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Jyoti Structures will reap rich dividends from the booming power sector

Jyoti Structures Limited (JSL) is among the top three players in the engineering, procurement and construction (EPC) space for the power sector in the country.

These companies provide turnkey solutions that involve the setting up of transmission lines (up to 800kV) and substations (up to 400kV). JSL does designing, engineering consultancy, tower testing, manufacturing, construction and project management. Its plants are located in Mehsana and Vadodara in Gujarat where it develops prototypes and undertakes fabrication and galvanising of transmission towers & structures, microwave towers, windmill towers and railway electrification structures. It has four subsidiaries and also a 30% stake in Gulf Jyoti International LLC, a joint venture with Gulf Investment Corporation.

Investments in the power sector are booming as the government has taken initiatives to bridge the deficit in generation, transmission and distribution. During the 11th Five-Year Plan (FYP) period, the government plans to invest Rs1,40,000 crore in the transmission segment—double the investment it made during the 10th FYP. The national grid capacity has been envisaged to increase to over 38,000MW during the 11th FYP—from 14,100MW at the end of the 10th FYP—followed by an increase to around 75,750MW in the 12th FYP period. Besides, the restructured accelerated power development and reform programme (APDRP), which aims to reduce the aggregate transmission & distribution loss to below 15%, envisages an investment of Rs51,577 crore by the end of the 11th FYP. Also, there has been an increase in the investment for the Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) which plans to provide electricity to all rural households over a period of four years.

The investment in transmission is equally distributed between the two segments, namely, transmission lines and substations. However, 30% of the spending on transmission lines and 65% of the spending on substations constitute bought-out items, such as conductors, insulators, transformers and other electrical equipment.

This indicates that 50% of the total investment in transmission will provide the opportunity for JSL and its competitors. The company had a strong order book of over Rs4,030 crore at the end of Q3FY09-10, of which transmission contributes 68% and substation and rural electrification contribute 12% and 20%, respectively. Power Grid Corporation, which is likely to invest Rs55,000 crore in the 11th FYP, would release 30%-35% of the orders. The rest would come from state electricity boards (SEBs) and private-sector players. Some of the key contracts in the company’s fold include Reliance Power’s BOOT (build, own, operate and transfer) project to strengthen the western system and the
Rs833-crore order from the Maharashtra State Electricity Distribution Company (MSEDCL) won jointly with Areva T&D. It has bid for a BOOT project floated by RRVPNL (Rajasthan Rajya Vidyut Prasaran Nigam), along with SREI Finance, and is also bidding for a similar project in Haryana. It is also increasingly taking up BOOM (build, own, operate and maintain) projects.

While business volumes and topline growth would not be a problem, the business is capital-intensive. The problem with businesses like these is the modest return on equity (RoE). JSL’s RoE is 19%. Its operating margin is also low, at 11%. The market-cap to sales and operating profit are 0.72 and 6.3, respectively. So, timing the stock purchase is the key. Buying it around Rs150 may be safe.

Unquoted

Chromatic India Limited (Rs75)
Chromatic India is in the business of manufacturing and trading of SO (spirooxazine) dyes and chemicals. The company’s product line includes eco-friendly reactive dyes for cotton, viscose, polynosic and other cellulosic fabrics. The company’s financials are shady. In the March and June 2009 quarters, it posted sales of Rs1.35 crore and Rs1.55 crore and an operating loss of Rs30 lakh and Rs6 lakh, respectively. Surprisingly, in the September and December 2009 quarters, the company posted sharply higher sales of Rs4.28 crore and Rs5.80 crore and operating profit of Rs28 lakh and Rs33 lakh, respectively.  What about the stock? Between 19 November 2009 and 15 February 2010, the stock has shot up 497%. What’s cooking?

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