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Emco: Showing signs of improvement - Views on News from Equitymaster

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Emco: Showing signs of improvement
Nov 17, 2011

Emco has announced its sec0nd quarter financial results for 2011-2012 (2QFY12). The company has reported 31.8% YoY decline in sales. It also posted a net profit of Rs 18.5 m in 2QFY12 against a loss of Rs 286 m in the same quarter previous year. Here is our analysis of the results.

Performance summary
  • Standalone topline declined 31.8% YoY during 2QFY12.
  • The company reported operating profit of Rs 199 m in 2QFY12 compared to an operating loss of Rs 274 m in 2QFY11.
  • The company posted net profit of Rs 18.5 m against a loss of Rs 286 m in the same quarter previous year.

Standalone financial performance
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Sales 2,902 1,979 -31.8% 4,089 3,859 -5.6%
Expenditure 3,176 1,781 -43.9% 4,618 3,474 -24.8%
Operating profit (EBDITA) (274) 199   (529) 385  
Operating profit margin (%) -9.4% 10.0%   -12.9% 10.0%  
Interest (net) 112 124 11.0% 203 236 16.1%
Depreciation 46 51 11.2% 92 100 8.8%
Other income 0 4 721.4% 0 4 718.0%
Profit before tax (431) 27   (823) 53  
Tax (145) 9   (278) 17  
Profit after tax/(loss) (286) 18   (545) 36  
Net profit margin (%) -9.9% 0.9%   -13.3% 0.9%  
No. of shares (m)         65.1  
Basic & diluted earnings per share (Rs)         0.6  
P/E ratio (x)*         16.3  
* On a trailing 12 months basis

What has driven performance in 2QFY12?
  • Emco's standalone topline declined by 31.8% YoY during the quarter due to execution delays. Slowdown in the power sector and increasing competitive pressures in the transmission & distribution industry impacted the overall top-line growth of the company.

  • Emco reported operating margins of 10% during 2QFY12. The company reported operating profit of Rs 199 m during the quarter compared to a loss of Rs 274 m in 2QFY11 due to decline in raw material expenses. Raw material expenses (as a percentage of sales) declined from 96.6% in 2QFY11 to 81.0% in 2QFY12. Other expenditure also declined 63% YoY supporting margin growth.

  • The company reported a net profit of Rs 18.5 m during the quarter vis--vis a loss of Rs 286 m in 2QFY11 due to strong performance at the operating level. However, increase in interest and depreciation expenses impacted profitability growth to a certain extent.

What to expect?
Investment slowdown in the Indian T&D space due to delays in off take of power projects has been the biggest concern for the company. Further rising competitive intensity in the industry due to overcapacity has also impacted relisations. Even margin sustenance would be a key challenge amidst the current raw material price inflation. Rising leverage will also keep bottom-line under pressure. In light of these factors, we maintain our negative view on the stock.

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