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Jyoti: Growth muted but
valuation compelling
Muted order inflow is likely to confine sales growth to single-digits,
with EPS expected to grow only 7-13% during FY12-13
With a cautious view on execution and margins, we have lowered
our FY12-13 EPS estimates by 7-10% and cut our TP to INR100
But with limited scope for equity dilution and the stock trading at
4.3x FY13e PE, below the 2008-09 trough, we reiterate OW
Investment thesis
Jyoti witnessed single digit growth in both its
order intake (c6%) and order book (c8%) last
year. Because of this, we believe that its sales
growth this year will likely be in single digits at
c9%. In addition, given the concentration of
Jyoti’s exposure to the Indian T&D market
(c88%), we expect its order inflows to remain
weak this year as well, as we expect domestic
transmission orders to pick up only in the next
calendar year. Hence, we forecast order inflows to
remain broadly flat in FY12 driving sales growth
of only c8% in FY13.
So far margins have shown resilience to pricing
pressures and at this stage we don’t expect
margins to erode significantly as management can
choose to only bid for tenders that offer decent
returns. We believe management are keen to keep
margins at c11-11.5%. Consequently, we forecast
an EBITDA margin of c10.9% for FY12 and
c11.0% for FY13, driving EPS growth of c7% and
c13%, respectively, over the same periods.
We note that even on our cautious estimates, the
stock appears significantly cheap. Based on our
new estimates, the stock is trading at a 4.8x
FY12e PE and 4.3x FY13e PE compared to the
historical average c13.3x 12m forward PE for the
last 5 years. We note that during the crisis of
2008-09, the stock had de-rated to an average 12m
forward PE of c6.3x during the worst 8 months of
the crisis (September 2008 to Apr 2009). It seems
the current multiples are factoring in a crisis much
bigger than in 2008-09 which we believe is not
warranted at this stage.
We have revised down our FY12 and FY13 EPS
estimates by 10% and 7%, respectively, due to our
slightly more cautious view on execution and
margins. Consequently, we reduce our target price
to INR100 from INR115.
We note that over the past 6 months, apart from
external factors, the stock has de-rated somewhat
because of the overhang of potential equity
dilution from warrants issued with the NCDs
(Non-convertible debentures). However, we note
that the exercise price of those warrants is INR120
and at this stage we believe it is unlikely that the
stock will double in the near term to breach that
level. Hence, the risk of equity dilution is minimal
at this stage. All told, we think Jyoti is attractive at
these levels, even with low EPS growth, and
reiterate our OW rating on the stock.
We highlight the key bull and bear factors related
to Jyoti below:
Bull factors
Margins have remained resilient against
pricing pressures
Recent JV with Lauren and the start of its
production facility in the US should
provide some growth momentum for Jyoti
from FY13 onwards
The risk of equity dilution has diminished
considerably
Currently the cheapest stock in the sector,
trading below even the 2008-09 multiples
Bear factors
Weak order growth likely to persist and put
pressure on earnings growth in FY12-13
Working capital requirements remain highest
among peers, thus raising interest burden
Limited diversification makes the company
vulnerable to domestic competition and
pricing pressures
Valuation
Our target price of INR100 is derived from our
preferred EVA valuation methodology, assuming
target sales growth of c7%, through-the-cycle
operating return margin of c10% and WACC of
c16.1%. Our target price implies that 12 months
from now, the stock should be trading at a 12-
month forward PE of c6.0x on 24-month forward
EPS of INR15.6.
Under HSBC’s research model, for stocks without
a volatility indicator, the Neutral rating band is
5ppt above and below the hurdle rate for India
stocks of 11%. This translates into a Neutral
rating band of 6% to 16% around the current share
price. Our 12-month target price of INR100
suggests a potential return of c62% (excluding
dividends), which is above the Neutral rating
band; hence, we reiterate our OW rating.
Risks
Key risks related to our investment case include:
Delay/cancellation of transmission projects
Excessive pricing pressure leading to
significant margin erosion
Continued decline in market share
for industry detail and other company:
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Jyoti: Growth muted but
valuation compelling
Muted order inflow is likely to confine sales growth to single-digits,
with EPS expected to grow only 7-13% during FY12-13
With a cautious view on execution and margins, we have lowered
our FY12-13 EPS estimates by 7-10% and cut our TP to INR100
But with limited scope for equity dilution and the stock trading at
4.3x FY13e PE, below the 2008-09 trough, we reiterate OW
Investment thesis
Jyoti witnessed single digit growth in both its
order intake (c6%) and order book (c8%) last
year. Because of this, we believe that its sales
growth this year will likely be in single digits at
c9%. In addition, given the concentration of
Jyoti’s exposure to the Indian T&D market
(c88%), we expect its order inflows to remain
weak this year as well, as we expect domestic
transmission orders to pick up only in the next
calendar year. Hence, we forecast order inflows to
remain broadly flat in FY12 driving sales growth
of only c8% in FY13.
So far margins have shown resilience to pricing
pressures and at this stage we don’t expect
margins to erode significantly as management can
choose to only bid for tenders that offer decent
returns. We believe management are keen to keep
margins at c11-11.5%. Consequently, we forecast
an EBITDA margin of c10.9% for FY12 and
c11.0% for FY13, driving EPS growth of c7% and
c13%, respectively, over the same periods.
We note that even on our cautious estimates, the
stock appears significantly cheap. Based on our
new estimates, the stock is trading at a 4.8x
FY12e PE and 4.3x FY13e PE compared to the
historical average c13.3x 12m forward PE for the
last 5 years. We note that during the crisis of
2008-09, the stock had de-rated to an average 12m
forward PE of c6.3x during the worst 8 months of
the crisis (September 2008 to Apr 2009). It seems
the current multiples are factoring in a crisis much
bigger than in 2008-09 which we believe is not
warranted at this stage.
We have revised down our FY12 and FY13 EPS
estimates by 10% and 7%, respectively, due to our
slightly more cautious view on execution and
margins. Consequently, we reduce our target price
to INR100 from INR115.
We note that over the past 6 months, apart from
external factors, the stock has de-rated somewhat
because of the overhang of potential equity
dilution from warrants issued with the NCDs
(Non-convertible debentures). However, we note
that the exercise price of those warrants is INR120
and at this stage we believe it is unlikely that the
stock will double in the near term to breach that
level. Hence, the risk of equity dilution is minimal
at this stage. All told, we think Jyoti is attractive at
these levels, even with low EPS growth, and
reiterate our OW rating on the stock.
We highlight the key bull and bear factors related
to Jyoti below:
Bull factors
Margins have remained resilient against
pricing pressures
Recent JV with Lauren and the start of its
production facility in the US should
provide some growth momentum for Jyoti
from FY13 onwards
The risk of equity dilution has diminished
considerably
Currently the cheapest stock in the sector,
trading below even the 2008-09 multiples
Bear factors
Weak order growth likely to persist and put
pressure on earnings growth in FY12-13
Working capital requirements remain highest
among peers, thus raising interest burden
Limited diversification makes the company
vulnerable to domestic competition and
pricing pressures
Valuation
Our target price of INR100 is derived from our
preferred EVA valuation methodology, assuming
target sales growth of c7%, through-the-cycle
operating return margin of c10% and WACC of
c16.1%. Our target price implies that 12 months
from now, the stock should be trading at a 12-
month forward PE of c6.0x on 24-month forward
EPS of INR15.6.
Under HSBC’s research model, for stocks without
a volatility indicator, the Neutral rating band is
5ppt above and below the hurdle rate for India
stocks of 11%. This translates into a Neutral
rating band of 6% to 16% around the current share
price. Our 12-month target price of INR100
suggests a potential return of c62% (excluding
dividends), which is above the Neutral rating
band; hence, we reiterate our OW rating.
Risks
Key risks related to our investment case include:
Delay/cancellation of transmission projects
Excessive pricing pressure leading to
significant margin erosion
Continued decline in market share
for industry detail and other company:
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