Stock Pick From Heavy Electrical Equipment
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HERE IS WHY - Company is confident of obtaining large orders in H2FY15
- Hefty order book of Rs 4,850 crore gives revenue visibility
- Consistent dividend payment for the last 10 years.
Jyoti Structures (JSL) is among the leading player in the transmission Engineering, Procurement and Construction (EPC) sector in India. Th e company is a focused player in the Transmission & Distribution (T&D) segment and provides turnkey solutions in the fi eld of transmission lines, substations and rural electrifi cation. What attracts us to the stock is that the company has been widening its reach in the export market to off set the decline in domestic order fl ows. Th e company’s order book of `4,850 crore, of which 44 per cent constitute exports, provides revenue visibility over the next 18 months. Now let us take a closer look at the other investment rationales that are likely to attract you towards this counter. JSL, at the end of Q3FY14, had an order book of `4,850 crore, which is 1.6x of its book-to-bill (BTB) ratio in spite of the dearth of orders in the domestic market. Over the last two years, the company has been focussing on widening its reach globally to reduce the impact of slowdown in the domestic market. Th e company has forayed into the Middle East and South America. Almost 36 per cent of the total orders are presently from the overseas customers. Of the total order book, transmission lines account for 66 per cent, while substations and rural electrifi cation comprise around 34 per cent.
The company is quite confident of obtaining large orders in H1FY15. According to the company management’s guidance, there are opportunities worth Rs 8,000 crore to be grabbed in FY15. Of this, the company expects export orders worth Rs 2,800 crore to be received largely from regions in South America. It is targeting African nations like Namibia, Uganda, Kenya, Zambia, Nigeria and the neighbouring Nepal, where the competition is less compared to the Middle East. In the domestic sector, JSL expects orders to jump in H2FY15 on the back of increased orders from Power Grid. It also expects state utilities to increase expenditure as the focus of the new regime at the Centre continues to be reduction in transmission losses by upgrading its networks and increasing the availability of power to rural areas.
Project payments, which have been stuck on account of dependency clauses and also retention amounts, are expected to be released. As a result, interest costs as a percentage of operating profi t which stood at 84 per cent in FY14 would decline and boost the company’s bottomline over the next two years. Margins too are expected to expand as the low margin orders are getting executed giving way to high margin orders. Recovery from debtors and faster execution of projects would lead to arerating of the company.
On the valuation front, the stock discounts its trailing twelve-month earnings by 16.67x. Apart from this, the company is also a consistent dividend payer for the last 10 years, which is also a value accruing proposition. We feel that with the release in payments from the SEBs and also with the despatch of orders, the company becomes an ideal candidate for a place in one’s portfolio with a price target of `85 over a one year time horizon.