Jyoti Structures Ltd’s plan to raise funds from the market could ease pressure on profit margins by lowering interest costs. The firm has drawn up plans to raise Rs125 crore through non-convertible debentures (NCD) with detachable equity warrants to shareholders on a rights basis.
Persons in the company indicated that the fund-raising programme can be seen as interest arbitrage. The company has around Rs300 crore debt at an average interest cost of 10-11% and hopes to reduce the high-cost debt by around 2-3 percentage points after the NCD issue.
Jyoti Structures runs businesses that are working-capital-intensive; hence, the capital-raising is welcome. It operates in three core business areas: solutions in power transmission, rural electrification and sub-stations. Of this, the transmission business constitutes around 70% of overall revenues.
Graphic by Yogesh Kumar / Mint
Analysts say that working capital constraints had hindered order build-up in the last 12-15 months. From around Rs3,600 crore in the beginning of fiscal 2010, the company is likely to close the year with an order book of Rs4,100 crore. According to the management, however, the company has bids worth Rs7,000 crore in the pipeline, which should materialize in the ensuing four to six months.
While the NCD issue is a positive move from the company’s perspective, the moot question is the issue price and period when the equity warrants could be exercised. No doubt there could be an equity dilution, but given the anticipated revenue growth rate of around 20-25% in the next 24 months and the reduction in interest costs, there could be growth in earnings on a per share basis. Rising material costs, which are a key concern across most industries, may not make a dent in profitability as this is a pass-through business, where there are price escalation clauses.
So far in the nine months to December, while revenue grew by around 17% over the year-before period to about Rs1,470 crore, net profit grew by about 13% to Rs66 crore. The company’s shares have outperformed the market by a wide margin in the past one year. Valuations are currently at around 16 times past earnings, which is higher than the rate at which earnings have grown in the past three quarters. Growth rates have to pick up considerably for current valuations to be justified.
Write to us email@example.com