On A Power Trip

We had recommended Emco to our investors in Issue 9 dated April 13, 2009 in the Analysis column at Rs 40.45 on the grounds of good valuations and better earning visibility. Currently, however, the counter is trading at 121.5 per cent above our recommended price (within three months of our recommendations). In the recently announced budget the government has envisaged allocation of funds in APDRP and RGGVY to the extent of Rs 2,080 crore and Rs 7,000 crore. This enhanced budget allocation INCREASE121.5 per cent CMP Rs 89.60 for RGGVY is expected to accelerate the rural electrification process, thereby expanding the power distribution network in the rural areas. This will benefit power distribution and distribution equipment players in the industry and Emco will definitely benefit considering that most of its revenues come from SEBs.

The company is the third largest transformer manufacturing company in India and a leading player in the 400 KV transformer space with an annual capacity of 20,000 MVA. For the first quarter ended FY10 the company reported a topline growth of 9 per cent over its corresponding period last year. The bottomline, however, reported a de-growth of 18 per cent mainly due to a substantial growth in the interest cost of 211 per cent (in absolute terms the net profit decreased from Rs 28.78 crore a year ago to Rs 23.55 crore currently). This mainly led to the more than 200 bps drop in the NPM. Our advice is that you should book complete profits on this counter as this will be a good exit point at this level.