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Jyoti Structures Vs KEC Int. - III - Views on News from Equitymaster
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Jyoti Structures Vs KEC Int. - III
Sep 24, 2008

In the previous article, we had discussed on how the two companiesí income statements have looked over the past few years considering the different markets they cater to. In this article, we will take a look at their balance sheets and the key ratios over the past few years.

  • Also read - Jyoti Structures Vs KEC Int. Ė II

    During FY05, KEC International went through a composite scheme of arrangement, wherein it restructured its business segments. As such, we have compared both the companiesí last three years (FY06 to FY08) balance sheet numbers.

    Current ratio: The current ratio is a measure of financial strength, which helps in identifying the solvency level of a company. During the period under consideration, Jyoti structures (JSL) had an average current ratio of 2.2, while its counterpart, KEC International (KEC) had an average current ratio of 1.3, thus clearly putting JSL in a better position to manage its short term debts. JSLís current assets have grown at a compounded rate of 30%, while its current liabilities have grown at a slower pace of 11%. On the other hand, KECís current assets have grown by 38%, whereas its current liabilities have grown by 18%.

    Working capital: JSL has maintained its working capital management during the period under consideration, with its debtor days hovering around its three-year average of 133. KEC, on the other hand has witnessed its debtor days increasing from 144 in FY06 to 185 in FY08, averaging out to 164 days. This difference is mainly on account of the latterís larger presence towards the international market, making its contracts to have a longer gestation period. In terms of inventory days, JSL has seen its inventory days improving from 64 in FY06 to 21 FY08, while KEC has retained its inventory days at around 27 in the last three years. Majority of the inventory is made up of raw materials for both the companies, indicating that their work is rolled out at a quick pace. Raw material makes up nearly 50% and 65% of the inventories for JSL and KEC, respectively.

    Key ratios:

    Source: Respective companies

    Return on invested capital (ROIC) measures how a company is using its money (retained earnings) to generate returns on its capital employed. This ratio helps in knowing how well a companyís management uses its investments (into the business) to generate returns. As we can see from the above chart, JSLís ROIC has marginally improved from 6.6% in FY06 to 8.4% in FY08, while KEC has improved its ROIC from 10.3% in FY06 to 12.2% in FY08.

    Return on assets (ROA) is used for measuring the rate of return on total assets. It shows how well a companyís management uses its assets to generate profits. Although on a lower side, both the companies have improved their return on assets over the past three years. KEC improved its ROA, from 3.3% in FY06 to 7.1% in FY08, while JSL, has increased its ROA from 4.7% in FY06 to 7.8% in FY08.

    On debt front, working capital loans form a major portion of both the companiesí total loans. During the current economic conditions, with tightening of liquidity, the increase in cost of capital is likely to impact the companiesí profitability in the mid-term. At the end of FY08, JSL had a debt to equity ratio of 0.7 and an interest coverage ratio of 3.6, while KEC had a debt to equity ratio of 1.2 and an interest coverage ratio 4.9.

    What to expect?
    At the current price of Rs 102 and Rs 374, the stocks of JSL and KEC are trading 10.9 times and 10.7 times their trailing twelve-month earnings, respectively. Both the companies have equal amount of market share in the domestic markets, which puts them in a strong position to gain from the strong investments in the transmission and distribution space going forward. Also, increasing investments in fast growing international markets such as MENA (Middle East and North Africa, where both the companies have significant presence) hold tremendous opportunities going forward.

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