Easun Reyrolle Ltd: Rolled for Growth:

BSE Code: 532751

CMP: Rs.126.8

Face Value: Rs.2

Book Value: Rs.28.63

Market Cap: Rs.258.44

52 Week High/Low: Rs.384/Rs.126

Performance: Market Out-Performer

Stop Loss: Rs.199 for the short term

Target: Rs.300—Rs.350 in 9 months to 12 months

Introduction: Easun Reyrolle, incorporated in 1974 is a leader in the field of electrical power management in India & abroad. It is into the business of manufacturing protection products, automation systems, metering products, switchgears and turnkey projects. Three Manufacturing plants in India, located at Hosur, Bangalore and Chennai, incorporate modern state-of-the-art production facilities and latest test equipment. Being a veteran with over 6 decades in the field of Power Engineering, ERL offers all the vital components of a substation. ERL possesses excellent credentials and offers ‘One touch access’ with state of the art solutions across Power Generation, Transmission, Distribution and Industrial Markets both in India and abroad. It has a strong presence in control relays and panel segment. Whether it be in power generation, transmission, distribution or utility, Easun Reyrolle offers products, system, solutions and services to manage these segments with reliability, efficiency and safety. Through a comprehensive marketing and service network spread across India's vast territory, Easun Reyrolle is able to offer its customers the exacting levels of support and service needed to cater to their requirements. Wide-ranging R&D efforts in all its activities ensure that customers receive not only the latest international technologies, but also those that can be adopted to the unique demand of power systems across the world. The highly qualified, well trained R&D engineers at Easun Reyrolle employ the latest test equipment & resources, to ensure that proven and world-class technology is delivered consistently.

Shareholding Pattern: The promoters hold 21.66 % while the public holding is 78.34%. Among the public, FIIs hold 12.82% and mutual funds hold 6.9%. Both the FII and mutual funds’ holding has increased substantially when considering Q-o-Q and sequentially—this is a positive indicator. It is also interesting to note that Nirmal M Bang holds 1.36% of the shares of the company and which has remained constant for a number quarters.

Financials: On a standalone basis, For FY08, the total income of the company was Rs.185.34 Cr, as against Rs.132.96 Cr in FY07. The net profit for the company in FY08 was Rs.21.81 Cr as against Rs.17.7 Cr in the same period previous year. This gave an EPS of Rs.10.69 as against Rs.10.61 in the same period previous year. On a consolidated basis the results of the company for FY08 are much better: The total income of the company came out to be Rs.207.61 Cr and net profit came out to be Rs.25.3 Cr giving an EPS of Rs.12.4. On standalone basis, Q4FY08, the results are flat: while the total income came out to be Rs.57 Cr as compard to Rs.47.14 Cr in Q4FY07. The net profits came out to be Rs.6.4 Cr in Q4FY08 as against Rs.6.8 Cr in Q4FY07. The EPS for Q4FY08 is Rs.3.18 on Rs.2, face value of the equity shares.

Triggers:

• Easun Reyrolle Ltd is expected to have much better FY09 as compared to FY08. The Switchgear, metering, turnkey projects and automation business would be the key to revenue growth in the FY09.
• Though the NPM has declined marginally on a q-o-q comparison due to increased outlay towards investments, lower OPM and higher interest exposure, but it has helped in augmenting the Return on Net Worth (RONW) and Return on Capital Employed (ROCE).
• During the quarter ended December 31, 2007, the Company raised the paid up capital by way of allotting 18,75,000 Global Depository Receipts (GDRs) underlying Equity Shares of Rs.2 each at a premium of Rs.313.60 aggregating Rs.59.18 Cr (US$1.5 Cr). The Company also issued Zero coupon Foreign Currency Convertible Bonds (FCCBs) aggregating to US $3.5 Cr. Those proceeds are fully utilized for the purpose mentioned in the offer document and soon its benefits are going to be seen. Also, during the month of January 2008 the Company exercised the green shoe option as per terms of the offer document and consequently allotted additional 937,500 GDR underlying Equity Shares of Rs.2 each at a premium of Rs.313.60 aggregating to Rs 29.59 Cr (US$ 7.5 million) The proceeds of this allotment is being utilized for the purpose mentioned in the offer document, the benefits of which will start to trickle-down from following quarters.
• ERL International Pte Ltd Singapore became a wholly owned subsidiary of the Company with effect from December 14, 2007. The strike price of FCCBs was at Rs.400 per Share (face value of Rs.2 each).
• Easun Reyrolle Ltd (ERL) is less affected by USD fluctuations vis-à-vis the rupee, as the imports are in dollars and the exports are largely in Pound Sterling. However, once the consolidation of ERL Phase happens with ERL in FY08, one will have to re-look at the impact of Rupee appreciation on consolidated numbers in Q2FY09.
• ERL is planning for more acquisitions in future and for that purpose, ERL has already raised long-term funds of GDRs issues. The acquisition targets are being actively researched.
• ERL has plans to acquire companies related to power transmission and distribution. Since, it is into the business of protection, control panels, metering and switchgears, it is looking at acquiring companies that can fill the gap in these products, so that ERL has a complete range of power transmission and distribution related products.
• The BOD of the Company recommended a whooping dividend of 150% for FY08, that is Rs.3 per share including the interim dividend of 25%.
• The acquisition of ERL Phase (erstwhile NxtPhase), which was done in July 07, has been completed. The full effect of the ERL Phase acquisition in the ERL financials would start to be visible from Q2FY09. The integration process of ERL Phase has been done quite smoothly. It has finalized the first Indian order for ERL Phase product.
• The energy meters produced by ERL have been in great demand. These energy meters are technologically very advanced and ERL is among the few companies to enter into automatic metering business. These are multipurpose energy meters, which have facilities like automatic meter reading concept, bill payments, communication and other related information from a remote location. So far, it has installed meters for more than 8,000 customers in Mumbai. ERL has been receiving orders for installing the energy meters over 50,000-60,000 locations. The revenues expected from this segment would be immense, looking at the mounting demand for this product. With energy audit requirements in place and need to cut pilferage being felt more, demand for such meters could grow going forward.
• The Company has been growing at a compounded growth rate of more than 50% per year over the last four years. Given the bright prospects for Power Sector in India, the Company expects to maintain this rapid growth in the future also. It has recently completed the acquisition of a Canadian Company (ERLPhase Power Technologies Ltd) and is now in the process of expanding its global reach and business.

Conclusion: ERL is slated to outperform in terms of sales from Q1FY09. The businesses that would contribute to augmentation of revenues would be automation business, turnkey projects, metering business, etc. whereas the share of revenues from protection business, where ERL is predominantly into, will record less growth in revenues as compared to other new business ventures of ERL. However, due to constant focus on incremental revenues, there could be pressure of achieving estimated OPM and NPM, but ERL should be able to achieve the operating and net profit numbers in absolute terms. Hence the scrip could be purchased at the CMP of Rs.16.8 for some decent appreciation in the next 9 months -12 months due to rapid growth in the Power sector. But, please always book partial profits as it rises up and then again enter at lower stages—this is a must-apply strategy, due to too much volatile market conditions.