The stock of power transmission player, Jyoti Structures, has fallen 33 per cent year-to-date in 2011, after several quarters of slowdown in order flows did not go too well with the market. Limited overseas exposure did not help the company combat the domestic slowdown, unlike peers such as KEC International, which have a more significant presence in the overseas market.

These issues are set to change for Jyoti Structures. Its efforts to ramp up overseas presence are yielding results. Higher order flows seen by the company in the March quarter, coupled with increased tenders from Power Grid Corporation (PGCIL), mean that the domestic scenario too is set to turn around. Investors with a two-year perspective can consider taking limited exposure to the stock (Rs 89), which trades at 5.8 times its expected per share earnings for FY-12, at a good discount to bigger peer KEC international (10 to 11 times).

Improvement visible

Jyoti Structures ended FY-11 with a 19 per cent growth in sales to Rs 2,380 crore and 21 per cent expansion in net profits to Rs 111 crore, thanks to significant traction in performance in the fourth quarter. It was not only execution but also order inflows that witnessed marked improvement in the March quarter. Jyoti Structures bagged orders worth Rs 1,100 crore in the above quarter alone; accounting for 40 per cent of total inflows for the full fiscal. This performance is also the best, post-2008. The current pace of bidding and order activity from PGCIL also appears to suggest that revival is on the cards.

Jyoti Structures has, in fact, currently bid for PGCIL projects valued at Rs 2400 crore. This together with the company's bid for private and State electricity board orders added to Rs 4,900 crore. Even if a part of this gets converted into projects, it will add sufficiently to the current order book of Rs 4500 crore (1.8 times FY-11 sales) which itself is expected to keep the company busy for the next 18-24 months.

Jyoti Structures also ended FY-11 without much pressure from input costs. Barring 10-15 per cent of the contracts being fixed price in nature, a majority of orders were built on variable pricing model, with leeway to pass on input cost hikes. However, as the proportion of fixed-to-variable contracts may be subject to change, the June quarter results have to be watched for consistency on this front. An average borrowing cost of 11 per cent, though not high, has kept interest coverage at at a not-so-comfortable level of three times.

The company has made efforts to keep interest costs under check by raising 7 per cent non-convertible debentures (issued to shareholders) of Rs 120 crore that would substitute a part of the working-capital loans. This can be expected to reduce interest burden as debentures now account for a fourth of total borrowings. Detachable warrants that would come for conversion in FY-13 would expand capital by 25 per cent. We however, expect earnings growth to compensate for the equity expansion.

Overseas expansion

While Jyoti Structures witnessed only 14 per cent of its sales coming from overseas in FY-11, it has made some efforts to improve this proportion to provide some hedge against domestic slowdown. For one, its joint venture in West Asia, Gulf Jyoti, turned profitable in the calendar year ending 2010 and had orders worth Rs 1,100 crore (Jyoti's share being 30 per cent) in hand. Two, the company's African subsidiary has cautiously focussed on less-turbulent markets such as South Africa, where it has secured orders from the local electricity boards.

Three, the company is setting up a steel lattice tower manufacturing unit in the US, which has been a good market for power transmission equipment companies with players such as KEC International taking the inorganic route to tap the US market.

While this 30,000 tonnes per annum facility (with capex of $30 million) in Texas is expected to go on-stream by end-2011, we have not accounted for the contribution from this unit, until it establishes itself. However, the region offers potential, as besides replacement demand, a number of renewable energy projects are set to be connected to the grid.

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