India Equity Institutional Research I Capital Goods – Electrical Equipment Company Report

EMCO Ltd. ` 64

On the verge of rebound BUY

EMCO is transforming….
From a transformer and rectifier manufacturing company to a coal mining, Price Outlook : ` 97
power generation and T&D EPC player. It has started production from its
Indonesian coal mines and expects to sell around 1 million tones of coal in Market Data Dec 31st , 2010

FY12. Company is currently executing 673 ckm of 765 kv lines for PGCIL at Shares outs (Cr) 6.2
Equity Cap (`. Cr) 12.38
a cost of ` 550 crore.
Mkt Cap (`. Cr) 399
We have valued the company on SOTP basis to arrive a target price of ` 97,
52 Wk H/L (`) 109/57
giving an upside of 49.7% from the CMP of ` 64.7.
Avg Vol (1yr avg) 151,605
Face Value (Re) 2
Investment Rationale : Bloomberg Code EMCO IN
Indonesian coal mine to be a key valuation trigger: Company has started
production from its Indonesian coal mines in Q1FY11 and is currently producing Market Info:
40,000 tonnes / month. It expects to sell around 150,000 tonnes and 1,000,000 SENSEX 20,509
tonnes in FY11 and FY12 respectively. NIFTY 6,134

Key operational metrics FY11E FY12E FY13E FY14E

Production(tonnes) 150,000 1,000,000 1,080,000 1,166,400 Share Holding pattern (%)
Realisation($)/tonne 22.0 23.8 25.7 27.7 Particulars Sep -10 Jun – 10 Chg
Cost($)/tonne 12.0 13.0 14.0 15.1
Promoters 36.73 36.73 -
Profit($)/tonne 10.0 10.8 11.7 12.6
Revenue (`. Crore) 6.4 39.9 47.6 55.5 Institutions 11.48 14.30 (19.7)

EPS Impact (`.) 0.5 2.9 3.5 4.1 FII 3.40 6.72 (49.4)
Source: Company, KR Choksey Research
Public 48.39 42.25 14.5

We believe that it is going to be a key valuation trigger as its coal mines mature in Total 100.00 100.00
to full fledged production by FY12 and FY13. Company is well placed to benefit of
rising demand from Power sector in India as its coal has a calorific value of 5,200-
5,300 Kcal/ Kg, fit for consumption in thermal power plants.

Projects business to turn Profitable: Company reported a net loss of ` 54.5

crore in H1FY11 on account of cost over runs and provisioning for cost escalation in
ongoing projects. We believe that company will report a net profit of around 25-30
crores from project business in H2FY11 as it has made the provision for the cost
over runs in Q2FY11.T&D equipment industry is in a sweet spot with PGCIL having a
planned capex of around ` 1.26 trillion from FY11 to FY17, giving the market
participants revenue visibility for next 6-7 years.

PGCIL: 12th Plan Transmission capacity addition plans

Transmission Lines(Ckm) 54,000-66,000 Analyst :
600 KV/800KV HVDC 4,000-6,000
Harshad Shukla
765 KV AC 25,000-30,000 harshad.shukla@krchoksey.com
400 KV AC 25,000-30,000 ℡ 91-22-6696 5569

New substations (Nos.) 75-90

765/400 KV 25-30
www.krchoksey.com
400/200/132 KV 50-60
℡ 91-22-6696 5555
1200/400 KV 1-2
℡ 91-22-6691 9569
Transformation capacity(MVA) 130,000-150,000
765/400KV 90,000-100,000
400/200/132 KV 40,000-50,000

KRC Research is also available on Bloomberg KRCS<GO>, Thomson First Call, Reuters, Factset and Capital IQ
EMCO Ltd.

Going forward, project business (Substation and transmission lines) will drive the topline and profit growth. We believe
that company has learnt its lessons from past, when it had aggressively bid for the projects on wafer thin margins with
fixed priced contracts.

EMCO has a 3% market share (In value terms) in PGCIL substation orders in FY10.Company is expected to bag orders
from PGCIL going forward, as it has technical qualification for substations up to 400 KV. Project business doesn’t have
threat perception from China and Korea as it is package mix of civil, mechanical and electrical work, requiring physical
presence in India.

Transmission SBU to benefit by PGCIL capex: Company has the capability of building transmission lines of up to
765 KV with total installed capacity of 45000 MT per annum. Currently, it is executing 5 lines of 765 KV for the PGCIL at
a cost of `. 550 crore. It reported a revenue of `. 111 crore and capacity utilization of mere 36 % for the segment in
FY10.

Going forward, we believe that company has a strong revenue growth visibility for the next 5-6 years in the segment
and its capacity utilization will grow many folds. PGCIL will be spending around `. 58000 crore ( Tower package to be
around 30 % of capex ) over a period of 3-4 years for building 9 high capacity power transmission corridors (HCPTC)
and is soon expected to start inviting the bids for the same.

Smaller players have been able to secure the orders from PGCIL despite the presence of much larger players like KEC
international, Jyoti structure, Kalptaru power and Tata Projects, evident by the decline in their share of PGCIL orders
from 57% in FY09 to 45% in FY10.

Transformer business to witness a turnaround: Company’s performance in the transformer segment has been
dismal in H1FY11 with revenue of `. 157.6 Crore and an order book of `. 350 crore. Industry’s top line and profitability
has been marred in last 2 years by economic slowdown, excess capacity and import from China and Korea.

Going forward, we believe that industry is going to witness a turnaround in FY12. Key demand drivers will be PGCIL
capex for 12th five year plans, Capex by the SEBs and revival in industrial capex cycle. As for import threat from China
and Korea, there is a clear policy shift towards preference to local manufactures. Evident by PGCIL making it mandatory
to have 50 % local manufacturing content, a qualification to bid for 765 KV transformers. We believe that a similar
policy change is likely to happen in 400 KV segment as there is enough spare capacity available in the country with
competitive pricing. EMCO stands to be a key beneficiary.

Company is looking to rope in a foreign player as a technical collaborator to bid for PGCIL’s 765 KV transformer orders
and talks are already in the process. If it manages to tie up with a foreign player to bid for the 765 KV transformers, it
will be result in further upside for the company.

Company’s foray in to power business: EMCO is currently operating an 11 MW wind power plant and has 2 thermal
power plants of 660 MW and 1200 MW at Chhattisgarh and Orissa, respectively under various stages of planning and
implementation. Company has sold off its stake in its subsidiary EMCO energy to GMR energy in July 2009 to focus on
development on larger power plants than the smaller one that the subsidiary was pursuing.

We have not taken power business in the valuation as there is not much clarity from management on the subject. But
going forward, as and when the clarity emerges on the power plants, it will be a valuation trigger and initiate re-rating
of the stock.

Valuation and our view: We have valued the company on a SOTP basis to arrive at a target price of ` 95, resulting in
an upside potential of 49.7 % from current levels of ` 64.7. Currently the stock is trading at 8.6 x FY12 earnings of power
segment (EPS: ` 7.5). Given the transmission capex from PGCIL for next 5-6 years, diversified business line i.e.
transformers (11 KV to 400 KV) and projects (Substation and transmission lines), annual capacity of 20,000 MVA and
45000 MT in transformer and transmission tower segment, respectively, strong order book in project business (` 650
crore at the end of H1FY11), we have assigned a multiple of 9 to the FY12 earnings of the power segment, resulting in a
value of ` 67.1.

We have valued the Indonesian coal mines of the company having a reserve of 105 million tones on the EV/Reserve
basis. Indonesian coal mines having a calorific value of 5100-5500 Kcal/kg with no mining history are valued at 1.5-2.0 x
reserve.

2 KRChoksey Institutional Research

EMCO Ltd.
Key Financials:
Particulars (` Cr.) FY09 FY10 FY11E FY12E
Sales 996.3 978.6 1027.7 1202.2
EBITDA 150.5 117.0 55.5 162.2
PAT 53.3 41.2 -11.9 63.0
EPS 8.6 6.7 -1.9 10.2
P/E 6.9 9.0 N.M 6.4
P/B 0.9 0.7 0.7 0.6
EV/EBITDA 4.3 5.6 11.8 4.0
OPM% 15.1% 12.0% 5.4% 13.5%
NPM% 5.4% 4.2% -1.2% 5.2%
ROE% 12.2% 7.1% -2.1% 10.0%
ROCE% 14.2% 10.2% 4.8% 11.8%
Source: KRChoksey Research

Peer Comparison : Valuation

P/E P/B EV/EBITDA

Company FY10 FY11 FY12 FY10 FY11 FY12 FY10 FY11 FY12

EMCO 9.0 N.M 5.5 0.6 0.6 0.6 5.6 12.7 3.7

TRIL 10.1 7.5 6.1 1.5 1.3 1.1 5.3 4.0 3.3

Voltamp 10.3 11.6 9.6 2.5 2.1 1.7 7.7 8.6 7.0

Indotech 37.0 19.6 8.3 1.6 1.6 1.4 - 10.4 4.8

Crompton Greaves 26.8 22.7 19.5 8.7 6.4 5.0 16.8 14.8 12.9

Bharat Bijlee 15.6 11.3 9.2 2.7 2.3 2.0 9.2 6.8 5.5

KEC international 12.0 11.4 9.1 3.4 2.6 2.2 8.9 7.9 6.6

Jyoti structure 10.9 10.2 8.6 2.1 1.8 1.5 6.9 6.0 5.2

Kalpataru Power 12.5 10.1 8.2 2.2 1.5 1.3 8.8 6.7 5.5
Source: Bloomberg, KRChoksey Research

3 KRChoksey Institutional Research

EMCO Ltd.

Annexure:

Profit and loss account (Consolidated)

` Crore 2007-08 2008-09 2009-10 2010-11P 2011-12P

Net Sales 944.3 996.3 978.6 1027.7 1202.2

Raw material cost 721.9 743.1 750.3 852.0 895.2

Employee cost 24.6 35.0 53.4 59.6 66.1

Selling and Administration Expenses 44.5 49.6 47.7 50.4 56.5

Other expenses 12.1 18.1 10.1 10.3 22.2

Total expenditure 803.1 845.8 861.6 972.2 1040.1

EBITDA 141.2 150.5 117.0 55.5 162.2

Depreciation 9.8 16.4 17.9 19.1 21.6

EBIT 131.4 134.1 99.1 36.4 140.5

Interest 44.0 59.4 49.3 56.5 60.1

Other Income 7.8 5.7 133.5 8.2 9.6

PBT 95.2 80.4 183.3 -11.9 90.0

Tax 30.8 27.3 49.5 0.0 27.0

PAT ( Reported) 64.4 53.1 133.8 -11.9 63.0

Extraordinary items -0.5 -0.2 92.6 0.0 0.0

PAT (Adjusted) 64.9 53.3 41.2 -11.9 63.0

EPS( Adjusted ) 10.5 8.6 6.7 -1.9 10.2

Source: KRChoksey Research

Segmental revenue:

Business Segments
800
674 664
633 668
577 593
600
506 519

400 333 349

200
35 38 20 40
39 33 18
40 48 22
12 16 6
0
FY09 FY10 FY11E FY12E FY13E
Transformers Project Energy M eters Coal mines Others

Source: Capitaline, KRChoksey Research

Plan wise substation capacity planned

At the end of plan period Plan wise addition

Capacity(MVA)
10th Plan 11th Plan (E) 12th Plan (E) 10th Plan 11th Plan (E) 12th Plan (E)
765KV 2,000 53,000 163,000 12,000 51,000 110,000
400KV 92,942 145,000 225,000 35,562 52,058 80,000
230/220KV 156,497 230,000 325,000 40,132 73,503 95,000
Total 251,439 428,000 713,000 87,694 176,561 285,000
Source: CEA, KRChoksey Research
4 KRChoksey Institutional Research
EMCO Ltd.

Technicals

Last Price 64
14 day EMA 62.60
50 day EMA 62.20
C 200 day EMA 73.30

The stock is moving sideways. The support for the stock exists at around 63 levels. The MACD indicator for the
stock is moving sideways in positive zone. Investors can buy the stock at declines.

Disclaimer :
This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. While the
information contained therein has been obtained from sources believed to be reliable, investors are advised to satisfy themselves before making any
investments. Kisan Ratilal Choksey Shares & Sec Pvt Ltd., does not bear any responsibility for the authentication of the information contained in the reports
and consequently, is not liable for any decisions taken based on the same. Further, KRC Research Reports only provide information updates and analysis. All
opinion for buying and selling are available to investors when they are registered clients of KRC Investment Advisory Services. As a matter of practice, KRC
refrains from publishing any individual names with its reports. As per SEBI requirements it is stated that,Kisan Ratilal Choksey Shares & Sec Pvt Ltd., and/or
individuals thereof may have positions in securities referred herein and may make purchases or sale thereof while this report is in circulation.

Kisan Ratilal Choksey Shares and Securities Pvt. Ltd.

1102, Stock Exchange Tower, Dalal Street, Mumbai 400 001. Members: BSE & NSE
Head-Off Phone : 91-22-66535000 Fax : 66338060 www.krchoksey.com
Branch-Off Phone : 91-22-66965555 Fax : 66919576

5 KRChoksey Institutional Research