The Hindu Business Line : Emco: Buy

INVESTORS can consider taking exposure in the Emco stock. At the current price, it trades at about 19 times its expected FY06 earnings. The price earnings multiple is attractive compared to its peers.

Gradually improving performance, key reforms in the power sector and success in capturing new markets lend optimism to the earnings growth of the company. Emco manufactures transformers and electronic meters. It also has a projects division that implements large turnkey projects in power generation, transmission and distribution segments.

Improving performance

For the quarter ended June 2005, Emco's top-line grew 37 per cent. The bottom-line saw a 272 per cent jump on account of a drop in interest costs and flat depreciation. With the recent inflow of funds through global depository receipts, interest costs can be expected to decline further.

Emco's operating margins have been in the 13-15 per cent range for the last five years, healthier than even of bigger players such as ABB.

Emco's current order book is Rs 325 crore — up a near-40 per cent over FY05 sales. This can grow further as power ancillaries are expected to benefit from the heightened activity of State electricity boards and private players in transmission and distribution of power.

Benefits from power sector reforms

The Accelerated Power Reform Development Programme (APRDP) mooted by the Union Ministry stresses on modernising and revamping transmission and distribution (T&D) lines. Further, the National Grid was formed to transfer power from surplus to deficit regions. This would require huge investment in transmission facilities.

Emco's major products and solutions are in the T&D segment. It manufactures a wide range of transformers and is well-placed to cater to different voltage requirements. To reduce T&D losses, the APRDP requires metering at all stages by SEBs and private utilities. Thus, Emco's wide range of meter-reading solutions can be expected to be a key earnings growth driver.

The Electricity Act, 2003 allows multi-licensing in distribution wherein more than one competing company can distribute power in an area through independent systems. This would require ramping up the T&D facilities, thus providing a fillip to the transformers business.

Better cash flows in offing

Emco is highly geared with a total debt-to-equity ratio of about 1.5. Nearly 70 per cent of the debt, however, is working capital funds. The crunch in working capital can be traced to a long cycle of realisation from debtors.

The Additional Credit Assistance now provided by the Centre to the SEBs and funding by agencies such as Power Finance Corporation and Rural Electrification Corporation can be expected to improve the finance situation of suppliers to SEBs. Emco's current debtor's realisation of more than 200 days is likely to reduce. Further, Emco's international division has grown by more than 190 per cent during FY05. The company expects improved cash flows from this division with shorter realisation periods.

Other triggers

Emco entered into a strategic alliance with Tamco Corporate Holdings of Malaysia. Though the current tie-up is for marketing of switchgears, the company plans to jointly set up a switchgears manufacturing unit. If this happens the company will benefit from integration of operations and improve its global presence since Tamco is a prominent international player in switchgears.

BSES Infrastructure, a subsidiary of Reliance Energy, holds about 10 per cent stake in the company. This appears to be a strategic holding. Any increase in stake may prove to be a positive for Emco. Increasing cost of raw materials especially copper and lamination shall remain a key risk. In this backdrop, the impact of rising raw material prices on operating margins need to be closely watched.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page