Buy Emco; target of Rs 95: KRChoksey

KRChoksey is bullish on Emco and has recommended buy rating on the stock with a target of Rs 95 in its December 31, 2010 research report.

“Emco has started production from its Indonesian coal mines in Q1FY11 and is currently producing 40,000 tonnes / month. It expects to sell around 150,000 tonnes and 1,000,000 tonnes in FY11 and FY12 respectively.”

“Going forward, project business (Substation and transmission lines) will drive the topline and profit growth. We believe that company has learnt its lessons from past, when it had aggressively bid for the projects on wafer thin margins with fixed priced contracts. EMCO has a 3% market share (In value terms) in PGCIL substation orders in FY10.Company is expected to bag orders from PGCIL going forward, as it has technical qualification for substations up to 400 KV. Project business doesn’t have threat perception from China and Korea as it is package mix of civil, mechanical and electrical work, requiring physical presence in India.”

“We have valued the company on a SOTP basis to arrive at a target price of Rs 95, resulting in an upside potential of 49.7 % from current levels of Rs 64.7. Currently the stock is trading at 8.6 x FY12 earnings of power segment (EPS: Rs 7.5). Given the transmission capex from PGCIL for next 5-6 years, diversified business line i.e. transformers (11 KV to 400 KV) and projects (Substation and transmission lines), annual capacity of 20,000 MVA and 45000 MT in transformer and transmission tower segment, respectively, strong order book in project business (Rs 650 crore at the end of H1FY11), we have assigned a multiple of 9 to the FY12 earnings of the power segment, resulting in a value of Rs 67.1. We have valued the Indonesian coal mines of the company having a reserve of 105 million tones on the EV/Reserve basis. Indonesian coal mines having a calorific value of 5100-5500 Kcal/kg with no mining history are valued at 1.5-2.0 x reserve,” says KRChoksey research report.

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