Punj Lloyd: Engineering a bounceback

Punj Lloyd: Engineering a bounceback

The recent rise in new orders, stable margins and the plan to repay high cost debt augur well for Punj Lloyd

Recent events at Punj Lloyd indicate that the company’s fortunes could turn around for the better. And hence, its stock price (adjusted for the stock split) which is closer to its listing price of Rs 211 in January 2006 could move higher. Although Punj Lloyd’s sales have grown almost seven times since 2006, the stock is now quoting at 2006 levels, thanks to the problems the company had to undergo over the last one year or so.

The consolidated net loss, substantial erosion in operating profit margins and lower order inflows took a toll on the share prices. However, analysts believe that the concerns are now fully factored in and the stock could get rerated on the back of a substantial pick up in new orders, repayment of high cost debt, improvement in margins and restructuring of its key subsidiaries.

BOUNCING BACK
in Rs crore	FY09	FY10E	FY11E
Revenue	11,876	13,670	15,850
EBITDA	383	1,230	1,506
EBITDA (%)	3.2	9	9.5
Net profit	-225	500	565
EPS (Rs)	-7.2	15.6	17.7
PE (x)	NA	15.8	14
E: Analyst estimates

Expanding revenue mix
The company generates about 61 per cent of its revenues from the oil and gas sector and 80 per cent from the export markets like the Gulf region, Europe, Africa by primarily offering services in process engineering, pipelines and tankages. The decline in international crude oil prices and the consequent contraction in capex in the hydrocarbon sector thus, have been the biggest concerns for the company resulting in slow growth in new orders during the 2008-09.

Moreover, the problems got compounded as the company reversed the profit booked against one of its completed order (HEERA project with ONGC). The slowdown in domestic infrastructure spending due to the election period also added to its woes, all of which hit the operating performance of the company.

For now, things seem to be improving given that the company recorded order inflows of Rs 9,946 crore during the June 2009 quarter, which is substantial considering that its order inflow was Rs 12,759 crore for the 12 months ended March 2009.

Taking the recent order flows into account, the company’s outstanding order book now stands at Rs 27,889.3 crore, which is 2.3 times its 2008-09 revenue. This ratio has improved from 1.74 times in 2008-09 and provides higher revenue visibility, even as some of the new orders have relatively longer execution cycle. “The company has won about Rs 10,000 crore worth of orders in last four months. The revenue visibility has definitely improved, but that is because of the fact that the company has been able to procure big orders in the infrastructure space in the overseas market. While as far as the orders from oil and gas segment is concerned, we do not see significant recovery coming in before the next 3-6 months,” says Shailesh Kanani, analyst, Angel Broking.

Meanwhile, the company is looking at ways to capitalise on the domestic infrastructure growth story. The company is already providing construction and engineering services in different infrastructure segments like power, roads and ports among others. The domestic market currently contributes to about 20 per cent of the total sales, which the company is planning to increase to 30-40 per cent going ahead.

Improved visibility
For 2008-09, the company reported adjusted consolidated losses of Rs 250 crore while operating profit margins had dropped to its lowest levels at 3.7 per cent. This was attributed by the poor performance of its subsidiary, Simon Carves, which was carrying low margins (of 1-2 per cent) orders in its books, leading to overall drag on consolidated operating margins.

Going ahead, no major issues regarding its Simon Carves subsidiary is likely to resurrect. That’s because, the company has booked all the losses incurred at the subsidiary level. Besides, it has taken several initiatives like reducing the subsidiary’s employee strength, relocated Simon Carves’ headquarters from Manchester, UK to Abu Dhabi and lastly, integrated its operations with Punj Lloyd’s process business.

Notably, post the June 2009 quarter results that were better than street expectations, the improved revenue visibility and the rise in the operating margins has resulted in a majority of analysts revised upwards their earnings estimates by 8-10 per cent for 2009-10 and 2010-11.

“Margins have improved in this quarter. We hope that these should remain at current levels considering that the low margins legacy orders have been completely executed,” says Shreyas Mehta, analyst, K R Choksey Shares and Securities. However, a few also believe that the company may clock is a slightly lower margin due to the change in business mix.

“Punj Lloyd expects the June 2009 quarter operating margins of 10.4 per cent to be sustainable within a change of 50 basis points either way. The high margin legacy orders are currently insignificant. Our outlook on margins remains at 8.7-9.0 per cent owing to the component of infrastructure projects going up in the overall order book of the company,” says Parikshit Kandpal, analyst, Ambit Capital.

Conclusion
The company is undergoing certain changes wherein the fundamentals are reshaping for the better. Its strategy to focus on domestic infrastructure could work provide increased visibility in the near-term while increased capex needs in the hydrocarbon segment could play out well in the long run. The improved margins as well as plans to raise funds to the tune of Rs 1,500 crore through the QIP route with an aim to prepay some of its high-cost debt (debt to equity currently at 1.55 times) could prove to be positive in the near-term. At Rs 247, the stock trades at a PE of 14 times and 12 times its estimated earnings for 2009-10 and 2010-11, respectively.