Structural Changes Power Growth

Updated: Nov 16 2003, 05:30am hrs
Power utility stocks have witnessed an increase in trading activity on the bourses following various initiatives from the Central and state governments in the power sector. Power generating firms such as Tata Power, Reliance Energy (erstwhile BSES) have done well. However, it is the transmission segment companies that have stolen the march over their peers. Stock price of Jyoti Structures (JSL) and KEC International (KECI) have registered over four to five-fold increase since March 31. Others such as Kalpataru Power Transmission (KPT) and RPG Transmission (RPGT) have also witnessed an increase of 75 per cent and 248 per cent respectively during the same period.

Analysts attribute this to an improvement in perception following the opening up of the transmission segment. The decision has provided a shot in the arm for these companies as their bottomlines are expected to swell given improved revenue growth.

They asserted that, while the delicensing of generation, open access to transmission lines, power trading etc promises growth opportunity, the enactment of Electricity Act 2003 will address perennial concerns that were associated with the sector. These steps were necessary considering domestic power needs and importantly to lure private players in the sector. As per expectations, power utility firms have registered improved performance during the last few quarters. In the transmission segment, companies like JSL, KEC International have turned around at the gross level during FY03 however KECI continued to bleed at the net level.

JSLs performance stands out from others as the company has done exceedingly well during the first half to September 2003. Its performance reflects benefits derived from internal and external changes that have taken place during the current fiscal.

Its revenue grew by 11.7 per cent to Rs 107.8 crore whereas operating profits shot up a staggering 86 per cent to Rs 12.5 crore during the first half. Importantly, operating profit margin (OPM) improved to 11.6 per cent from 7 per cent. In fact, the company has maintained the growth trend in its OPM through the first and second quarter. Lower employee costs also came in handy. Employee costs declined to Rs 12.6 crore in FY02-03, down by 25 per cent due to decline in employees strength to 544 from 744.

The management expects the employee costs to decline further to Rs 10 crore in the current year. Interest costs too have declined by almost 20 per cent to Rs 8.3 crore. JSL is the only company in the domestic transmission lines segment that offer turnkey services in both the transmission lines as well as the substations segment. The company is focusing on the substation segment and almost 50 per cent of the order book position comprises orders from this segment.

In the recently held AGM in Mumbai, JSL chairman outlined future course of action and issued a positive outlook for the FY03-04. The company expects its revenues to grow by 15 per cent to Rs 320 crore on the back of huge order book position.

Its order book position stands at Rs 500 crore and are to be executed over a period of 15-30 months. Around Rs 90 crore booked orders are from the export market. The domestic orders are at variable price, while exports are at fixed price.

As the prices of steel and zinc, the two major raw materials have increased, the company expects the trend could apply pressure on export margins.

High debt ratio has been another area of concern for most of these companies. The debt-to-equity ratio for transmission segment ranges between as high as 4.25 in case of RPGT to 1.51 for KPT. JSL, too, is in a similar situation and is facing a liquidity crunch. To counter this, the company has decided to allot shares on a preferential basis. It has issued 20 lakh equity shares of the face value of Rs 10 each at a premium of Rs 37 on preferential basis to high networth individuals. As a result of this its interest outgo is expected to decline to Rs 16 crore in FY03-04, from Rs 19.80 crore in the fiscal 2002-03.

The transmission line tower segment pins its hope on a six level intervention strategy formulated by ministry of power under the Accelerated Power Development and Reforms Programme (APDRP) scheme. The SEBs are likely to become commercially viable as a result of improvement in the state of sub transmission and distribution systems under the scheme.