Stock Review: Jyoti Structures

 

The Tower Engineering Procurement Construction (Tower EPC) business has only three listed companies. Jyoti Structures is one of them. The company was established in 1974. It is present in two business segments: transmission and substations. The major part of its revenue comes from the transmission segment.

The company has three subsidiaries: JSL Corporate Services, Jyoti Energy and Jyoti Structures Africa. To tap opportunities in the Middle East, Jyoti Structures has created a joint-venture (JV) entity called Gulf Jyoti International. Jyoti Structures holds 30 per cent stake in this joint venture. It is entitled to 15 per cent of the JV's profits (before calculating its 30 per cent share of profits as owner) as management fee, over and above its 30 per cent share of profits.

 

Strengths

Strong order book: After registering a decline in order intake during Q1FY11, the company bounced back in Q2FY11 with a 72 per cent increase in order intake (year-on-year). A sizeable order from Adani Power helped expand the order book. Total order inflow during Q2FY11 stood at Rs 700 crore, which included orders from Power Grid Corporation (PGCIL) amounting to Rs 70 crore.

Government policy: The government's policy of encouraging private participation will benefit Jyoti Structures. With a number of government-backed schemes being implemented, Jyoti Structures is bound to get many opportunities.
PGCIL share: Till October 2010 Jyoti Structures had won the highest number of tenders from PGCIL.
Diversified client profile: Though there is concentration risk in its business operation, Jyoti Structures has a diversified client profile: 34 per cent of orders come from PGCIL, 12 per cent from private utilities, and the rest 54 per cent from state utilities.
Focusing on margins: The management has said that it has fixed an internal benchmark: if a project does not offer a margin of at least 11.5-12 per cent, then Jyoti Structures will avoid bidding for it.

 

Concerns

Business concentration: Its business is focused on domestic transmission. The company has not aggressively pursued opportunities in sectors such as telecom and Indian Railways.
Aggressive bidding: Jyoti Structures has bid aggressively for PGCIL projects. This could lead to pressure on margins as competition has increased with many local players bidding for these projects.
Rise in metal price and currency fluctuation. Increase in input costs, currency fluctuation, and execution delays all have the potential to affect the bottom line negatively.

 

Valuations

The company's three-year average return on capital employed (RoCE) stands at a healthy 19.45 per cent (though it has been declining in recent years). Its current PE of 10.49 (December 2, 2010) is lower than its five-year median PE of 15.59. The company has registered an annual five-year EPS growth rate of 36.69 per cent. The PEG of the stock is 0.29. An investor with a high risk appetite may invest in this stock.