PUNJ LLOYD : A strong multi-bagger call from Be and Make

Punj Lloyd                                            - Be and Make

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A strong multi-bagger call from Be and Make 

cmp: Rs.128/-

Date: 22-09-2010

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Investors with a long-term perspective and a high-risk appetite can  buy this stock. Investors can take exposure in the stock, considering the company's ability to cater to diverse clients.

About Punj Lloyd:

Punj Lloyd (BSE SCRIP ID: PUNJLLOYD, NSE SYMBOL: PUNJLLOYD) is a globally diversified conglomerate providing engineering, procurement and construction services in Oil & Gas, Petrochemical and Infrastructures sectors, with interests in aviation, defence and marine. Known for its capabilities in delivering mega projects ‘on-time,’ thereby ensuring repeat customers; the Group possesses a rich experience of successfully delivered projects across the globe, while maintaining the highest standards of health, safety, environment and quality (HSEQ).

The company's performance has suffered in the past four quarters:

Delays in overseas projects due to client-related issues have affected execution. The rate of completion is important for project firms to be able to book revenue and profits, even though they may have incurred expenses on the projects. Execution delay in its projects in Libya, which account for one-third of its order book, was the main reason.

Recent results Q1 too FY11 belied investors’ confidence:

Besides, residual write-offs were visible in this quarter, too, attributable to legacy orders of a company Punj Lloyd had acquired in 2006. The firm booked a loss of GBP2.5 million (around Rs18 crore) on a bio-ethanol project in the UK, according to analysts.

Execution delays and a contraction in revenue, coupled with fixed overheads, took a toll on its operating profit margin, which fell from 9.8% to 7.7% y-o-y. Both employee costs and other expenditure arising out of administrative costs as a percentage of sales were significantly higher. Meanwhile, stand-alone results slipped, too, with revenue nearly halving to Rs1,000 crore. This resulted in a loss of Rs19 crore.

Order book is growing but not with the expected pace:

Punj Lloyds Rs25,550 crore order book, at about 2.5 times its FY10 revenue, provides confidence. But analysts are awaiting clarifications on the 8% drop in order book size, compared with end-March, which may be a cause for some concern.

Libya - the main Game Changer, cushioned by past experience:

Currently, Libya contributes approximately 34% to outstanding order backlog as on 31st Mar ‘10 and 31% of orders under analysis. In the orders under analysis of Rs299 bn, Libya contributes approximately Rs94 bn. So far until Q4FY10, progress in execution has remained tepid, posing risk to FY11E & FY12E earnings estimates.

Despite above, we want to highlight their prior experience in Libya and scope of work in current orders – which is a comforting factor. Punj Lloyd has executed two pipeline orders worth Rs6.9 bn and Rs6.6 bn received from Sirte Oil Company during Aug ‘06. The current orders from Libya are rather low skills orders i.e.

1) Realty project contract of Rs59.0 bn

2) Urban infrastructure work in Arada and Souk Al Juma of Rs6.3 bn and Rs8.2 bn respectively

3) Utilities construction in 3 towns Zawara, Ragdaleem and Al Jamali of Rs18.7 bn.

Thus, probability of Libya orders impacting margins or posing negative surprise is very low, barring client-led delays.

What are the positives right now?

1.         Net loss down at subsidiaries’ level: The subsidiaries reported a 41.6% y-o-y and a 70.5% y-o-y fall in revenue and operating profit to Rs606 crore and Rs32 crore respectively. The OPM declined to 5.3% from 10.5% a year ago. The net loss stood at Rs12 crore against a profit of Rs58 crore in the year ago quarter. The loss was on account of Rs18.4 crore of cost over run in Ensus project, however there would be no further losses on account of Ensus project going ahead. The net loss on sequential basis was down to just Rs12 crore in the quarter from Rs451 crore in the previous quarter.

2.       Reducing debt equity will improve margins: Most of analysts expecting a reduction in its debt to equity ratio from 1.5 at end-March to around 1.2 by the end of FY11.

3.       The losses on account of Ensus project is over for sure. Cost-overruns on projects did not overshoot in Q1FY11- restricted at Rs0.2 bn for Ensus Project. Both the project now stands delivered

a. Ensus Project operating at 98% utilization and

b. Project work on ONGC Heera is completed.

4.       Company likely to maintain positive cash flows in FY11 and FY12.

5.       The stock fell very sharply and looks attractive at the current market price when viewed long term. There could be a strong support around the 102-110 levels for this stock and is around 10-15% near to the current levels indicates down side risk is limited if the company likely to post good set of numbers in upcoming quarters.

6.       Strong earnings visibility: Despite the some renegotiation and removal of orders PUNJ maintain Rs.255.6bn orders in hand which are 2.4 times to FY10 numbers which indicates strong earnings visibility.  Punj secured order inflows worth Rs32.8 bn – equivalent to 20% of FY11E targeted order flows. Despite this, order book actually declined 8% qoq to Rs255.6 bn –attributed to renegotiation and removal of orders valued Rs22 bn - (1) 50% reduction in Rs8 bn Digi Port order to Rs4 bn and (2) Jurong Island Aromatics project is valued Rs17.7 bn removed from backlog.

7.       Planning to diversify across regions and sectors: The infrastructure projects form 71% of the company’s order book, significantly up from 56% share in Q1FY2010.

a.       Being with Indian infra story: Region wise too they are more concentrating to diversify, they are now more concentrating the Indian infra space.

b.       Entering Railway space: Punj is also “actively looking” at the Railway space, particularly track laying and signaling. The company's subsidiary Sembawang has been pre-qualified as a bidder for a construction package of the Chennai Metro project.

c.       Decent experience in nuclear space: Punj’s Manchester subsidiary Simon Carves, has done almost 3.5 million man-hours of nuclear work experience. Atul punj states that “We feel that partnering with our own subsidiary as well as other companies in this space will give us a very interesting position in that area.”

d.       Catering opportunities in Defence space: Punj Lloyd had been issued a license by the government of India to manufacture guns, rockets and missile artillery systems and other related equipment. The engineering and construction firm had inked a pact with Singapore Technologies Kinetics (ST Kinetics) in June 2008 for manufacturing defence equipment. "Punj Lloyd is setting up a land systems factory in Gwalior. Punj Lloyd already got the possession of the land and now it will start making capital expenditure for the project... It will be done in phases and the total project will cost US$100 million,"

e.       Punj Lloyd Group launches into Solar Utility Projects: Punj Lloyd Delta Renewables will develop, engineer and execute renewable energy based projects throughout the world. It already won the largest solar based contract worth Rs232 cr from Bihar state government.

What are the concerns for this stock:

1.         Execution, yes execution is big concern for this stock. No doubt it is conglomerate global infra company despite that they are facing lot of hurdles while executing the orders. So, PUNJ is not facing any troubles in getting the orders but the major concern as all know is execution at this point of time.

2.       Libya order, 38% of total order book is a worrying factor. Any delay in this will severely affect the Punj’s performance in the near term.

Be and Make’s conclusion:

There is nothing to study about the abilities of PUNJ, it is conglomerate in world infra space, no doubt in it. It is facing some trouble with the subsidiaries and some past orders, hope from Q2FY11 or 2HFY11 things will improve. We already got some indications in the recent quarter that the worst is over and we are entering in to a safe zone as an investor point of view. The current market price is very attractive when viewed its abilities and the stock is trading just around to its book value.  In my view, it is a safe bet when aiming at least two years, for short term there may be some hiccups but for long term it is an absolute buy at the current levels. I am not giving any targets or stop loss for this call, just hold it for two years you will fetch multi-fold returns for sure. One can allocate ‘not less than’ 33% in this stock at the recommended price. The stock has huge support between Rs.96-102/- hence one need to watch out for these levels carefully in any case if the stock fells from the Rs.96/- then the support would be around the Rs.81/- hence at that time we should consider the another 33% allocation to this stock.

With thanks

BE AND MAKE

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