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Stock Insight: High Rise

Jyoti Structures will ride on govt's focus to add 1,00,000 mw capacity and booming power demand in the Middle East

Jyoti Structures (Idirect Code: JYOSTR) has emerged as a major player in the power transmission industry with its operations spanning around 33 countries.

The company manufactures transmission line towers, sub-station structures, antenna towers/masts and railway electrification structures. The company is a leader in high-voltage power transmission lines and substations and among the few companies in the world that can execute total turnkey jobs.

The company, which was incorporated in 1974, has two manufacturing units - Nashik and Raipur. It has a ready domestic market in state electricity boards and grid corporations. NTPC and MSEB are among its long list of clients. Its products have been approved by various international organisations like Vatenfall (Sweden) , Power Link, Western Power and Trans GRID (Australia), IVO (Finland), ABB (Germany), Balforkilpatric (UK), HydroQuebec (Canada), National Grid (UK), Mott MacDonald (UK) and Keneddy Donkin Power (UK).

Increasing government spend in the power sector will hold well for the company as the government embarks on its “Electricity to all” scheme. Under this scheme the government proposes to add 1,00,000 mw of power by 2012.

Towards this end the government has prepared a detailed blueprint to boost power generation which includes (i) Accelerated power development programme (APDRP) under which projects worth over Rs 17,000 crore have been approved (ii) Rajiv Gandhi Grameen Vidyutikaran Yojna, a rural electrification scheme involving an expenditure of Rs 16,000 crore and (iii) the creation of National Grid. This plan involves setting up of an additional 60,000 km of transmission network throughout the country. The National Grid project would also expand transmission tower market from Rs 2,500 crore to Rs 6,500 crore.

The company is also well positioned to cash in on the booming power demand in the Middle East and North Africa on the back of its good track record of executing intricate projects. Jyoti is set to reap benefits as these countries will require an additional of 1,00,000 mw units of power in ten years. Sensing opportunity, the company has set up a joint venture company called Gulf Jyoti International with Gulf Investment Corporation, Kuwait to set up a tower manufacturing facility in the United Arab Emirates (UAE).

The joint venture has already bagged a Rs 180-crore order from Dubai Electricity and Water Authority for supply, installation, testing and commissioning of 400 KV D/C overhead transmission lines on a turnkey basis.

The Middle East and North Africa offer maximum opportunities in the global T&D sector. According to an estimate, some $57 billion will be spent by 2010 in these regions to install new transmission facility. According to World Energy Council, countries belonging to Gulf Cooperation Council (GCC) will be investing about $25 billion in power projects and different sectors within the energy industry and will require investments of more than $1 trillion over the next 20 years. The company is expected to become a key beneficiary of this boom. The GCC includes Bahrain, Kuwait, Qatar, Oman, Saudi Arabia and the UAE.

The company's healthy order book along with capacity addition will translate into healthy revenues and profitability. Its order book stands at around Rs 1,674 crore (as on September 30, 2006). Going ahead, the company is expected to post a net profit at a CAGR of 72.5 per cent to Rs 76.86 crore on a compounded sales growth of 32.80 per cent over FY06-08E.

The company's sustained capacity additions in line with the increasing demand has ensured that the company is capable of executing large orders at ease. It had increased its capacity of tower manufacturing to 72,000 tonnes in financial year 2005. It is expected that the company will also ramp up its capacity utilization to 92 per cent from the current 85 per cent resulting in better utilisation of assets. Most of the domestic contracts that the company undertakes, have price escalation clauses for major raw materials like steel, aluminium and zinc. Using this clause, the company is able to pass on the increase in raw material cost to its customers. This ensures that the company is insulated well from the price volatility thereby reducing pressure on margins. This augers well for the company as 85 per cent of its revenues come from domestic market.

However, its overseas contracts are on fixed price basis. The company is leaving no stone unturned to contain its fixed costs and it is expected that the company will double its operating profit to Rs 148 crore in financial year 2008.

The company is expected to witness high revenues and profit visibility in three years given the robust investment scenario in the power sector. The boom in the sector will further translate into good order book and higher margins. In the domestic market Jyoti's share is around 25 per cent, similar to that of its rival Kalpataru Power. Its another competitor, KEC International, has about 17 per cent market share. Jyoti's expertise lies in construction of substations of up to 400 kv, which makes it a complete turnkey EPCs contractor for power transmission lines. Additionally, it is the only major player executing sub-station projects, which provides it a competitive edge over other players in the industry.

Source: Idirect