Emco, a leading player in the power transformer business, is expanding its presence across the value chain of the power sector including into power generation, sub-stations, transmission lines and Balance of Plant (BOP), adding capacities and investing in R&D to develop new technologies. With an aim to de-risk its business and enhance growth, the company is increasing focus on the global markets as well. Its joint venture with the South Africa based Edison Power, is a step in this direction.
Rajesh Jain, CMD, EMCO elaborates on the recent developments and the company's outlook in an interview with Vishal Chhabria and Jitendra Kumar Gupta. Excerpts
What are your plans in power generation?
We have formed EMCO Energy, a company which will look at the opportunities in generation and IPTC (Independent Power Transmission Company) verticals.
IPTC model is same as UMPP (Ultra Mega Power Plant) model in power generation. However, the same has been delayed for some time due to external factors but, is expected to open up
soon. Within generation, we are setting up a 550 mw power plant, including phase-1 consisting of 270 mw merchant power plant with an investment of Rs 1,240 crore.
This is a coal-based power plant and all the pre-project activities like land, fuel linkages, water and power evacuation have been completed, except for the placing of final order for equipment, which is in the discussion stage. If things go as planned then we should be able to complete this project by 2010. For the second phase we are waiting for fuel linkages.
What delayed the first phase of power plant?
The delay was primarily on account of the contract with Chinese equipment supplier who could not stand by the terms of the agreement and we had to revisit the contract again and again for the different issues such as foreign exchange, taxation and rise in steel prices, etc. But, we hope to sought out this issue soon.
What are your plans for the export market?
Today, we are exporting to more than 30 countries and currently constitutes to over 14 per cent of the total revenue. We further intend to take this to about 20 per cent this year (FY08) and 30 per cent subsequently.
In order to achieve this, we have taken steps and are setting up a facility in South Africa, which should be operational in the beginning of the next year. Besides, we are also looking for acquiring companies, which have strong presence in the regions of Latin America or North America.
What is the opportunity in South Africa?
The African continent is estimated to have a market of $5-6 billion for the transformers over the next ten years. South Africa itself has a market of $500-600 million.
Africa is a market that one will have to look from a long-term perspective. We will take the advantage of the growth in the South African market at the same time retaining low cost advantage from India.
In the domestic market, how soon will your capacity reach full utilisation levels?
We have expanded transformer manufacturing capacity to 20,000 MVA last year. This year our utilisation would be 10-12,000 MVA, which should rise to 16-17000 MVA in FY09. We are pushing our vendors to expand their capacities (about 5,000 MVA), besides investing in Africa, which should take care of our requirements.
With the projects business growing fast, do you see a change in revenue mix?
We expect overall revenues to grow by about 50 per cent over the next two years. A majority will come from the project business, which is growing faster than transformers.
Over the next two years, we expect the contribution of projects business to revenues to grow to 50 per cent as against 30 per cent currently.
In projects, aren't the margins lower than the transformer business?
While the transformers segment enjoys a margin of 15-16 per cent the project business gets about 11-12 per cent.
Do you see margins shrinking in future?
Based on the current order book of Rs 1,100 crore, which is equal to 12 month sales, we will be able to maintain blended margins of 13.5 per cent in FY09. However, the prices of raw material like oil, copper and other inputs are rising.
Can you elaborate on the individual segments in the projects business?
Currently, projects account for about 40 per cent of the total order book. In the past, we have developed capability to build substations up to 400 KV.
Within this segment, we are also engaged in transmission lines including tower manufacturing and laying transmission lines. We aim to scale up this business and bid for larger projects in the 765 KV space.
Within projects, these are the two important segments, while we are also exploring opportunities in the BOP (Balance of Plant) space as we already have capability in some of the activities such as electrical and can leverage them. We also enjoy edge over other project companies by way of leveraging our transformer manufacturing capability to emerge as a competitive bidder.
We are expanding our tower manufacturing annual capacity to 45,000 tonne by May 2008 from 20,000 tonne currently. We may further raise capacities depending on the placement of orders from Power Grid.
How does Emco compare in R&D and what difference has it made to the organisation?
This year (FY08), our target is to achieve 10 per cent of total revenue from new products and technologies developed by the R&D team and take it further to 15 per cent in the years to come. We have been developing new technologies and making changes to the product to create value for the customer. We have made many changes in the meter and transformer segment.
Now we are making a new product known as active filter for quality power. This is very relevant in our country but consumers are not aware of its advantages.
This new product will help to reduce pollution in power known as Harmonic pollution. Harmonics are created by electronics and automation, which cumulatively result in heating in cables and transformers and thus one cannot effectively utilise the assets.
To prevent this, the equipment need to be de-rated. If this excess heat is not controlled, it could cause a failure in systems, machines or equipment. The other innovation going ahead will be in the form of gas insulated equipment.
What is the filter product potential in India?
A study conducted in the US about two years back which said that the economic loss due to the bad quality of power was at least $20 billion. We have started work in this area and have carried out two installations including one in Sharepur in a textile mill.
Their harmonic pollution count was 33 per cent, which came down to 9 per cent post installation of the instrument. It improves power factor, productivity and reduces failure or breakdowns.
This equipment costs Rs 5-6 lakh for 50 ampere and Rs 10-12 lakh for 100 ampere. However, the number of equipment required will vary across projects.
What are your growth estimates?
We did a turnover of about Rs 656 crore in FY07, which we expect will grow by 50 per cent in FY08 and FY09, whereas net profit growth should be in excess of 50 per cent.
