>EMCO (PRABHUDAS LILLADHER)

■ Revenue disappoints: EMCO reported revenue de-growth of 12.7% YoY to Rs2bn, out of which 68% sales was from transformers, 28% from projects and 4% from meters. The management has reduced its revenue guidance to 10% growth for FY10. EBITDA margin decreased only by 38bps to 12.9% despite employees growing by 41% to Rs149m (due to an interim bonus of Rs40m given to employees because of the Emco Energy sale). Adjusting for the bonus, EBITDA margin has actually increased by 159bps to 14.9%. This was ahead of our expectation and was due to lower raw material cost.

PAT for the quarter de-grew by 17% to Rs94m. The company realised Rs985m (net of taxes of Rs288m) as profit from the EMCO energy sale which was recorded below the line as an extra-ordinary item.

■ EMCO Energy sold for ~Rs1.7bn: EMCO had sold off its fully owned subsidiary, EMCO Energy, for Rs1.7bn to GMR Energy. EMCO had spent Rs430m on this power generation venture and had already obtained several approvals as well as coal linkage for 300MW and expandable to 600MW. The cash from this sale has been partly used to retire debt and partly for working capital, which will in turn help keep a check on interest cost, going forward.

■ Order inflow improves: EMCO’s order book grew by 23% YoY to Rs16bn, out of which 34% is towards transformers, 64% towards projects and 2% towards meters. The order inflow during the quarter stood at Rs3bn (growth of 43% YoY), the management expects the order inflow to continue at a brisk pace in H2FY10.

■ Valuation: At CMP of Rs92, the stock currently trades at 10.4x FY10E and 8.8x FY11E earnings of Rs8.8 and Rs10.5, respectively. Given the expectation of improved order inflow, reduced working capital pressures on the back of cash inflow from Emco Energy sale and relatively cheap valuation, we maintain our ‘Accumulate’ rating on the stock.

To read the full report: EMCO