Reduce Emco; target of Rs 60: Emkay

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Reduce Emco; target of Rs 60: Emkay

Emkay Global Financial Services is bearish on Emco and has recommended reduce rating on the stock with a target of Rs 60 in its June 8, 2011 research report.

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Emkay Global Financial Services is bearish on Emco and has recommended reduce rating on the stock with a target of Rs 60 in its June 8, 2011 research report.

"Emco, Q4 PAT of Rs48mn, significantly lower than our estimate (Rs128mn) led by disappointment in transformer business both on volumes and margins. Project revenues (21% yoy growth) neutralize impact of fall in transformers revenues (down 34% yoy) but not margins. Overall revenues stand at Rs3.4bn down 11% yoy. Overall ambiguity continues as management guides for traction in order inquires but indicates margins outlook is uncertain. Reduce FY12E earnings by 48% to Rs2.1/share introduce FY13E earnings of Rs4/share; Trading at 13.6x FY13E earnings and 6.9xFY12E EBITDA- expensive."

"Q4FY11 PAT of Rs48mn (our est-Rs128mn) declined 38% yoy led by disappointment in transformer business both on revenue (Rs1.4bn down 34% yoy) and margin front (10%, down 680bps yoy). Revenues for the quarter stood at Rs 3.4bn (down 11% yoy). Overall EBITDA margins declined by 140bps to 7.2%. FY11 revenues stood at Rs 10.5bn (up 7% yoy), EBITDA loss stood at Rs 43mn vs. EBITDA of Rs1.1bn in FY10 and PAT loss of Rs 442mn vs APAT of Rs354mn. During the concall the management indicated that worst was (losses of Q1&Q2) was behind the company and they were witnessing traction in order enquiries but highlighted that the pricing scenario was uncertain due to (1) new players entering the market and (2) higher supplies from the existing players. Given the uncertainty over the pricing scenario (and hence margins) we cut our FY12E earnings by 48% to Rs 2.1/share and also introduce our FY13E earnings of Rs4/share. The cut in earnings is mainly led by (1) lower absolute MVA volumes of 11,500MVA vs earlier est of 14410 MVA due to lower FY11 volumes of 10000MVA (we have maintained our volume growth est of 15%) and (2) lower EBITDA margin (7.3% vs 8.5%)."

"Emco has been facing issues on account of (1) project business cost overruns, (2) competition across all its businesses impacting volumes and margins and (3) huge working capital cycle. Given, ambiguity on FY12E performance, we expect these issues continue to impact stock's performance. At CMP of Rs54, the stock is trading at 13.6xFY13E earnings, 0.6xFY13E book value and 6.9xFY12E EBITDA - expensive compared to peers at 4.2x FY13E EBITDA. We maintain our reduce rating on the stock with a price target of Rs 60/share," says Emkay Global Financial Services research report.

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