Buy Emco; target of Rs 97: KRChoksey

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Buy Emco; target of Rs 97: KRChoksey

KRChoksey is bullish on Emco and has recommended buy rating on the stock with a target of Rs 97 in its March 9, 2011 research report.

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KRChoksey is bullish on Emco and has recommended buy rating on the stock with a target of Rs 97 in its March 9, 2011 research report.

"Emco is the 3rd largest manufacturer of transformers in India and a leading player in electronic energy meter, turn key electrical substation and transmission lines of up to 765 KV.It specializes in application transformers like rectifiers, furnace and locomotive with wide product line ranging from 11 KV to 400 KV. Company has acquired a 37.4 % stake in an Indonesian coal mine PT Bism with the proven reserves of 105 million tones. In addition, It is also making a foray into power business with 1800 MW of thermal power capacity under various stages of planning and implementation."

"Company reported a positive EBITDA after a gap of two quarters. It registered a margin of 14% in transformer segment back from 8% in Q2FY11.Going forward; we believe that transformer segment is going to witness a turnaround, even in face of intensifying competition, as a Capex of approximately Rs 640,000 crore in T&D sector over the next 5-6 years will ensure the optimum capacity utilisation for major players like EMCO. Company became EBITDA positive in project business during the quarter even as commodity prices continued to rise sharply. Going forward, we believe that EMCO will be able to secure a pie in PGCIL transmission line orders as it has a prior experience for the same. Company has again reiterated during the concall that it is actively scouting for a joint venture partner to make a foray in 765 KV segment transformers. It is also planning to venture into high voltage switchgears. We believe that next phase of growth will come from higher voltage segment as lower voltage class has largely become commoditised."

"Company is currently producing 40,000 MT from its Indonesian coal mines and during the concall it has reiterated that it will be to sell 150,000 MT during FY11. Going forward, we believe that coal is going to be a precious commodity for Indian power utilities as production ramp up from CIL is not going to keep pace with the demand growth. Sharp spike in coal prices on account of floods in Australia and strong demand from China and India augurs well for the company. We expect EMCO to ramp up the production to 1 million tonnes by FY12, giving a sharp boost to company's profitability. EMCO has returned back to profitability and we believe the worst is over for the company. The strong investment pipeline in the T&D space and commencement of production from its Indonesian coal mines ensures revenue visibility for the next 5-6 years. We have valued the company on SOTP basis and arrived at a target price of Rs 97 which is 64% upside to the current market price. Currently the stock is trading at a P/E of 5.8x FY12E EPS," says KRChoksey research report.

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To read the full report click on the attachment