Aug 18, 2011

Punj Lloyd Q1FY12 earnings review: Be and Make


Top line growth led by improved execution: Revenues of Punj Lloyd for Q1FY12 reported a growth of 40% on consolidated basis as against same period last year. This was better than our expectation and led by improved execution.

Operating margins witnessed an improvement: Operating margins witness an improvement on sequential and yearly basis and stayed at 7.4% but still in single digits.

Auditor notes continue to remain: during Q1FY12 also regarding claims of Rs 2.43 bn on Heera redevelopment project, liquidated damages worth Rs 650 mn and outstanding debtors of Rs 830 mn along with unbilled work in progress of Rs 1.66bn related to the said project. Also, claims worth Rs 897 mn arising due to cost overrun due to delay in supply of free issue of material and claims of Rs 725 mn amount which is withheld by the customers also continue to remain.

Steep increase in interest cost turns bottom line in to Red: Despite an outperformance at the operating level, a sharp surge in the interest cost and a higher tax outgo eroded all the profit.
The company declared a loss of Rs12 crore as against a loss of Rs31 crore in Q1FY2011 and a profit of Rs18 crore in Q4FY2011 (profit due to a very high other income).

Concerns still persists:
  1. Future write offs from Heera redevelopment project with ONGC which is under litigation. If the decision comes against Punj Lloyd, company would have to reverse the extra revenues worth Rs 2.43 bn booked in last year.
  2. Very high debt equity ratio will erode all the profits in the upcoming quarters. Interest rates are still in the rising stream and no signal to cool off at now. Hence, NP margins pressure remains on the stock.
  3. Execution is still a big concern for the stock, order book growing in a good phase but there is no clarity about the margins.

Be and Make’s view: It is a quarter which gives some hopes on execution, but high interest cost dented all the profits. There is no signal which can entice us to buy this stock at the current market conditions. Here the problem is not with the price of the punj Lloyd but it is all about the market conditions. In my view, it has to test the levels of 54/- and 47/- along with the bleak market conditions.

With thanks
Be and make

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