TANMAY OBSERVES!

EMCO LTD - http://www.emcoindia.com/

CMP Rs 91.35 Market Cap Rs 538 Cr

Book Value - Rs 71 EPS - Rs 9.03 (FY09) Debt-Equity Ratio - 0.84

Ratios - Price to Earnings : 10.11  Price To Book : 1.28 Price To Sales: 0.52

The Company was incorporated in 1964. The main object of the Company is to manufacture various types of high tension transformers. 

What's the business?

EMCO offers Transmission & Distribution (T&D) solutions in the power sector.  

• Through it's TRANSFORMER DIVISION it offers widest transformers range up to 315 MVA, 400 KV for power generation transmission & distribution. It is the largest producer of specialised rectifier & furnace transformers in the country. In addition it also manufactures Loco-Motive & Traction Transformers.  
• Through it's METERS DIVISION it offers state of the art metering solutions like tamper proof electronic energy meters, automatic meter reading solutions like drive by, walk by or fixed network, prepayment metering solutions & High end metering like Trivector Meters, Grid Metering etc. It also offers a total Energy and revenue management solutions. 
• Through it's PROJECTS DIVISION it offers turnkey solutions from concept to commissioning for large electrical substation projects in the power generation, transmission & distribution area. It offers a Cellular Indoor Substation (CIS) as an alternative and less cost solution to the expensive gas insulated substation (GIS) up to 132 kV in the areas where space and cost is a major constraint. It also undertakes entire industrial electrification work from designing to execution. The SCADA group offers IT solutions for power distribution management. It undertakes large distribution automation and sub-station automation projects.  
• Through its INTERNATIONAL DIVISION EMCO offers Transformers and Energy Meter confirming to the latest International specifications. Emco Transformers have been commissioned in USA, Europe & West-Asia also. 

How fast is the company growing?

Companies are judged by their sales and earnings growth rates than on the absolute value of their sales and earnings. Look for companies that consistently grow faster than there peers.

EMCO had posted Rs 235.9Cr Sales in FY05 and has grown Sales to Rs996Cr in FY09 which gives a (Compounded) Annual Growth Rate of 43% over the last 4 years and similarly profits have grown 53% to Rs 53.1Cr in FY09 (despite a fall in profits from Rs 64.4 Cr in FY08).

How profitable is the company?

Investors prefer companies that give consistent profit margins -- the percentage of sales that they keep -- every year. This is accomplished either by lowering expenses or raising prices. EMCO Operating Profit Margins have stabilized around 13% for the last 5 years which gives it a strong record of squeezing out consistent profits from every rupee of sales.

Key Features:-

• Amongst Top 3 Transformer Companies in India(20,000 MVA)
• Manufacturing widest range of Transformers in India (5kVA –315 MVA/400kV)
• Largest Transformer commissioned-315 MVA, 400 kV
• Leading Player in 132 kV,220 kV & 400kV market segments in India
• Leaders in special application Transformers like Furnace, Rectifier and Locomotive
• Exporting to more than 30 countries aroundthe world
• Constant Dividend payout for the last 5 years
• Manufacturing Electronic Energy Meters forover a decade and having complete product range of Single Phase,Three Phase, Trivector meters 

Recent Data:-

• Order book at the start of Oct 1, 2009 was Rs 1600 crore as compared to Rs 1300 crore as on corresponding previous period. Of the order book Govt. and private share is in the ration of 70:30.
• Majority of the orders i.e. transformer, substation and transmission line is covered with price variation clause.
• Sale in value-terms were down by 13% (to Rs 201 crore) largely on account of fall in commodity prices. But Volume sales for the first half ended Sep 2009 was up to 5100 MVA compared to 4800 MVA in the corresponding previous period.
• The company is planning to double transmission tower capacity from 45000 MT to 1 lakh MT. Further the company is also proposing to augments is substation building capacity.

Major Catalyst:-

India is expected to add a generation capacity of 62000 MW on certainty basis in the 11th five-year plan out of the plan target of 78700 MW. Against this the country has added just 14337 MW during the first two and half years of April-Sep 2009. Thus to capacity to be added in the remaining two and half years will be over 45000 MW. This translates into a capacity addition of about 19000 MW per annum. 

Limited pricing worries:-

Majority of the orders i.e. transformer, substation and transmission line is covered with price variation clause and any fall/rise in commodity prices may not affect EMCO to a large degree.

Conclusion:-

EMCO is a large player in transformers business but being valued at a cheap price given recent slowdown in global economy but India is a power-deficit country and meeting generation targets is of prime importance. Being the largest producer of specialised rectifier & furnace transformers in the country, EMCO stands to benefit given its experience of 4 decades in the industry. Technically the stock is looking very strong as it looks being accumulated near current levels and low valuations would provide much-needed margin of safety even if broader markets are looking weak. EMCO is trading in an up channel on weekly graph and 1-year target can be Rs 150. Investors accumulate this stock in declines, this can be an Electric Performer!