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Emco: Facing rough weather - Views on News from Equitymaster
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Emco: Facing rough weather
Oct 29, 2009

Performance summary
  • Standalone topline falls 13% YoY in 2QFY10 and 5% YoY in 1HFY10.
  • Operating margins contract by 0.4% YoY, impacted by higher employee costs as also higher other expenditure (both as percentage of sales).
  • Net profits excluding extraordinary items fall by 17% YoY, impacted by higher depreciation expenses and a higher effective tax rate.


Financial performance snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Sales 2,306 2,014 -12.7% 4,140 3,941 -4.8%
Expenditure 2,000 1,754 -12.3% 3,594 3,428 -4.6%
Operating profit (EBDITA) 307 260 -15.2% 546 512 -6.1%
Operating profit margin (%) 13.3% 12.9%   13.2% 13.0%  
Other income 0 3   0 4  
Interest 105 78 -25.9% 160 165 2.6%
Depreciation 39 44 14.7% 76 88 15.1%
Profit before tax 163 141 -13.5% 309 264 -14.8%
Extraordinary income/(expense)                -   985                  -   985  
Tax 50 48 -5.4% 96 89 -7.4%
Profit after tax/(loss)# 113 94 -17.1% 213 175 -18.1%
Net profit margin (%) 4.9% 4.7%   5.2% 4.4%  
No. of shares       58.8 58.8  
Diluted earnings per share (Rs)*         8.4  
P/E ratio (x)*         11.0  
* On a trailing 12 months basis; # Excluding extraordinary items

What has driven performance in 2QFY10?
  • Emco’s standalone topline fell by 13% YoY during the quarter. As indicated by the management, this is due to the combination of the effect of a fall in raw material prices in the region of 13% (which decreases the overall value of contracts that have price variation clauses associated with them), and lower prices due to competitive pressures.

  • Emco’s operating margins shrank by 0.4% during 2QFY10 despite a fall in raw material expenses, and largely due to the rise in staff costs. These costs, as percentage of sales, increased substantially from 4.6% of sales in 2QFY09 to 7.4% in 2QFY10. This was due to a one time ex-gratia payment in 2QFY10 of Rs 35 m as part of incentives for sale of the power generation unit as mentioned below, and there should be no such costs in the coming quarters. Other expenditure too saw an increase by about 0.2% compared to the previous quarter.

  • The lower margins, along with a higher effective tax rate took its toll on the bottomline which saw a fall of 17% YoY excluding the effect an extraordinary gain. This gain was a result of the sale of the company's subsidiary which was setting up a power plant at Warora, Maharashtra, and which fetched the company Rs 985 m.

What to expect?
At the current price of Rs 92, the stock is trading at a multiple of 11 times its trailing twelve months earnings. The company’s current order book stands at Rs 16 bn compared to Rs 13 bn during the same time last year. This includes 34% of transformer orders, 2% of meter orders, and another 64% from the projects business wherein the company executes turnkey substations.

After the sale of its power project as mentioned in the above report, Emco will continue to scout for opportunities in the power generation business. It is also looking to double its transformer capacity and add additional capacities and capabilities for executing EPC substation projects. Also, the company intends to get into the 765 KV transformers business which does not form part of its current portfolio. In line with that motive, it is now amidst conducting feasibility study for the same and would also be open to a technical collaboration. In the meters business it is hopes to get into providing entire metering solutions with an eye on the export market.

Emco’s management is targeting a growth of 10% in topline for the whole of FY10, and plans to finish the year with an EBIDTA margins of 13%. We have a cautions view on the stock with respect to its valuations and current business environment.

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