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Emco: Yet another quarter of red ink - Views on News from Equitymaster

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Emco: Yet another quarter of red ink

Oct 25, 2010

Emco has announced its 2QFY11 results. The company has reported a 44% YoY growth in sales, and a quarterly loss on the bottomline front. Here is our analysis of the results.

Performance summary
  • Standalone topline grows 44% YoY during 2QFY11.
  • Operating margins contract fall into the negative, impacted by a significant rise in raw material costs (as percentage of sales).
  • Reports a net loss at the bottomline level due to a negative performance at the operating level as well as a rise in depreciation and interest expenses.

Financial performance snapshot
(Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Sales 2,014 2,902 44.1% 3,941 4,089 3.8%
Expenditure 1,754 3,176 81.1% 3,428 4,618 34.7%
Operating profit (EBDITA) 260 (274) -205.3% 512 (529) -203.2%
Operating profit margin (%) 12.9% -9.4%   13.0% -12.9%  
Other income 3 0   4 0  
Interest        78    112 44.0% 165 203 23.3%
Depreciation        44      46 2.9%       88 92 4.7%
Profit before tax      141 (431)      264 (823) -412.2%
Extraordinary income/(expense) 985       -        985       -    
Tax        48 (145)         89 (278) -412.8%
Profit after tax/(loss) 1,079 (286)   1,160 (545) -147.0%
Net profit margin (%) 53.6% -9.9%   29.4% -13.3%  
No. of shares       58.8 61.9  
Diluted earnings per share (Rs)*         (5.9)  
P/E ratio (x)*         NA  
* On a trailing 12 months basis    # Excluding extraordinary items

What has driven performance in 2QFY11?
  • Emco's standalone topline grew 44% YoY during the quarter. A part of the reason for this is that a large number of sub-station orders got commissioned during the quarter enabling the company to book revenues on account of the same.

  • Emco's operating margins fell into negative territory 2QFY11. This was mainly on account of raw material costs (as a percentage of sales) seeing a very sharp spike during the quarter. Many of the substation projects that got commissioned during the quarter saw cost overruns due to delays and quantity variations, coupled with them being fixed price contracts where the company did not have the option passing on increased costs to the customer. Also, the company has made provisions during the quarter for similar losses on projects that are still under execution as per quarter end management estimates.

  • Emco also saw substantially higher interest expenses during the quarter. This along with the negative operating margins led to the company reporting an after tax loss of Rs 286 m.

What to expect?
At the current price of Rs 63, the stock is trading at a multiple of 7.3 times our estimated FY13 earnings per share. As indicated by the management, the transformer business continues to see price pressures on account of severe competition and excess capacity. Execution of transmission line projects has also been adversely impacted due to excess rains this monsoon as also right of way issues. At the current price, we continue to maintain a cautious view on the stock (Research Pro subscribers, kindly click here.)

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Feb 21, 2019 10:51 AM


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