Emco

Cluster: Emerging Star
Recommendation: Buy
Price target: Rs115
Current market price: Rs95

Annual report review
Key points

*In FY2009 Emco booked Rs7.96 crore of loss in foreign exchange (forex), adjusting for which the company?s operating performance is better by 80 basis points to 14.7% from 13.9% reported earlier.

*The company?s revenues saw 30.5% contribution from the project division in FY2009 as compared to 28.4% in FY2008. The transformers division reported 1.9% increase in volumes during the year while the realisation dropped by 2.2% year on year (yoy) on account of fall in commodity prices.

*The working capital cycle (net of cash) increased to 172 days in the financial from 152 days in FY20008 on account of increase in its current assets. Significantly there has been Rs35.5-crore increase in advances to its subsidiary, Emco Overseas, which led to sharp increase in loans and advances.

*Recently, CESC (a power utility) has acquired 50% stake in Dhariwal Infrastructure that is setting up a 600MW power plant. The deal looks similar to the sale of 2x270MW plant by Emco Energy (Emco?s subsidiary). While Emco has still not disclosed the amount it mopped from the sale, keeping CESC deal as benchmark Emco should have been able to garner close to Rs350-400 crore.

*Emco has currently invested Rs43.5 crore in the subsidiary. If this is true Emco could actually partially pay off of its debt on books easing the company?s financial cost and boosting its profits. Assuming the repayment of the advanced amount our earnings for the stand-alone entity could increase by 5-10%.

*We have realigned our numbers and upgraded our estimates by 4.4% to Rs11 in FY2010. For FY2011, we have realigned our numbers with no material change in our earnings. Further, we have not factored in any cash flow from the sale of the plant, which would be an upside to our current estimates.

*We remain positive on Emco, as it is fast emerging as a strong end-to-end solution provider in the power transmission and distribution (T&D) space in the country. We feel the order inflow for the company would remain robust with the spending in power T&D space expected to remain buoyant. We expect Emco to report a compounded annual growth rate (CAGR) of 17.3% and 19.4% in the top line and the bottom line respectively over FY2009-11. We maintain our Buy recommendation on the stock with price target of Rs115 (9x FY2011E earnings per share [EPS]). At the current market price the stock trades at 8.6x and 7.4x FY2010 and FY2011 estimated EPS respectively.Source: ShareKhan


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