Emco Ltd. Turns profitable, Maintain ‘Reduce’ ratings:: Emkay

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Emco Ltd.

Turns profitable, Maintain ‘Reduce’ ratings

REDUCE

CMP: Rs 66                                       Target Price: Rs 60

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n     Emco reported PAT of Rs55mn, 9% lower than our estimate but more important is that it turned profitable in the quarter – some assurance of cost overruns provisions being over

n     Revenues were significantly ahead of estimates at Rs3bn led by projects even though EBITDA margins remained muted at 4.7% in the segment

n     Guides for 0.15mn MT of coal sales in FY11E from Indonesian coal mine (37% stake); the ramp up in this business remains important for FY12E performance as the margin pressures in the core business remain  

n     Reduce FY11E/12E earnings by 5%/10% to Rs.(5.6/Share) and Rs4.1/Share;Trading at 16.1x FY12E earnings and 6.1xFY12E EBITDA - expensive; Maintain Reduce

Revenues ahead, PAT below

Emco reported revenues of Rs3bn (up 46% yoy), ahead of our estimates of Rs2.6bn.

The revenue growth was driven by projects business where it reported 128% yoy growth

whereas transformers revenues declined by 8%. The EBITDA margins stood at 8%

exactly in line with our estimates. Though the margins in the transformers business was

better at 14% but projects business margins stood at muted 4.7%. The EBITDA stood at

Rs242mn, down 9% yoy. Led by higher interest cost (higher debt and interest rate) of

Rs115mn, it reported a PAT decline of 46% yoy, 9% below our estimates. However, the

important highlight of the qtr is that it turned profitable giving some assurance of cost

overruns being over.

Margin pressure continues in the core business; tweak FY11E and FY12E

earnings by -5% and -10%

Led by lower than estimated PAT due to higher interest cost, we are reducing our

FY11E and FY12E earnings by 5% and 10% to Rs.(5.6/Share) and Rs4.1/Share. For

FY11E, management has guided for 0.15mn MT of coal sales from Indonesian coal

mine (37% stake). We believe the ramp up in this business remains important for

FY12E performance as the margin pressures in the core business remain.

Net debt increases to Rs3.8bn; maintain Reduce

Emco had net debt of Rs900mn at the end of FY10 which has increased to Rs2.8bn at

the end of Q2FY11 and further to Rs3.8bn at the end of Q3FY11. Though as it looks the

cost over runs provisions seems to be over but payment delays/ working capital cycle

problems continues with Emco. This is evident from the fact that debtors days currently

stands at huge 230days. At CMP of Rs66, the stock is trading at 16.1xFY12E earnings,

0.8xFY12E book value and 6.1xFY12E EBITDA - expensive compared to peers at 3-5x

EV/EBITDA. On the back of expensive valuations and unreasonably high collection

cycle, we maintain our reduce rating on the stock with a price target of Rs60/share.