A robust order book, forays into new geographies, steady margins and healthy industry outlook will help Jyoti Structures sustain growth rates.
In times of uncertainty, companies that provide relatively better earnings visibility are among the preferred lot, and in that context, companies catering to the needs of the power sector including power equipment and EPC companies are good bets. So far, the expenditure towards power related infrastructure has been good. Notably, the emphasis has been put in the recent past, thus increasing the capex on power by many folds. To put an example, the investments towards the transmission and distribution has been targeted to go up by three fold to over Rs 300,000 crore (annual growth of 25 per cent) during 2007-12.
This is primarily on account of the increasing generation capacities in the country, and growing need for the trading and inter-regional transfer of power. The investment case looks stronger considering that the froth (read: premium valuations) that existed in January 2008 has almost disappeared and stocks are now available at more reasonable valuations, even as their growth prospects haven’t deteriorated significantly. Also, since the input prices are coming down, companies are in a better position.
Among companies that fit the bill is Jyoti Structures, which commands about 17-18 per cent of the domestic transmission and distribution (T&D) market. The company is one of India’s largest power T&D player, providing EPC services including designing, engineering, manufacturing, project management of transmission towers, sub-stations and rural electrification. The company has been growing along with the increasing opportunities in the power sector.
On growth path
The company’s stand alone revenue over the last five years has grown at 37.9 per cent annually. Since the emphasis on power is expected to continue, the company’s revenue should continue to grow at 32-35 per cent annually over the next two to three years. Its strong order book of Rs 3,560 crore, which 2.6 times its FY08 revenues, provides good visibility.
With regards margins, the company reported operating margins of 11.6 per cent in H1FY09, a bit lower as compared to 12 per cent in H1FY08. However, as 75-80 per cent of the company’s total orders are from domestic markets with a price escalation clause, expect margins to stabilise at current levels. Lastly, the company has expanded its capacities from 76,000 tonne per annum to 94,000 tonne per annum, in light of the high order book and the upcoming opportunities in the sector.
Overseas gains
Besides the domestic market, the company has taken several initiatives including its foray into the South African and Gulf countries by way of forming subsidiaries and joint ventures (JV). The company formed a JV with Gulf Investment Corporation, which has a tower manufacturing capacity of about 33,000 tonnes. This venture will primary focus on Middle East and North African markets, which are considered to be having large opportunities in the power transmission space. Jyoti Structures entry into the South African market is through Jyoti Structures Africa, where it holds a 70 per cent stake.
| BRIGHT LIGHT | |||
| Rs crore | FY 08 | FY 09E | FY 10E |
| Sales | 1,370.4 | 1,781.5 | 2,316.0 |
| OPM (%) | 12.5 | 12.0 | 11.9 |
| Net profit | 72.4 | 90.5 | 113.1 |
| EPS (Rs) | 8.9 | 11.2 | 14.0 |
| PE (x) | 4.5 | 3.6 | 2.9 |
| E: Estimates | |||
This African JV company has already bagged several projects, including a contract for the construction of 114Km of 765KV transmission line valued at Rs 93 crore. However, these are recent initiatives, the results of which will start reflecting from FY09 onwards and help the company to strengthen its presence in these growing markets in the long run.
Minor concerns
Though there are better growth prospects, but there are some concerns with regards to high working capital needs. The company requires net working capital, which is about almost 35 per cent of the sales or about 69 days in FY08. The high working capital is the result of the growing business and financing receivables for almost 132 days in FY08. As a result of this, the company has to depend on the debt, which has gone up by 40 per cent in FY08 to Rs 224 crore, largely on account of working capital needs.
This has also shown an impact on rising interest costs by almost 40 per cent in FY08, resulting in marginal impact on profitability. Analysts expect this trend to continue on account of the growing business needs and to fund the existing order book. The results for the first half of FY09 also point in this direction, wherein interest costs is up by 52.7 per cent to Rs 30.79 crore (top line growth of 34 per cent and bottomline growth of 23.3 per cent). As a result of this, despite strong growth in the top line, the company’s earnings are expected to grow at a relatively slower pace of about 24-25 per cent.
Investment rationale
Most of these concerns have been factored into the company’s share price. Also, as the interest rates are considered to have peaked, any cut in the lending rates by banks would be positive for the company. Moreover, the business is growing, the company reported about 70 per cent jump in order book during FY08 compared to FY07.
Post correction in the market, the stock came down by almost 90 per cent from its peak of Rs 328 in January 8th, 2008. At the current market price of Rs 39.65, the stock is reasonably valued at a PE of 3.6 times it estimated FY09 earnings and 2.9 times its FY10 earnings. Considering the growth prospects, strong order book, industry outlook and company’s leadership position in the sector, long-term investors can buy this stock.
