Order book, diversification bode well for Jyoti Structures

The government has huge plans for infrastructure development, including power generation. With economic activity picking up, the number of players in the power generation space is rapidly increasing, which will lead to a vast demand for power transmission and distribution infrastructure. Jyoti Structures Ltd, one of the leading domestic players in transmission engineering, procurement and construction (EPC) space, would continue to benefit from the massive investments lined-up in the transmission sector.

Business: Jyoti Structures (JSL) provides turnkey solutions in the field of high-voltage power transmission lines and sub-stations.
The company offers a range of services, including the design and project-management of installation of high-voltage underground cables and optical fibre ground wire networks; engineering consulting services such as transmission system design, computer-aided 3D analysis and detailed drawing generation; tower testing; project management and construction of transmission lines. It also engages in manufacturing activities such as making proto types, as well as fabricating and galvanising transmission towers and structures, microwave towers, wind mill towers, and railway electrification structures.

JSL offers its solution through three core business segments — transmission, sub-stations, and rural electrification & distribution. Transmission revenues account for the majority of revenues (around 75-80%), while rural electrification and sub-station orders constitute remaining revenues equally.

JSL has also formed two joint venture (JV) companies, namely Gulf Jyoti International and Jyoti Structures Africa in order to expand its reach and participate in transmission line markets of the Gulf and Africa.

Investment Rationale: The government has an ambitious plan of providing power for all by 2012, due to which it has planned capacity addition of 78,700 mw during the current Five-Year Plan and more than 100,000 mw in the next plan.

In India, transmission & distribution-related losses are relatively high at around 27% compared with 10-15% in developed countries. Accordingly, the government has envisaged an
investment of around Rs 35,000 crore in the transmission segment over the next seven years to fix these losses.

Also, the increasing power deficit — currently at 20,000 mw — is leading to more private players coming up with power generation capacities. The increased allocation to accelerated power development and the reform programme in last Budget and huge investments in transmission sector would thus benefit companies in the EPC business.

JSL has a strong order backlog of around Rs 4,030 crore as on December 31, 2009, with an average execution timeline of 18-24 months. Transmission, sub-station and rural electrification segments constitute 68%, 12% and 20% of this backlog, respectively. On a geographical basis, domestic orders constitute 90-95% of the order-book with remaining 5% from international orders.

JSL expects order inflow to continue at a strong pace over the next few quarters, led by the huge investments planned by both central and state utilities. The company is bidding for orders worth Rs 7,000 crore in the next 3-4 months. This includes Rs 2,900 crore from Power Grid Corp, Rs 1,800 crore worth international tenders from countries like Botswana, South Africa, Mozambique, Kenya etc and remaining from various state electricity boards (SEBs).

Jyoti is also expected to bid for Rs 2,700 crore worth of recently opened tenders from Power Grid Corp.

JSL is further diversifying its business from being a pure transmission EPC player to an asset owner, which offers larger opportunity. JSL is bidding for Rs 800-900 crore worth of BOOT (build-own-operate-transfer) projects from SEBs such as those of Rajasthan and Haryana.

Among its JVs, Gulf Jyoti has an order-book of Rs 770 crore to be executed over next 30 months, while Jyoti Structures Africa has an order-book of Rs 120 crore. The JV companies are expected to contribute to profits by next fiscal.

Concerns: Being into the infrastructure segment, JSL faces typical business risks like delays in execution affecting revenues, payment delays leading to impact on balance sheet, high exposure to government sector and intensifying competition on domestic front.

Any adverse macro environment leading to decrease in government and industrial sector spending would affect JSL’s revenues. Though it faces margin pressure due to raw material price increases, the company’s large domestic presence, where it has signed price escalation clause, will help to mitigate the same.

Valuations: JSL’s strong order-book and future order pipeline provides good visibility for revenue growth over the next few years.
JSL’s revenues are expected to grow at CAGR of 22% over FY09-FY11E and net profit at CAGR of 23% over the same period. At current market price of Rs 165.70, JSL trades at a PE of 13.89x and 11.28x its FY10E and FY11E earnings, respectively. In view of its strong order pipeline and presence in diversified power infrastructure segments, JSL can be looked at current levels from a medium-term perspective.

Disclaimer: The writer does not hold any shares in the company