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Diverse EPC capabilities, a strong domestic focus and wide client base
make Jyoti Structures Ltd (JSL) a key beneficiary of the massive power
sector investment planned in the XI-XII Plans. The company’s revenues
and earnings are projected to grow at 12% and 15% CAGR,
respectively, over FY10-13E, fuelled by its reasonable sales visibility
(TTM book-to-bill ratio of 2x in Q3FY11). However, a pick-up in order
inflows will be highly crucial for re-rating. Stronger-than-expected
performance of subsidiaries and success in the domestic BOOT segment
provide attractive value creation opportunities. We are initiating
coverage on the stock with ADD rating given that the recent correction
in the stock price has priced in the negatives, but at the same time new
orders will be eagerly awaited.
Well-placed to grow order book but needs to get orders at the earliest
With an order book of | 4,100 crore (Q3FY11), the company enjoys
reasonable sales visibility (TTM book-to-bill ratio of 2x). The order intake
is expected to be robust in FY11E-13E fuelled by the large order pipeline
and positive macroeconomic environment. Though the company’s wide
client base and status as a turnkey provider of transmission lines and
substations make it especially well-placed to enjoy significant traction in
order book expansion, the current market share loss in PGCIL tendering
will be a key overhang until its starts winning the orders. Consequently,
we project strong growth of the company’s order book (7.7% CAGR in
FY10-13E to | 5,186 crore) and revenues (12.3% CAGR to | 2,824 crore).
Value creation opportunities for subsidiaries
The performance of international operations, especially the Gulf JV, is
expected to improve sharply in CY11E (though the current ongoing crisis
in the MENA region may lead to slippages in execution). This, coupled
with the company’s plans to bid for domestic power transmission BOOT
projects and US expansion (inorganic route), could lead to value creation
opportunities for subsidiaries. This provides a further upside to our
valuation case.
Valuations
At the CMP of | 82, the stock is trading at P/E of 6.4x and 6.6x on FY11E
and FY12E earnings, respectively. We believe low discounting and a
steep correction in the stock price is for the want of order inflows and
dilutive concerns owing to the issue of warrants attached with NCDs.
Though the company has reasonable revenue visibility, a pick-up in
order wins is highly crucial for a re-rating of the stock. We are initiating
coverage on the stock with a Add rating and target price of | 89.
Company Background
Incorporated in 1974, Jyoti Structures Ltd (JSL) is an EPC player operating
in the power transmission sector. The company has capabilities to
undertake transmission line, substation and distribution projects. Since
inception, it has manufactured over 15,000 circuit km of high voltage
transmission lines and over 550,000 MT of transmission line towers. As
on Q3FY11, the company’s order book stood at | 4,100 crore. The
transmission, rural electrification and substation segments accounted for
76%, 14% and 9% of the order book, respectively.
In FY06-10, the company’s revenues grew at 30% CAGR to | 2,013 crore
driven by the substantial investment in the domestic power sector. JSL is
primarily a domestic focused company with ~92% of standalone entity
revenues and 81% of the standalone entity order book derived from India
(as on Q3FY11).
Outside India, JSL has a subsidiary, Jyoti Structures Africa (Pty) Ltd and a
JV, Gulf Jyoti International LLC, which have been formed to tap power
sector opportunities in Africa and the Gulf region, respectively.
JSL has two manufacturing plants in Nashik and Raipur with a combined
production capacity of 94,000 MT per annum. The overall capacity of the
company is 110,000 MT per annum. It has in-house facilities for
manufacturing transmission lines up to 800 kV and substations up to 400
kV. The company is headquartered in Mumbai.
Investment Rationale
Strong sales visibility – Robust order intake expected
With an order book of | 4,100 crore (Q3FY11), JSL enjoys strong sales
visibility (TTM book-to-bill ratio of 2x). We project the order book will
remain at ~| 4,100 crore by Q4FY11 (against the management guidance
of | 4,800-5,000 crore) on the back of order inflows from PGCIL), private
sector orders and orders from state utilities. Going ahead, we expect the
order backlog to grow at a CAGR of ~7.7% over FY10-13E and expect the
order backlog to be at | 5186 crore.
In 9MFY11, the order intake was | 1,640 crore, dominated by private
sector (e.g. Adani Power) and state utilities. We expect a strong order
intake in FY12E fuelled by the positive macroeconomic environment,
higher investment by PGCIL and state utilities to meet their XI Plan targets
and high-value HCPTC orders. Further, with the commencement of order
intake from planned generation capacity addition of ~100 GW in the XII
Plan (2013-17), we believe a significant opportunity exists for domestic
players such as JSL. Consequently, we project the company’s order book
will grow at 7.7% CAGR in FY10-13E to | 5,186 crore and revenues will
grow at 12.3% CAGR to | 2,824 crore.
A lacklustre performance in order wins in FY11E in PGCIL tenders has led
to a deceleration in revenue visibility for JSL. The book to bill ratio as of
Q3FY11 stood at 1.9x vs. 2.1x in Q3FY10. Hence, going ahead, a pick-up
in order flows is highly crucial for JSL, in our view.
Strong execution capabilities – but EPC capabilities in high capacity
substation lacking
JSL has strong execution capabilities having successfully undertaken
transmission line, substation and distribution projects for public and
private sector clients over the years.
We believe JSL’s capability to undertake transmission line and
substations projects (up to 400 Kv) enhances its competitive position in
the industry given the shift towards EPC ordering by key clients. However,
with PGCIL expected to award EPC orders for higher capacity substations
(765 Kv) in future, JSL will need to upgrade its capabilities quickly to
continue to remain competitive (Crompton Greaves and Areva T&D are
key competitors in this space). In 9MFY11, JSL has bagged an order in the
substation space of about ~| 42 crore from PGCIL.
Diversified order book adds to appeal
Although JSL’s order book is highly skewed towards domestic orders
(82% of total in Q3FY11), the company enjoys strong order book
diversification. The overall order book is divided among PGCIL
(accounting for 26% of the total order book in Q3FY11), private sector
(14%), state utilities (58%), NTPC, etc. The company’s dependence on
PGCIL has reduced from ~45% of the total order book a few years back.
In our view, this is a positive development for the company as it broadens
the client base and avoids execution challenges as PGCIL awards a high
proportion of orders in Q4 (to meet its annual targets).
Key non-PGCIL orders for JSL over the years have come from private
sector players, including Reliance and Adani Power, and state utilities,
including Maharashtra, Tamil Nadu, Uttar Pradesh, Chhattisgarh and DVC.
BOOT projects provide upside potential
With the government’s emphasis on encouraging private sector
investment in the power sector, BOOT projects are increasingly becoming
attractive for power transmission companies. In addition to the EPC
component, BOOT projects provide companies like JSL a stable revenue
stream.
JSL is likely to bid for one BOOT project, valued at | 600-700 crore, in
H2FY11. The execution period of this project will be 36 months. We
expect the company to participate in future BOOT projects also.
According to the management, the funding decision (debt vs. equity) for
the BOOT project will be taken after the bid results are announced.
Small international presence – turnaround of Gulf JV expected in CY11E
International revenues constituted ~19% of consolidated revenues in
FY10. JSL has executed some transmission line and substation projects in
Africa and the Gulf region through Jyoti Structures Africa (Pty) Ltd and
Gulf Jyoti International LLC.
The management is positive on the growth prospects of the Gulf JV. With
an order book of | 1,050 crore executable over 18 months, the JV is
expected to generate revenues of | 400-500 crore in CY11 (vs. | 130 crore
in CY09). The management views North Africa and some GCC countries
as key areas for business expansion. Profitability is likely to be robust with
the management expecting PAT margins to be in the 6% range for the JV.
We expect the African subsidiary to take some more time to stabilise its
performance. The subsidiary has placed bids in South Africa for projects
to the tune of | 700-800 crore.
We have, however, not incorporated the performance of the international
operations in our valuation case. A stronger-than-expected performance
provides an upside to our valuation case.
Plans to expand presence in US market through inorganic route
The company is eyeing the lucrative US market for supplying steel towers
driven by its large market potential and superior margin profile. For this,
the company plans to invest ~US$30 million in a US-based lattice steel
tower manufacturer. This comes on the heels of the acquisition of the USbased
SAE Towers Holdings LLC by JSL’s competitors, KEC International,
making the latter a global leader in lattice towers.
We, however, await further clarity on this from the management
Co recently issued non-convertible debentures: Cap on valuations
The company has recently issued non-convertible debentures (| 123
crore) with detachable warrants (total issue size of | 369 crore). Every
shareholder holding eight equity shares will receive one NCD with two
detachable warrants. The NCDs will have a coupon rate of 7% and will be
redeemed within 15 months from the date of allotment. The warrants
have an exercise price of | 120 (exercisable within 18 months from date
of issue). We have built in two scenarios 1) with dilution and 2) without
dilution.
Risks and concerns
Margin contraction from increased competition
In our view, the company’s margins could decline due to the increased
industry competition. In recent years, domestic and MNC players have
aggressively bid for PGCIL projects (by 12-15% lower than JSL’s bids).
According to the management, as a result of the increased competition,
the company’s market share for PGCIL’s transmission line orders has
dropped in recent quarters (from 16-17% level in Q4FY10).
Lower margins due to commodity price volatility
Although domestic orders come with a price variation clause, the
company’s international orders are fixed price contracts. The company’s
margins could contract due to a significant increase in commodity prices
(steel, zinc, etc). Steel and zinc accounted for ~47% of the total raw
material costs in FY10.
High working capital requirements
JSL has high working capital requirements (~32% of net sales in FY10),
which are primarily funded through long-term working capital loans (D/E
ratio of 0.75 in Q3FY11). Hence, higher interest rates can lead to lower
profitability.
Lower revenues due to execution delays
Although JSL has a track record of successfully executing projects, a
lower-than-expected execution rate in future could result in lower
revenues. Projects could be delayed due to various external and internal
factors including economic slowdown, delays in environment clearances,
manpower shortages, raw material shortages, etc.
Financials
Revenues to grow at 12.3% CAGR in FY10-13E
With an order book of | 4,100 crore in Q3FY11, JSL enjoys strong sales
visibility. Fuelled by robust order intake due to the massive power sector
investment and 22 months execution period, we project the company’s
revenues will grow at 12.3% CAGR in FY10-13E to | 2,824 crore.
In H2FY11, we expect the company’s execution rate to pick up
significantly driving FY11E revenue growth at 14% YoY to | 2,301 crore
(vs. 16% YoY growth in H1FY11). This is in line with the company’s
revenue guidance of | 2,450-2,550 crore for FY11E.
EBITDA margin to sustain at current levels
We expect JSL to generate EBITDA margins in the range of 11-11.5% in
FY11E-13E. The company’s margins are insulated to a large extent from
higher raw material costs as its domestic orders have a price variation
clause. Margins could, however, come under pressure due to the
increased industry competition.
Earnings to grow at CAGR of 13.5% in FY10-FY13E to | 134.4 crore
With the steady growth in order book and revenues led by the timely
execution of orders and sustainable margins of ~11.5%, we expect
earnings to grow at a CAGR of 13.5% to | 134.4 crore during FY10-13E.
Expected to generate high return ratios
We believe the company will be successful in sustaining high return ratios
(RoCE and RoNW) given its stable margin profile. This stems from the
company’s initiatives to execute only those projects that meet some
specific return criteria. We have, however, not modelled any equity
dilution or debt raising by the company to fund its growth initiatives.
Valuations
At the CMP of | 82, the stock is trading at a P/E of 6.4x and 6.6x on FY11E
and FY12E earnings, respectively. We believe low discounting and a steep
correction in stock price is for the want of order inflows and dilutive
concerns owing to the issue of warrants attached with NCDs. Though the
company has reasonable revenue visibility, a pick-up in order wins is
highly crucial for a re-rating of the stock. We are initiating coverage on the
stock with a Add rating and a target price of | 89 per share.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Diverse EPC capabilities, a strong domestic focus and wide client base
make Jyoti Structures Ltd (JSL) a key beneficiary of the massive power
sector investment planned in the XI-XII Plans. The company’s revenues
and earnings are projected to grow at 12% and 15% CAGR,
respectively, over FY10-13E, fuelled by its reasonable sales visibility
(TTM book-to-bill ratio of 2x in Q3FY11). However, a pick-up in order
inflows will be highly crucial for re-rating. Stronger-than-expected
performance of subsidiaries and success in the domestic BOOT segment
provide attractive value creation opportunities. We are initiating
coverage on the stock with ADD rating given that the recent correction
in the stock price has priced in the negatives, but at the same time new
orders will be eagerly awaited.
Well-placed to grow order book but needs to get orders at the earliest
With an order book of | 4,100 crore (Q3FY11), the company enjoys
reasonable sales visibility (TTM book-to-bill ratio of 2x). The order intake
is expected to be robust in FY11E-13E fuelled by the large order pipeline
and positive macroeconomic environment. Though the company’s wide
client base and status as a turnkey provider of transmission lines and
substations make it especially well-placed to enjoy significant traction in
order book expansion, the current market share loss in PGCIL tendering
will be a key overhang until its starts winning the orders. Consequently,
we project strong growth of the company’s order book (7.7% CAGR in
FY10-13E to | 5,186 crore) and revenues (12.3% CAGR to | 2,824 crore).
Value creation opportunities for subsidiaries
The performance of international operations, especially the Gulf JV, is
expected to improve sharply in CY11E (though the current ongoing crisis
in the MENA region may lead to slippages in execution). This, coupled
with the company’s plans to bid for domestic power transmission BOOT
projects and US expansion (inorganic route), could lead to value creation
opportunities for subsidiaries. This provides a further upside to our
valuation case.
Valuations
At the CMP of | 82, the stock is trading at P/E of 6.4x and 6.6x on FY11E
and FY12E earnings, respectively. We believe low discounting and a
steep correction in the stock price is for the want of order inflows and
dilutive concerns owing to the issue of warrants attached with NCDs.
Though the company has reasonable revenue visibility, a pick-up in
order wins is highly crucial for a re-rating of the stock. We are initiating
coverage on the stock with a Add rating and target price of | 89.
Company Background
Incorporated in 1974, Jyoti Structures Ltd (JSL) is an EPC player operating
in the power transmission sector. The company has capabilities to
undertake transmission line, substation and distribution projects. Since
inception, it has manufactured over 15,000 circuit km of high voltage
transmission lines and over 550,000 MT of transmission line towers. As
on Q3FY11, the company’s order book stood at | 4,100 crore. The
transmission, rural electrification and substation segments accounted for
76%, 14% and 9% of the order book, respectively.
In FY06-10, the company’s revenues grew at 30% CAGR to | 2,013 crore
driven by the substantial investment in the domestic power sector. JSL is
primarily a domestic focused company with ~92% of standalone entity
revenues and 81% of the standalone entity order book derived from India
(as on Q3FY11).
Outside India, JSL has a subsidiary, Jyoti Structures Africa (Pty) Ltd and a
JV, Gulf Jyoti International LLC, which have been formed to tap power
sector opportunities in Africa and the Gulf region, respectively.
JSL has two manufacturing plants in Nashik and Raipur with a combined
production capacity of 94,000 MT per annum. The overall capacity of the
company is 110,000 MT per annum. It has in-house facilities for
manufacturing transmission lines up to 800 kV and substations up to 400
kV. The company is headquartered in Mumbai.
Investment Rationale
Strong sales visibility – Robust order intake expected
With an order book of | 4,100 crore (Q3FY11), JSL enjoys strong sales
visibility (TTM book-to-bill ratio of 2x). We project the order book will
remain at ~| 4,100 crore by Q4FY11 (against the management guidance
of | 4,800-5,000 crore) on the back of order inflows from PGCIL), private
sector orders and orders from state utilities. Going ahead, we expect the
order backlog to grow at a CAGR of ~7.7% over FY10-13E and expect the
order backlog to be at | 5186 crore.
In 9MFY11, the order intake was | 1,640 crore, dominated by private
sector (e.g. Adani Power) and state utilities. We expect a strong order
intake in FY12E fuelled by the positive macroeconomic environment,
higher investment by PGCIL and state utilities to meet their XI Plan targets
and high-value HCPTC orders. Further, with the commencement of order
intake from planned generation capacity addition of ~100 GW in the XII
Plan (2013-17), we believe a significant opportunity exists for domestic
players such as JSL. Consequently, we project the company’s order book
will grow at 7.7% CAGR in FY10-13E to | 5,186 crore and revenues will
grow at 12.3% CAGR to | 2,824 crore.
A lacklustre performance in order wins in FY11E in PGCIL tenders has led
to a deceleration in revenue visibility for JSL. The book to bill ratio as of
Q3FY11 stood at 1.9x vs. 2.1x in Q3FY10. Hence, going ahead, a pick-up
in order flows is highly crucial for JSL, in our view.
Strong execution capabilities – but EPC capabilities in high capacity
substation lacking
JSL has strong execution capabilities having successfully undertaken
transmission line, substation and distribution projects for public and
private sector clients over the years.
We believe JSL’s capability to undertake transmission line and
substations projects (up to 400 Kv) enhances its competitive position in
the industry given the shift towards EPC ordering by key clients. However,
with PGCIL expected to award EPC orders for higher capacity substations
(765 Kv) in future, JSL will need to upgrade its capabilities quickly to
continue to remain competitive (Crompton Greaves and Areva T&D are
key competitors in this space). In 9MFY11, JSL has bagged an order in the
substation space of about ~| 42 crore from PGCIL.
Diversified order book adds to appeal
Although JSL’s order book is highly skewed towards domestic orders
(82% of total in Q3FY11), the company enjoys strong order book
diversification. The overall order book is divided among PGCIL
(accounting for 26% of the total order book in Q3FY11), private sector
(14%), state utilities (58%), NTPC, etc. The company’s dependence on
PGCIL has reduced from ~45% of the total order book a few years back.
In our view, this is a positive development for the company as it broadens
the client base and avoids execution challenges as PGCIL awards a high
proportion of orders in Q4 (to meet its annual targets).
Key non-PGCIL orders for JSL over the years have come from private
sector players, including Reliance and Adani Power, and state utilities,
including Maharashtra, Tamil Nadu, Uttar Pradesh, Chhattisgarh and DVC.
BOOT projects provide upside potential
With the government’s emphasis on encouraging private sector
investment in the power sector, BOOT projects are increasingly becoming
attractive for power transmission companies. In addition to the EPC
component, BOOT projects provide companies like JSL a stable revenue
stream.
JSL is likely to bid for one BOOT project, valued at | 600-700 crore, in
H2FY11. The execution period of this project will be 36 months. We
expect the company to participate in future BOOT projects also.
According to the management, the funding decision (debt vs. equity) for
the BOOT project will be taken after the bid results are announced.
Small international presence – turnaround of Gulf JV expected in CY11E
International revenues constituted ~19% of consolidated revenues in
FY10. JSL has executed some transmission line and substation projects in
Africa and the Gulf region through Jyoti Structures Africa (Pty) Ltd and
Gulf Jyoti International LLC.
The management is positive on the growth prospects of the Gulf JV. With
an order book of | 1,050 crore executable over 18 months, the JV is
expected to generate revenues of | 400-500 crore in CY11 (vs. | 130 crore
in CY09). The management views North Africa and some GCC countries
as key areas for business expansion. Profitability is likely to be robust with
the management expecting PAT margins to be in the 6% range for the JV.
We expect the African subsidiary to take some more time to stabilise its
performance. The subsidiary has placed bids in South Africa for projects
to the tune of | 700-800 crore.
We have, however, not incorporated the performance of the international
operations in our valuation case. A stronger-than-expected performance
provides an upside to our valuation case.
Plans to expand presence in US market through inorganic route
The company is eyeing the lucrative US market for supplying steel towers
driven by its large market potential and superior margin profile. For this,
the company plans to invest ~US$30 million in a US-based lattice steel
tower manufacturer. This comes on the heels of the acquisition of the USbased
SAE Towers Holdings LLC by JSL’s competitors, KEC International,
making the latter a global leader in lattice towers.
We, however, await further clarity on this from the management
Co recently issued non-convertible debentures: Cap on valuations
The company has recently issued non-convertible debentures (| 123
crore) with detachable warrants (total issue size of | 369 crore). Every
shareholder holding eight equity shares will receive one NCD with two
detachable warrants. The NCDs will have a coupon rate of 7% and will be
redeemed within 15 months from the date of allotment. The warrants
have an exercise price of | 120 (exercisable within 18 months from date
of issue). We have built in two scenarios 1) with dilution and 2) without
dilution.
Risks and concerns
Margin contraction from increased competition
In our view, the company’s margins could decline due to the increased
industry competition. In recent years, domestic and MNC players have
aggressively bid for PGCIL projects (by 12-15% lower than JSL’s bids).
According to the management, as a result of the increased competition,
the company’s market share for PGCIL’s transmission line orders has
dropped in recent quarters (from 16-17% level in Q4FY10).
Lower margins due to commodity price volatility
Although domestic orders come with a price variation clause, the
company’s international orders are fixed price contracts. The company’s
margins could contract due to a significant increase in commodity prices
(steel, zinc, etc). Steel and zinc accounted for ~47% of the total raw
material costs in FY10.
High working capital requirements
JSL has high working capital requirements (~32% of net sales in FY10),
which are primarily funded through long-term working capital loans (D/E
ratio of 0.75 in Q3FY11). Hence, higher interest rates can lead to lower
profitability.
Lower revenues due to execution delays
Although JSL has a track record of successfully executing projects, a
lower-than-expected execution rate in future could result in lower
revenues. Projects could be delayed due to various external and internal
factors including economic slowdown, delays in environment clearances,
manpower shortages, raw material shortages, etc.
Financials
Revenues to grow at 12.3% CAGR in FY10-13E
With an order book of | 4,100 crore in Q3FY11, JSL enjoys strong sales
visibility. Fuelled by robust order intake due to the massive power sector
investment and 22 months execution period, we project the company’s
revenues will grow at 12.3% CAGR in FY10-13E to | 2,824 crore.
In H2FY11, we expect the company’s execution rate to pick up
significantly driving FY11E revenue growth at 14% YoY to | 2,301 crore
(vs. 16% YoY growth in H1FY11). This is in line with the company’s
revenue guidance of | 2,450-2,550 crore for FY11E.
EBITDA margin to sustain at current levels
We expect JSL to generate EBITDA margins in the range of 11-11.5% in
FY11E-13E. The company’s margins are insulated to a large extent from
higher raw material costs as its domestic orders have a price variation
clause. Margins could, however, come under pressure due to the
increased industry competition.
Earnings to grow at CAGR of 13.5% in FY10-FY13E to | 134.4 crore
With the steady growth in order book and revenues led by the timely
execution of orders and sustainable margins of ~11.5%, we expect
earnings to grow at a CAGR of 13.5% to | 134.4 crore during FY10-13E.
Expected to generate high return ratios
We believe the company will be successful in sustaining high return ratios
(RoCE and RoNW) given its stable margin profile. This stems from the
company’s initiatives to execute only those projects that meet some
specific return criteria. We have, however, not modelled any equity
dilution or debt raising by the company to fund its growth initiatives.
Valuations
At the CMP of | 82, the stock is trading at a P/E of 6.4x and 6.6x on FY11E
and FY12E earnings, respectively. We believe low discounting and a steep
correction in stock price is for the want of order inflows and dilutive
concerns owing to the issue of warrants attached with NCDs. Though the
company has reasonable revenue visibility, a pick-up in order wins is
highly crucial for a re-rating of the stock. We are initiating coverage on the
stock with a Add rating and a target price of | 89 per share.
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