Jyoti Structures Ltd (JSL), a power transmission equipment services provider, has announced that it would look to set up a base in the US for making lattice steel towers. It will invest around $12 million (around Rs55 crore) for this purpose.
Setting up a base in the Western markets seems to be the trend for Indian firms in the space. Sometime back, RPG Group’s KEC International Ltd acquired US-based SAE Towers Holdings Llc for $95 million, which makes it the largest global player in lattice towers.
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These moves could be because two reasons. First, competition in the domestic market is high and as a result these firms operate at a low profit margin of around 10-11%. For the September quarter, JSL reported an operating margin of 11.6%, while KEC posted a margin of 10%.
Secondly, thanks to the stress on renewable energy in developed markets, there would be opportunities in the power transmission space.
Besides, margins in developed markets are healthier at around 16-18%, which could de-risk the business model for Indian firms.
According to John Perinchery, analyst at Angel Broking Ltd: “While the strategy would pay off well with entry into newer geographies and customer profiles, it may need to raise funds for this expansion.”
One may recall that JSL had sought approval to raise up to Rs125 crore of non-convertible debentures with detachable warrants earlier this year. It hasn’t exercised this option yet, and could, therefore, use this route for funding its overseas expansion.
At the end of September, its total debt was around Rs390 crore, with a debt to equity ratio of about 0.8. Hence, raising further debt funds should not be much of a problem.
JSL’s shares have underperformed the CNX Midcap index of the National Stock Exchange since April. This is despite a healthy earnings growth of about 18% reported last quarter and a sharp 72% rise in order intake.
With valuations at around 10 times estimated fiscal 2011 earnings and an order book of nearly two times annual revenue, the stock’s performance may improve in the medium term.