Jyoti Structures Ltd Management Discussions

Overview of investments in power sector: Generation, transmission

A transmission system serves as the crucial link to connecting power generation sources to the distribution network, which, in turn, is responsible for supplying power to consumers. The primary objective of these systems is to assist the transfer of electricity from power generation facilities, reinforce the existing transmission infrastructure to accommodate projected increase in demand and effectively harness distributed power generation resources in various regions. Power transmission in India requires a transmission license, granted for 25 years by the relevant regulatory commissions.

In India, the transmission system follows a two-tier structure, consisting of intra-state transmission (InST) lines and inter-state transmission system (ISTS) lines, with a few specialised transmission lines serving distinct purposes. ISTS lines are developed and managed by inter-state transmission licensees. Currently, a majority of the ISTS network is under the ownership and operations of the Power Grid Corporation of India Ltd (PGCIL). The ISTS evacuates power from inter-state generating stations (ISGS) that serve beneficiaries in multiple states, transmitting power from ISGS to the delivery points of the state grid, and transferring excess power from regions or states with surpluses to those with deficits in accordance with relevant regulations.

Conversely, the InST system is established and maintained by state transmission utilities (STUs) or InST licensees. InST focuses on evacuating power from the generating facilities of a state, including those operated by both the state and private sectors, catering to beneficiaries within that state. It also handles the transmission of power, stretching from the ISTS boundary to various substations within the grid network of the state, and ensures delivery of power to load centres across that state

Transmission systems in India play a crucial role, given the skewed distribution of energy resources and main load centres across the country. As power demand and energy from renewable sources are set to increase, transmission systems will play an imperative role in linking generation and distribution of power to the end consumer. Additionally, an efficient transmission and grid infr astructure would help reduce aggregate technical and commercial (AT&C) losses and improve energy efficiency in the power sector.

Power demand shows strong correlation with per capita GDP

A 30-year data assessment indicates a strong link between power demand and the overall GDP growth. Cross-country and crossstate comparisons also indicate the same. Hence, tracking GDP growth and its impact on per capita power demand may reveal prospects of the power sector.

Further, the Indian manufacturing GVA (Gross Value Added) share of 18% is lower than that of Association of Southeast Asian Nations (ASEAN) peers, which are factories to the world. That said, the ongoing supply-chain de-risking strategy of global players amid geopolitical disruptions; focus of the Indian government on initiatives such as Make in India and PLI; and the emergence of new-age sectors amid energy transition creating new manufacturing needs, are set to improve the contribution of manufacturing to the Indian GDP. This would further boost power demand prospects.

Risks

Key risks and monitorable for the sector

Slowdown in conventional generation capacity: The deceleration or interruptions in increasing generation capacities could result in a decrease in investments in transmission projects, which would negatively affect companies engaged in transmission tower engineering, procurement, and construction (EPC). Nonetheless, strong expansions in RE capacity and initiatives to enhance transmission networks are anticipated to partially compensate for the deceleration in traditional energy sectors. Furthermore, major industry players are considering international markets where capacity additions are being executed.

Execution delays: Execution delays can arise from a range of external factors, including issues related to securing rights-of-way, delays in obtaining environmental clearances, political instability, and security threats such as terrorist attacks, as well as internal factors like a shortage of labour or raw materials. Companies with more extensive expertise and experience in dealing with such challenges would be better equipped to navigate these situations compared to smaller enterprises.

Raw material cost management: Commodity prices are renowned for their susceptibility to volatility, influenced by various macroeconomic and global factors. The significant price fluctuations in metals such as aluminium, zinc, copper, and steel can yield adverse consequences. To shield themselves from price hikes, companies often include price escalation clauses in their contracts. A prevalent approach employed by industry participants is to establish contracts with their suppliers for the procurement of raw materials at project initiation. Additionally, companies frequently engage in forward contracts to safeguard their profit margins.

Efficient management of working capital: It is essential to have a robust system for monitoring working capital, optimising the utilisation of working capital resources and maintaining continuous vigilance. This becomes particularly important due to the extended duration of projects and lengthy accounts receivable cycles. Additionally, effectively managing interest costs is critical, as they tend to be variable and must be controlled to manage the overall cost of funding.

Forex fluctuations: Companies face exposure to foreign currency risks when the currency used for invoicing differs from the currency in which payments are ultimately made. Unfavourable fluctuations in exchange rates during the time between bid submission and contract award can potentially affect profits unless appropriate hedging measures are in place.

Availability of adequate workforce: The availability of both skilled and unskilled labour is crucial for the successful completion of projects. Labour is particularly necessary for tasks such as foundation casting, tower assembly, and line stringing. Typically, there is a ready supply of labour for foundation casting. Furthermore, there is a growing trend of labour migration to foreign countries, driven by the prospect of higher wages.

Cautionary Statement

Statements in the "Management Discussion and Analysis" section may be forward looking and are stated as required by applicable laws and regulations. Actual results may vary materially from those expressed or implied by the forward- looking statements due to risks or uncertainties associated therewith depending upon economic conditions, government policies and other incidental factors. Readers are cautioned not to place undue reliance on these forward-looking statements.