
Expenditure 1,128 1,591 41.0% 2,085 2,933 40.6%
Operating profit (EBDITA) 177 251 41.9% 325 452 39.2%
Operating profit margin (%) 13.5% 13.6%   13.5% 13.4%  
Interest 40 74 86.6% 66 120 82.9%
Depreciation 14 18 28.7% 29 36 22.3%
Profit before tax 123 159 29.1% 230 296 28.8%
Tax 36 55 52.5% 68 103 50.5%
Profit after tax/(loss) 87 104 19.3% 162 194 19.7%
Net profit margin (%) 6.7% 5.6%   6.7% 5.7%  
No. of shares         10.2  
Diluted earnings per share (Rs)*         42.9  
P/E ratio (x)*         28.0  
* On a trailing 12 months basis

Company background
Emco is one of the leading domestic players in the Indian power transmission and distribution front with its presence in the 132KV to 220KV transformer and electronic meters businesses. The company also undertakes turnkey projects of setting up sub-stations for state electricity boards. The transformer business formed around 73% of the company net sales in FY07, with the electronic meters and projects businesses chipping in with 7% and 20% share respectively. During the period FY02 to FY07, Emco has grown its net sales and profits at compounded annual rate of 36% and 97% respectively. The company currently has 4 manufacturing units and employs around 1,200 people.

What has driven performance in 2QFY08?
Sector buoyancy aids topline: Since Emco does not give a detailed breakup of its quarterly revenues, it is not possible to analyse the company on the back of performance of its various segments. However, on an overall basis, the continued buoyancy in poser sector investments, especially those in the transmission and distribution space (T&D) seems to have helped the company in achieving a 41% YoY growth during 2QFY08. As a matter of fact, Emco is one of the leading players in the power T&D equipment space, which has benefited from the strong surge in investments in improving the country’s dilapidated T&D framework as also adding new transmission capacities. In order to cater to the anticipated demand growth in the future as also to move up the value chain, the company is ramping up its transformer manufacturing capacity and has tied up for high-voltage transformer technology from a leading Chinese transformer manufacturer. We expect effective implementation of the APDRP scheme and the government’s rural electrification drive to be the key growth drivers for the company in the future.

Lower input costs save margin compression: Emco recorded a very marginal 10 basis points (0.1%) expansion in its operating margins during 2QFY08. This was largely due to the decline in raw material costs. As a percentage of sales, these reduced from 83% in 2QFY07 to 70% in 2QFY08. However, the entire benefit of lower material costs was wiped off by higher stock adjustment costs.

Higher taxes, interest pare bottomline growth: Emco’s net profit growth at 19% YoY during 2QFY08 was way below its topline growth during the quarter. This was largely a result of a substantial (87% YoY) rise in interest costs and an increase in effective tax rates (from 29% in 2QFY07 to 35% in 2QFY08).

What to expect?
At the current price of Rs 1,201, the stock is trading at a multiple of 11.8 times our estimated FY10 earnings. The company continues to grow in line with our estimates and, as such, we maintain our view on the stock from a long-term perspective.

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