Jyoti Structures + KEC International – Transmission Tower Business Outlook

The Outlook for Tower and related business remains positive in medium to long term even though the sector saw their margins come down YoY due to cost inflation leading to higher raw material cost. KEC International and Jyoti Structures are two favorites in this sector.

KEC International:
The merger of RPG Transmission and NITEL will lead to higher efficiency and will enhance operational and financial capability of KEC. The recent quarterly performance of KEC clearly demonstrates this fact.

Current order book of KEC stands at Rs 50 bn, which is 1.75 times of the FY08 revenue. The total turnover would grow at a CAGR of 28% for FY08-FY10E. The government is planning to go for tendering of 40000 telecom towers under USO fund to role out telecom network in the rural areas. With KEC planning to make a big entry here we expect the growth in revenue in Telecom Towers for the company would remain at 40% CAGR during FY08-FY10E.

On a consolidated basis expect a 25% CAGR in revenue and 21% CAGR in net profit for KEC over FY08-FY10E. EPS for FY09 is expected to be Rs 41.4 and Rs 51.2 for FY10. One can ADD KEC based on 8x EV/EBIDTA for FY10E with a 12 month price target of Rs 685. At the Target price the stock would trade, at 17x and 13.4x to FY09E and FY10E EPS estimates.

Jyoti Structures:
Jyoti Structures (JSL), one of the key players in the Transmission & Distribution space. JSL is amongst the top 3 players in India and has a strong management with proven execution skills.

JSL stands to gain the most from the Private sector Power business. JSL’s domestic order book stands at Rs 2652 crore with around Rs 1800 crore orders from the transmission line towers projects. Around 2/3rd of the transmission line tower projects orders are in the 400 KV lines and around 40% of the rest in the 765 range KV lines.

The 70% South African subsidiary of JSL has also witnessed a good move in winning substantial orders in a short time span. Currently this subsidiary has a total orders to the tune of USD 110 mn which are to be executed in the next one and half year’s time.

JSL is expected to report a modest EPS growth of 17% for FY09 to Rs 10.53 and for FY10 32% to Rs 14.00. Existing investors can hold to the stock. Fresh Additions can be considered with a 12 month price target of Rs 190.