[T.S.R:14551] Investor's Eye

Investor's Eye: Pulse - Direct Taxes Code; Update - Emco (Downgraded to Hold); Telecom - (Incumbents lose growth momentum, except Bharti); MF - Industry Update

 

Investor's Eye [June 16, 2010]  Sharekhan www.sharekhan.com

Summary of Contents PULSE TRACK Direct Taxes Code: Revised draft STOCK UPDATE Emco Cluster: Emerging Star Recommendation: Hold Price target: Rs94 Current market price: Rs83 Downgraded to Hold Result highlights Set back on all fronts: EMCO?s Q4FY2010 results were disappointing on most of the fronts. Whereas the execution in the projects business was lower than expected, the transformer business witnessed huge competitive pricing pressure.  Muted growth: The Q4 net revenue was up by mere 2% year on year (yoy) at Rs376.4 crore was due to delay in execution of some of the projects and fall in realisation of the transformer division. The transformer industry as a whole is witnessing an oversupply due to capacity expansion by the existing players as well as the entry of new overseas players especially those from China. This has resulted in pricing pressure to the tune of 20-30% on realisation/MVA.  OPM badly hit: The Q4 operating profit was down by 42% yoy to Rs32.3 crore mainly on account of an 8% year-on-year (y-o-y) increase in the raw material cost. The operating profit margin (OPM) at 8.6% in the quarter was steeply down from 14.9% a year ago and the worst ever in the recent years. The net interest cost fell by 10% yoy to Rs12.6 crore on account of the repayment of debt during Q2FY2010. Battered by a poor operating performance and a higher tax rate, the net profit fell by 66.4% yoy to Rs7.9 crore. Order book at Rs1,200 crore: The order book stood at Rs1,200 crore, down by 23.2% yoy, due to poor order booking during the quarter. The current order book translates into a book to bill ratio of 1.2x FY2010 revenues.  Coal mining venture starts operation: The coal mining venture in Indonesia started production in April 2010 and is delivering 50,000 tonne per month. The production is expected to be scaled up to around 1 million tonne in the near future. However we have not taken into account the revenue from the same in our projections and valuations. Cautious outlook, downgrading estimates: We hold a cautious outlook on the company?s transformers business as the competition in the segment is getting intense. In line with the FY2010 results and the margin pressure, we have downgraded our earnings estimates to Rs7.7 for FY2011 and Rs9.4 for FY2012. We expect EMCO to report a compounded annual growth rate (CAGR) of 10.6% in its top line over the period FY2009-12E. At the current market price, the stock is trading at 10.8x and 8.9x its FY2011 and FY2012 estimated earnings per share (EPS) respectively. In view of the rising competition, its limited earnings visibility and the margin pressure, we are downgrading our recommendation on the stock to Hold from Buy with a revised price target of Rs94 (at 10x FY2012 estimate). SECTOR UPDATE Telecommunication Incumbents lose growth momentum, except Bharti GSM operators (excluding Reliance Communications and Tata Teleservices which are yet to disclose their numbers for the month) added 11.26 million new subscribers in May 2010, a 0.7% growth over April 2010, taking the total subscriber base to around 428 million, 2.7% higher than that in April. The incumbents collectively added 9.74 million subscribers in the month (lower than the last six-month average net addition run rate of 11.8 million) whereas the new players, on the back of strong numbers from Videocon, posted a net addition of 1.51 million subscribers (constituting 13.4% of the overall net additon).  Among the incumbents, Bharti Airtel maintained its consistency adding 3 million subscribers for the third month in a row (prior to this, its net addition run rate was 2.8 million). Vodafone and Idea Cellular saw their net subscriber addition for the month deteriorate (by 10.16% and 1.71% respectively over April) most likely grabbed by Videocon?a new entrant (which launched services in five circles) and reported a strong 1.39 million subscriber addition for the month. Other new entrants who launched their services in the last six months continue to face the heat on the subscriber addition front, which is strongly visible in Unnior?s case, which within six months of its launch saw a drop in its subscriber base. MUTUAL FUND: INDUSTRY UPDATE Equity MFs? average assets drop amid volatility  The total average AUM of equity MFs stood at Rs207,162 crore for May 2010. After the adjustment of net inflows/outflows, the net slump in assets stood at 3.6% as against the appreciation of 3.5% in the Sensex.

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