Domestic customers rushing to meet targets could spur revenues, but competition will keep margin growth in check.
For the power transmission tower and line companies, home is where the heart is. A lull in orders from the overseas market due to the ongoing crisis and likelihood of a pick-up in domestic orders are the reasons why these companies will be looking homewards. Order book growth was flat at 6.4 per cent to Rs 14,650 crore in 2009-10. Subdued activity by Power Grid Corporation of India (PGCIL) and State Electricity Boards (SEBs), biggest Indian customers of transmission line companies, had sporadic orders.
Therefore, the three main transmission line companies — KEC International, Jyoti Structures and Kalpataru Power Transmission — managed to see revenues rising 21 per cent year-on-year to Rs 8,493 crore during 2009-10, much below expectations. The operating profit margin dipped 83 basis points to 11 per cent, as competition heated up and cost rises could not be passed. Overall raw material costs remained benign; they declined eight percentage points and accounted for 52 per cent of net sales. Rise in erection charges took its toll.
Analysts reckon that the share of raw material and construction costs move cyclically. There are quarters when the emphasis is on purchase, so material costs rise, and during some, the construction activity picks up. The combination of both these costs jumped 19.5 per cent and commanded around 75 per cent of sales, hence the pressure on margins.
Going ahead, the domestic scenario looks strong. PGCIL, which is short of its targeted capacity-expansion plan, is expected to place orders worth Rs 30,000 crore in the next two years and a similar amount of orders are estimated to come from SEBs.
With the global financial turmoil continuing, these companies have cut down their focus on overseas projects, which formed 30-50 per cent of the order book. Moreover, lucrative demand numbers have attracted competition. Apart from domestic players like Gammon, Larsen and Toubro, Korean and Spanish companies are also taking on the area. This is expected to keep a lid on the runaway margins. However, lower valuation levels, with price to earnings being around 12.4 times of estimated 2010-11 earnings, will keep investor interest intact. Visibility in improved profitability will be the trigger.