Opportunity to buy
The weakness in Indian stock market was reflected in Jyoti Structures' stock performance as well. The stock corrected 10% in last week's trading. We believe that this fall should be taken as an opportunity to buy the stock. We are positive on the stock, because of the following reasons.
Strong order backlog of Rs 23 billionn which is 2.3x of FY07 sales
Based on current order backlog and buoyancy in the power transmission line sector we expect sales CAGR of 30% for the period of FY07-FY10e
We expect EBITDA margin to improve on improved execution and expect EPS CAGR of 35% for the period
Q1 FY08 results confirms our forecast with sales growth of 34% and EPS growth of 49% y-o-y due to improvement in EBITDA margins
Upgrade to Overweight (V) with a new target price of Rs 254
We have used a combination of a DCF approach and PE multiple approach to determine our target price. Our new target price – Rs 254 – is the mid-point of our DCF fair value Rs 201 and PE multiple based fair value of Rs 307. This target price is higher than our earlier target price of Rs 220 as we roll over our valuation from Mar-08e to June-08e for the 12-month target price. The stock has a potential upside of 37.1%; we therefore upgrade the rating from Neutral (V) to Overweight (V).
Valuation
We have used a combination of a DCF approach and PE multiple approach to determine our target price.
DCF approach
We have used three-stage DCF to value Jyoti Structures. We have assumed Cost of Capital to be 12.3%. We have an explicit period starting from FY08e until FY10e. We use a semi-explicit period of 10 years starting from FY11e. We have assumed fade period to start in FY19e and to last for 10 years. During the fade period we assume RoIC will converge with Cost of Capital. Our DCF based fair value for June-08e is Rs 201. The increased fair value is higher than our earlier fair value of Rs 180 as we move to June-08e.
PE valuation
We have arrived at target PE of 23x based on an analysis of the stock's historical trading pattern. Over the last two years, Jyoti Structures has traded in the range of 15-25x its one year rolling forward PE multiple. There was a spike in this period, followed by a correction in the Indian stock market. Compared to the CNX Midcap Index, Jyoti Structures largely traded at a premium. During the last few months it has been trading in the band of 20-25x. We believe that Jyoti Structures at its current stage of growth should trade at a PE multiple of 23x, which provides us with a PE based fair value of Rs 307 based on our June-08e EPS estimate which is higher than our earlier PE based fair value of Rs 260.
Upgrade to Overweight (V) with target price of Rs 254
Our new target price – Rs 254 – is the mid-point of our DCF fair value Rs 201 and PE multiple based fair value of Rs 307. This target price is higher than our earlier target price of Rs 220 as we roll over our valuation from Mar-08e to June-08e for 12-month target price.
Jyoti Structures is classified as a volatile stock in our rating system, meaning that if the returns are higher than 21.3% it would be classified as Overweight. It has potential upside of 37.1%; we therefore upgrade rating from Neutral (V) to Overweight (V).
The weakness in Indian stock market was reflected in Jyoti Structures' stock performance as well. The stock corrected 10% in last week's trading. We believe that this fall should be taken as an opportunity to buy the stock. We are positive on the stock, because of the following reasons.
Strong order backlog of Rs 23 billionn which is 2.3x of FY07 sales
Based on current order backlog and buoyancy in the power transmission line sector we expect sales CAGR of 30% for the period of FY07-FY10e
We expect EBITDA margin to improve on improved execution and expect EPS CAGR of 35% for the period
Q1 FY08 results confirms our forecast with sales growth of 34% and EPS growth of 49% y-o-y due to improvement in EBITDA margins
Upgrade to Overweight (V) with a new target price of Rs 254
We have used a combination of a DCF approach and PE multiple approach to determine our target price. Our new target price – Rs 254 – is the mid-point of our DCF fair value Rs 201 and PE multiple based fair value of Rs 307. This target price is higher than our earlier target price of Rs 220 as we roll over our valuation from Mar-08e to June-08e for the 12-month target price. The stock has a potential upside of 37.1%; we therefore upgrade the rating from Neutral (V) to Overweight (V).
Valuation
We have used a combination of a DCF approach and PE multiple approach to determine our target price.
DCF approach
We have used three-stage DCF to value Jyoti Structures. We have assumed Cost of Capital to be 12.3%. We have an explicit period starting from FY08e until FY10e. We use a semi-explicit period of 10 years starting from FY11e. We have assumed fade period to start in FY19e and to last for 10 years. During the fade period we assume RoIC will converge with Cost of Capital. Our DCF based fair value for June-08e is Rs 201. The increased fair value is higher than our earlier fair value of Rs 180 as we move to June-08e.
PE valuation
We have arrived at target PE of 23x based on an analysis of the stock's historical trading pattern. Over the last two years, Jyoti Structures has traded in the range of 15-25x its one year rolling forward PE multiple. There was a spike in this period, followed by a correction in the Indian stock market. Compared to the CNX Midcap Index, Jyoti Structures largely traded at a premium. During the last few months it has been trading in the band of 20-25x. We believe that Jyoti Structures at its current stage of growth should trade at a PE multiple of 23x, which provides us with a PE based fair value of Rs 307 based on our June-08e EPS estimate which is higher than our earlier PE based fair value of Rs 260.
Upgrade to Overweight (V) with target price of Rs 254
Our new target price – Rs 254 – is the mid-point of our DCF fair value Rs 201 and PE multiple based fair value of Rs 307. This target price is higher than our earlier target price of Rs 220 as we roll over our valuation from Mar-08e to June-08e for 12-month target price.
Jyoti Structures is classified as a volatile stock in our rating system, meaning that if the returns are higher than 21.3% it would be classified as Overweight. It has potential upside of 37.1%; we therefore upgrade rating from Neutral (V) to Overweight (V).
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