Two turnaround stocks

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Punj Lloyd
Punj Lloyd’s stock has also been impacted on account of concerns over its prospects. For instance, in the case of Simon Curve’s (its subsidiary) ethanol project, analysts expect Punj to book additional liquidated damages in the March 2010 quarter. While Punj has already booked Rs 300 crore so far in 2009-10, its client raised a claim of Rs 160 crore in early March 2010. Punj’s large project in Libya, which is delayed and accounts for about 43 per cent of its order book, could mean more earnings downgrades by analysts in the near term. Also, concerns over its ONGC project exists, even as the company has booked most of the likely cost overrun. In terms of revenue visibility, too, Punj’s order book has been shrinking in the last few quarters on account of lower order inflows due to the lower capex in the global oil and gas industry.

PUNJ LLOYD
in Rs crore FY09 FY10E FY11E FY12E
Net sales 11,910 11,910 13,700 15,630
Net profit -230 350 510 630
EBITDA margin (%) 2.6 9.0 10.0 10.5
EPS (Rs) -7.7 10.7 15.3 18.9
RoE (%) -8.9 11.9 13.5 14.6
EV/EBITDA (x) 25.5 7.8 6.1 5.1
Order flow 13,100 14,200.0 15,300 21,100
Closing order book 20,800 22,900 25,200 30,200
Order book/sales (x) 1.7 1.9 1.8 1.9
Source: Macquarie Equities Research, ENAM Direct Securties

Overall, there are some concerns surrounding Punj’s near to medium-term prospects, which should gradually get resolved. On the positive side, Punj Lloyd is a leading company with superior engineering skills in hydrocarbon and infrastructure sectors. If these concerns, which are partly easing, are resolved, Punj’s performance should improve. Also, the company is gradually trying to de-risk its business model by focusing on the domestic E&P market and infrastructure projects, particularly in the road and power BOP segments. The strategy has paid off given that share of infrastructure projects in the order book has risen from 35 per cent in March 2008 quarter to 60 per cent in December 2009 quarter. Also, contribution of South East Asia, including India, in overall order book has increased to 20 per cent. Going ahead, the company is eying about Rs 3,000 crore worth of new orders in the oil and gas industry in 2010-11. The years 2010-11 and 2011-12 would be crucial as its order book could bounce back and by that time the concerns over project delays and possible write offs relating to the existing projects should become history.

Suzlon Energy
Due to various concerns, Suzlon Energy’s share price dropped from a high of Rs 455 in January 2008 to Rs 36 in December 2008.

In January 2008, it traded at a one-year forward P/E of about 25 times. But now, even as it is at just 10 times, investors continue to stay shy of the stock. Notably, while concerns exist, things seem to be changing for the better.

For instance, the company has repaid its outstanding acquisition loan of $780 million by selling a 35.22 per cent stake in Hansen (an erstwhile subsidiary) besides, securing a new five-year dollar denominated loan of $465 million. This has led to a 15 per cent reduction in debt and hence, interest cost. Along with improving fundamentals, analysts say, Suzlon’s net debt-equity ratio will fall further to 0.7 times by 2011-12.

SUZLON ENERGY
in Rs crore FY08 FY09 FY10E FY11E FY12E
Total sales (mw) 2,384 2,790 1,713 2,110 2,547
Domestic installations (mw) 976 749 723 884 1,079
Exports (mw) 1,408 2,041 990 1,226 1,468
Consolidated revenues 13,679 26,082 22,380 21,264 25,089
EBIDTA margin (%) 14.9 11.4 6.6 10.2 11.3
PAT 10,154 2,364 -2,609 3,255 9,624
EPS (Rs) 7.8 7.6 -1.6 1.8 5.3
RoE (%) 33.2 14.0 -3.1 3.9 10.4
Net debt-equity ratio (x) 0.4 1.4 1.3 0.9 0.7
PE (x) * - - -47.4 42.2 14.3
Source: Morgan Stanley; E: Estimates, *PE is on current market price

On the demand side, again, concerns have not eased out completely but, there has been some recovery – new orders have started flowing from key markets like the US and Europe. Suzlon’s Germany-based subsidiary, REpower Systems AG, in November bagged its largest ever onshore order for supplying equipments worth 954 mw. A significant recovery, however, is seen starting the second half of CY2010, which should improve Suzlon’s order book which stood at 1,484 mw as of end-January 2010.

This in turn will drive Suzlon’s revenue growth and improve utilisation of existing capacities leading to better margins and profitability, going ahead.

Meanwhile, the domestic market has seen a pickup in new orders. Also, steps such as imposition of cess on coal and allowing higher RoE (return on equity) on power plants based on renewable energy are positives for the sector, and companies like Suzlon. Currently, India’s installed wind power capacity is about 11,000 mw as against the potential of 45,000 mw. Even globally, due to higher crude oil and coal prices, many countries are favouring wind energy projects, indicating huge growth potential. Suzlon, which is the fifth largest wind turbine player globally with large market share, strong product portfolio and distribution network, will be a key beneficiary in the long run.

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