Among the mid-sized firms which make equipment for the power sector, Jyoti Structures Ltd (JSL) has been steadily picking up orders. The firm’s shares rallied 2.5% on news of three orders in the power distribution business, adding to its backlog of Rs 4,500 crore at the end of March, which is twice its annual revenue. Further, the management statement that there is an equal amount of orders in the tender pipeline, allaying fears of sluggish order inflows in the sector, which has been the prophecy on the Street for some time.
In the past six months, lower than expected order inflows during the latter part of fiscal 2011 and the expected earnings dilution on account of equity expansion in the near term had weighed on the stock. The rights issue of nonconvertible debentures early this year saw a weak response, because of industry headwinds and JSL’s rising interest costs. But, better execution in the March quarter led to a 30% higher revenue than a year earlier. Operating profit, too, was higher by 18%.
Also See Power Glide (PDF)
Of course, like most Indian companies, higher sub-contracting expenses brought down the operating margin by almost 140 basis points (bps) during the quarter, compared with the year-ago period.
A bps is one-hundredth of a percentage point.
Rising interest costs have raised concerns for mid-sized capital goods makers because of higher working capital needs. In 2011, JSL’s borrowings grew by a third of its loan book at the end of the previous year. Analysts view that as revenue improves with better execution, the ratio of interest payout to profit earned will get better.
Meanwhile, revenue accretion from its businesses located abroad is expected to improve although more than three-fourths of its business is in India.
Its US facility will be operational by November. Other Indian companies such as KEC International Ltd, too, have set foot in the US, given the opportunity in transmission towers, and also higher profit margins of around 15% when compared with the stiff competition and margin contraction seen in the Indian terrain. So far, JSL has had limited exposure to overseas markets such as Africa and West Asia, largely through joint ventures.
Shares of JSL are reasonably valued on the street at around seven times its fiscal 2013 earnings.
Yet, lukewarm interest in the sector as a whole would suppress valuations until concerns on the macro picture on interest rates and industrial activity ease out.
Graphics by Yogesh Kumar/Mint
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