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Huge cost overruns; Maintain negative view

July 30, 2010

¾ Emco reported its worst ever quarter with huge cost over-

REDUCE
Price Rs 67 Sensex Target Price Rs60 17,868

runs in its projects business – our sense is that cost over-runs are across the projects (including 765kv PGCIL order) over-runs likely to continue through FY11E, with P.V.C. built in most of orders, miscalculations in quantity of input needed deliveries from customer side, (2) competition impacting margins by 4-5% minimum and (3) payment delays

¾ Almost 60% of 765kv order (Rs5.5bn) still unexecuted, cost

¾ Transformer business also affected due to (1) rescheduling of

Price Performance
(%)

1M

3M

6M 12M

Absolute Rel. to Sensex
Source: Bloomberg

(18) (27) (26) (22) (21) (29) (32) (34)

¾ Give benefit of doubt to management, assume positive

numbers from Q2FY11 onwards, still reduction in earnings estimates by 97%/50% for FY11/12E; Maintain Reduce.

Big negative surprise led by cost overruns Stock Details
Sector Reuters Bloomberg Equity Capital (Rs mn) Face Value(Rs) No of shares o/s (mn) 52 Week H/L Market Cap (Rs bn/USD mn) Daily Avg Volume (No of sh) Daily Avg Turnover (US$mn)

Transformer EMCO.BO EMCO@IN 115 2 57 109/67 4/86 298009 0.5

Revenues decline by 38% to Rs1.2bn, EBITDA loss of Rs256mn and net loss of Rs260mn - a big negative surprise. We believe that Emco has been aggressively bidding for transmission line towers and turnkey projects in T&D in the higher range (especially 765kv orders from PGCIL). We had highlighted earlier also that there could be a risk of very low margins in these contracts. But the reality seems to be worse. This we believe is the impact of huge cost overruns in these contracts. Though the company in its concall did not provide details but we believe that the cost overruns are likely to continue through FY11E. This is because 765kv order (45% of current project order book of Rs7.3bn) is still 60% unexecuted, likely to be executed in next three four quarters.

Give benefit of doubt to mgmt still have to cut earnings by 97%/50%
The management in the concall has guided for a better overall FY11E (starting Q2FY11) with (1) 90% of the order book (Rs12bn) to be executed in FY11E and (2) positive numbers at the bottom line (starting Q2FY11E). Though we are not fully convinced but we give benefit of doubt to the management. We have assumed (1) revenue growth of 18% in FY11E/12E and (2) EBITDA margins of 8% in balance 9mFY11E and FY12E. Still, we have to cut our earnings by 97%/50% to Rs0.2/4.7 for FY11E/12E.

Shareholding Pattern (%)
J’10 Promoters FII/NRI Institutions Private Corp Public M’10 D’09

36.7 7.5 14.3 21.7 19.7

36.7 9.5 16.6 18.4 18.7

33.4 9.2 17.4 19.8 20.2

Problems multiply - WC cycle increase; net debt increase by Rs1.7bn in just one qtr; maintain reduce with revised target of Rs60
Emco had net debt of Rs800mn at the end of FY10 which has increased to Rs2.5bn at the end of Q1FY11; a huge increase for a company with revenue of Rs1.2bn in the qtr. We believe Emco is grappling with multiple problems (1) payment delays (choice of wrong orders/customers), (2) inventory built up due to rescheduling of deliveries (choice of wrong orders/customers), (3) competition across its businesses (entering into right business at the wrong time - projects) and (4) wrong estimation of quantitative requirements of a project while bidding (talent crunch). Thus, we maintain our reduce rating on the stock with a revised price target of Rs60/share, 0.6xFY12E book value (Rs82 - earlier). On the CMP of Rs67, the stock is trading at 0.7xFY12E book value. Financial Snapshot
YEMar FY09 Net Sales 9,963 9,786 11,575 13,749 EBITDA (Core) 1,375 1,102 580 1,097 (%) 13.8 11.3 5.0 8.0 APAT 524 355 14 309 EPS (Rs) 8.9 5.4 0.2 4.7 EPS % chg (19.1) (38.8) (96.1) 2,109.3 RoE (%) 13.1 26.7 0.2 5.2 P/E 7.5 3.3 312.2 14.1 EV/ EBITDA 4.7 4.7 12.5 7.7 P/BV 0.9 0.7 0.7 0.7

Rs Mn

Amit Golchha amit.golchha@emkayglobal.com +91 22 6624 2408

FY10 FY11E FY12E

Emkay Global Financial Services Ltd

1

Result Update

Emco Ltd.

0% -179 -15.6 -21.2 3.8 -423.437 -74.9 -423.8 6.5 -25.8 10.8 QoQ (%) -68.6% -170 -4.6 6.8 -63.9% -1.3 -13.7 5.2 33.537 -73.2% -177 -8.1 -434.9 4.9 33.109 -93.5 8.2% Q4FY10 3.3 4.674 -86.1 10.6 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -99 -5.6 266 -46 220 0 -75 145 -44 101 0 101 0 101 1.754 -87.2 4.5% -156 -13.1 -423.5 323 -45 278 0 -125 153 -74 79 -1 78 0 78 1.8 30.5 Margins (%) EBIDTA EBIT EBT PAT Effective Tax rate 13. Result Update Rs mn Revenue Expenditure as % of sales Consumption of RM as % of sales Power and Fuel as % of sales Other Mfg Expenses as % of sales Employee Cost as % of sales Other expenditure as % of sales EBITDA Depreciation EBIT Other Income Interest PBT Tax Adjusted PAT Extra ordinary items Reported PAT (Profit)/loss from JV's/Ass/MI PAT after MI Reported EPS Q1FY10 1.8 252 -44 208 0 -86 122 -41 81 0 81 0 81 1.4 4.188 -1.1% 29.441 -91.045 -80.1% -149 -7.7% -226 -6.7 -357.2 260 -44 216 0 -75 141 -48 94 985 1079 0 1079 16.1 -21.2 -256 -46 -302 0 -91 -393 133 -261 0 -261 0 -261 -4.0 -201.6 -8.4 -280.926 -1.0 -138 -7.3 -208.6% -1.1 -27.1% Q3FY10 2.7 70.Emco Ltd.1 48.5 -33.8 6.7 (bps) -3461 -3625 -3941 -2612 -10 (bps) -3013 -3284 -3711 -2404 -1485 Emkay Research 30 July 2010 2 .4% Q1FY11 1.8% -161 -7.6 7.5 -423.014 -1.7 -421.9% Q2FY10 2.0 2.4% -22.9% -1.4 -58.4% -117 -5.1% 57.9 10.815 -87.444 -121.0 -1.7 23.4 -20.2 -422.6 -245.5% YoY (%) -38.428 -70.764 -3.8 12.5 -434.2 -428.9% -3.4 -179.7 12.1 -434.081 -1.

826 234 122 10.102 -19.5 0.212 12.919 648 722 364 1.157 2.561 200 9.0 FY12E 13.1 0 14 -99.766 FY11E 11 201 368 0 -1.375 6.920 0 3.157 FY10 131 5.8 0.419 6.975 0 8.1 5.7 3.757 200 8.8 164 1.7 1.6 0.9 13. exp & Def.1 13.0 201 379 3.561 0 3.9 13.7 0.7 0.5 4.853 Cash Flow Y/E.791 116 7.187 2. Financials Income Statement Y/E.196 -368 -88 363 0 -1.8 89.4 7 368 561 206 13.599 3.8 5.6 7.448 510 534 192 1.4 5.2 9.587 7. Mar (Rs.448 -137 -489 -300 -789 10 0 -290 0 0 -428 -46 -16 0 -490 -1.2 0 309 2109. Assets Total Assets 2.766 1.4 9.561 200 9.770 1.200 0 3.963 5.4 1.561 200 8.8 12.1 0.0 26.0 309 0 309 2109.4 10 428 468 159 34.3 2.3 524 0 524 -19.6 11.7 6.0 312.897 -270 1.962 6.6 1.087 164 0 12.995 9.827 0 2.2 0 415 797 273 34.068 0 5.2 29.786 -1.587 Result Update Balance Sheet Y/E.445 1.3 179 923 9.1 4.948 986 1.530 4. mn) PBT (Ex-Other income) Depreciation Interest Provided Other Non-Cash items Chg in working cap Tax paid Operating Cashflow Capital expenditure Free Cash Flow Other income Investments Investing Cashflow Equity Capital Raised Loans Taken / (Repaid) Interest Paid Dividend paid (incl tax) Income from investments Others Financing Cashflow Net chg in cash Opening cash position Closing cash position FY09 795 164 415 0 -984 -273 117 -394 -276 0 -110 -503 0 673 -415 -82 51 0 227 -159 1.274 1.447 0 4.907 4.8 214 7.9 11.9 210 0.854 3.7 13.565 1.3 6.093 0 3.633 807 1.9 93.783 -559 3.256 2.286 2.1 9.3 Gross Block Less: Depreciation Net block Capital work in progress Investment Current Assets Inventories Sundry debtors Cash & bank balance Loans & advances Other current assets Current lia & Prov Current liabilities Provisions Net current assets Misc.0 211 886 6.538 179 368 0 15 -203 1.166 2.3 10.1 3.684 7.707 5.1 0. Mar Profitability (%) EBITDA Margin Net Margin ROCE ROE RoIC Per Share Data (Rs) EPS CEPS BVPS DPS Valuations (x) PER P/CEPS P/BV EV / Sales EV / EBITDA Dividend Yield (%) Gearing Ratio (x) Net Debt/ Equity Net Debt/EBIDTA Working Cap Cycle (days) 0.993 9 -1.1 FY11E 11.561 0 3.8 172 0.450 100 6.287 FY10 1.9 0.1 5.561 0 2.082 4.3 10 368 21 7 34.167 172 0 13.7 2.6 4.838 0 3.0 2.7 2.2 3.587 FY11E 131 5.6 984 1.627 7 122 -141 13 -1. mn) Equity share capital Reserves & surplus Net worth Minority Interest Secured Loans Unsecured Loans Loan Funds Net deferred tax liability Total Liabilities FY09 118 4.269 702 -567 Key Ratios Y/E.2 2.5 8.599 FY12E 131 5.575 18.749 18.7 0.513 138 7.961 190 0 9.9 11.8 0.874 7.0 14.4 355 0 355 -32.8 5.766 691 FY12E 458 211 428 0 -1.349 0 9.2 0.436 0 8.0 0.704 10 0 -290 0 1.2 89.1 FY09 FY10 FY11E FY12E Emkay Research 30 July 2010 3 .0 11.514 0 9.386 519 419 264 1.286 1.3 -1 523 -18.583 0 4.6 12.700 1.3 3.5 0.0 4.4 5.404 -300 -1.7 11.651 5.696 5.119 96 5.000 -368 -2 -12 0 618 -1.190 1.276 480 1.757 0 3.215 4.2 3.398 2.4 0.458 603 625 309 580 -47.7 174 0.8 FY10 9.4 1.652 10.552 702 2. mn) Net Sales Growth (%) Expenditure Raw Materials Construction Exp Employee Cost Other Exp EBITDA Growth (%) EBITDA margin (%) Depreciation EBIT EBIT margin (%) Other Income Interest expenses PBT Tax Effective tax rate (%) Adjusted PAT (Profit)/loss from JV's/Ass/MI Adjusted PAT after MI Growth (%) Net Margin (%) E/O items Reported PAT Growth (%) FY09 9. Mar (Rs.550 3. Mar (Rs.4 71.5 5.7 0.756 4.Emco Ltd.2 6.097 89.2 8.8 8.986 1.1 8.9 0.076 1.0 14 0 14 -96.2 8.339 156.5 4.3 15.

Result Update Recommendation History: Emco Ltd.'s prior written consent. The material is based upon information that we consider reliable.2009 Reports Emco Q4FY10 Result Update Emco Q3FY10 Result Update Emco Q2FY10 Result Update Emco Q4FY09 Result Update Reco Reduce Reduce Reduce Sell CMP 78 91 83 95 Target 82 82 82 27 Recent Research Reports Date 26. and to observe. nor any person connected with it..2010 23.Emco Ltd.01. there may be regulatory. Paragon Center.06. including the United States.2010 13.2010 28.2010 14. Neither Emkay Global Financial Services Ltd. including persons involved in the preparation or issuance of this material may. such restrictions. Pandurang Budhkar Marg. The manner of circulation and distribution of this document may be restricted by law or regulation in certain countries.260 330 325 Target 220 1. (a) from time to time. but we do not represent that it is accurate or complete.2010 30. The recipient of this material should rely on their own investigations and take their own professional advice. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. and it should not be relied upon. officers. of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company (ies) discussed herein or may perform or seek to perform investment banking services for such company(ies)or act as advisor or lender / borrower to such company(ies) or have other potential conflict of interest with respect to any recommendation and related information and opinions. 6612 1212. – EMCO IN Date 31. 1st Floor.07. and we are not soliciting any action based upon it.2009 01. No part of this document may be distributed in Canada or used by private customers in the United Kingdom.07. Persons into whose possession this document may come are required to inform themselves of.05. Fax: 6624 2410 This document is not for public distribution and has been furnished to you solely for your information and may not be reproduced or redistributed to any other person. While we endeavor to update on a reasonable basis the information discussed in this material.2010 Reports NTPC Q1FY11 Result Update Bharat Bijlee Q1FY11 Result Update Sintex Industries Q1FY11 Concall Update Sintex Industries Q1FY11 Result Update Reco Accumulate Accumulate Hold Hold CMP 202 1. H -13 -16. Mumbai – 400 013.07.07. or other reasons that prevent us from doing so. No person associated with Emkay Global Financial Services Ltd. This material is for the personal information of the authorized recipient. have long or short positions in. and buy or sell the securities thereof. although its accuracy and completeness cannot be guaranteed. We and our affiliates. directors.350 325 325 Emkay Global Financial Services Ltd. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. In so far as this report includes current or historical information. is obligated to call or initiate contact with you for the purposes of elaborating or following up on the information contained in this document.10. it is believed to be reliable. Worli. compliance. No part of this material may be duplicated in any form and/or redistributed without Emkay Global Financial Services Ltd. and employees world wide. accepts any liability arising from the use of this document. Opinions expressed are our current opinions as of the date appearing on this material only. Tel No. The same persons may have acted upon the information contained here. DISCLAIMER: Emkay Research 30 July 2010 4 .