Punj Lloyd – Postpone Investment


Punj Lloyd

Q1 results not good

Punj Lloyd has not reported good results for the quarter ended 30.06.11 as compared to the quarter ended 31.03.11. Revenue has marginally increased from Rs.1234 crore to Rs.1350 crore. Revenue for the whole year 2010-11 was at Rs.4457 crore. Net profit has dropped steeply from Rs.31.87 crore to Rs.5.42 crore. Net profit for the year 2010-11 was at Rs.12.37 crore. Operating profit margin dropped marginally from 12.30% to 11.62%. Net profit margin dropped from the already low 2.58% to 0.40%. The low net margin indicates that the company is barely able to keep its head above water. The company is in the construction and engineering sector. Its shares are traded in the Indian stock markets at Rs.56.25 (09.11.11). The highest price recorded by the company’s shares in the last one year was at Rs.134.80 (11.11.10) and the lowest at Rs.52.25 (03.10.11). In other words, the current share price of Punj Lloyd is close to its lowest price in the last one year. This gives a temptation to the investors to invest in the company’s shares at the current price level. Is it justified to invest in the company now? Let us analyse.

Auditors’ qualification

The company has strong flow of orders. Beating the trend of slowing down of orders in the infrastructure sector, the company bagged twice the number of orders in the second quarter ended 30.09.11 as compared to the corresponding period of the previous year. During Q2, Punj Lloyd and its subsidiaries secured orders worth Rs.10286 crore, taking its total orders to a healthy figure of Rs.26690 crore. The company’s order books have swelled because of its focus on foreign markets. Punj Lloyd secured key orders from the Middle East countries Abu Dhabi, Qatar and Dubai. Punj Lloyd is very strong in the business of civil works for the gas and oil sectors. Now Punj Lloyd is beginning to slowly enter into the road segment where competition is high and margins are low. But Punj Lloyd is not prepared to lower its margins and is selectively competing in the road sector. Auditors have qualified the balance sheet of the company with remarks like its assets being stuck at the politically unstable Libya and its dispute with ONGC, India’s premier oil exploration company. Now that Libyan civil war has come to a conclusion, one expects the company to take steps to execute these orders as much as it can. Diplomacy is also needed to a great extent in negotiating with the new regime in Libya. Dispute with ONGC should be taken on a priority and settled amicably by the company.

Tie-up with the French company Dassault

The company’s subsidiary PL Engineering has tied up with the Paris-based Dassault Systems for the promotion of Systmes’ Software Solutions in India. Dassault Systems is a global leader in 3D and product lifecycle management solutions. Dassault adds value to more than 1.5 lakh customers in 80 countries. Dassault has been in the line of operations since 1981 and is a pioneer in the 3D software market. Its applications convert the complete lifecycle of products from concept to maintenance to recycling into 3D view. PL Engineering’s engineering and design capabilities make up all stages of a product and project life cycle right from conception to commissioning the project. Therefore the tie-up will complement Punj Lloyd’s capability further. Dassault has products and solutions for nuclear power, oil & gas, thermal power, petrochemicals, chemicals, industrial plant design, bio fuel, equipment manufacturing and aerospace.

Inconsistent results

For the last 3 years, Punj Lloyd’s revenue increased by a CAGR (Compounded Annual Growth Rate) of 16%. But the company’s profits suffered because of project delays and the resultant cost overrun. The company posted a loss of a huge Rs.300 crore for the year 2009-10. It turned around in 2010-11 and posted a profit of Rs.12 crore. There were several reasons behind the turnaround of the company. First, its overseas subsidiary reported an increase in revenue as a result of shelving of less profitable projects and concentrating on more profitable projects on hand. Secondly Punj Lloyd recorded a high non-operating income during 2010-11.

Africa constitutes major chunk of business

Punj Lloyd has vertical operations in infrastructure, oil & gas and power. In the year 2006, Punj Lloyd acquired SEC and Simon Carves. The acquisition strengthened the company’s urban infrastructure. The huge order book Punj Lloyd has now caters mainly to industrial infrastructure segment. Punj Lloyd is one of the largest players in this important segment in India. Punj Lloyd also orders catering to tankage construction and process pipeline. The company has large orders from African and Asian continents. 50% of the orders are from Africa and the remaining 50% from South Asia.

British subsidiary left to fend for itself

Punj Lloyd has withdrawn its provision for additional financial support to its British subsidiary Simon Carves Ltd. A resolution was passed in the company’s Board meeting held in July. Simon Carves Ltd is incorporated in England and Wales. Taking into consideration the financial and market conditions, Punj Lloyd has taken this decision. Punj Lloyd is also planning to transfer certain assets of Simon Carves Ltd to another company Simon Carves Engineering Ltd which is a British subsidiary of PL Engineering Ltd, incorporated in India, which is again a subsidiary of Punj Lloyd.

Negative reports

Goldman Sachs predicted in its report in June that the company would face certain negative factors like weak order flow trend continuing in 2012, further deterioration in receivable cycles and execution and lower than expected margins in 2012. Goldman Sachs recommended a sell for the company’s shares. Credit Suisse has also commented on the company’s low margins and predicted that an improvement in financial performance next year (2012) is very difficult. It has also warned about the Auditors’ qualifications of the company’s balance sheet. Emkay, in its report has praised certain positive features of the company and has recommended for a hold in the company’s shares by the investors. The company’s dispute with ONGC over cost overruns in the execution of the project has come as a sore point to the investors and analysts. The dispute involves an amount of Rs.243 crore. Batlivala and Karani, stock brokers have warned about halting of work in Libya amounting to Rs.3000 crore due to civil war. Stockmarketresearch.webs.com has recommended the company’s shares at the current price level for short term gains.

Company redeems FCCB

There are some positives also about the company. Punj Lloyd acquired a coal mine in Indonesia through its subsidiary Sembawang in Singapore. The subsidiary will acquire 50% stake in a thermal coal mine company in Central Kalimantan in Indonesia. Coal reserves in this coal mine has been estimated at 134 million MT and potential in situ reserves estimated at 57 million MT. Punj Lloyd has redeemed its FCCB (Foreign Currency Convertible Bonds) amounting to Rs.275 crore during the current financial year. The company issued its zero coupon FCCBs amounting to $125 million in 2007. 60% of the bonds had been converted into shares by the bond holders. The company redeemed the rest of the bonds. The conversion price was at Rs.272.50 whereas the prevailing market price was well below that. The company had a cash kitty of Rs.1184 crore in September 2010, a part of which was used to redeem the bonds. Because of the redemption of the FCCBs, debt equity ratio will not be altered sizeably as the FCCB redemption was only around six per cent of the company’s total debt.

Rs.10000 crore order backlog in Libya

During the financial year, Punj Lloyd had an order backlog amounting to a whopping Rs.9500 crore at the height of the civil war in Libya. Out of this, Rs.6000 crore worth orders was non-moving for more than one year and belonged to its subsidiary Sembawang Engineering & Construction. Punj Lloyd has stated that it will be removing the backlog from its order books if no progress was made till the first quarter of the financial year 2011-12 ending 30.06.12. Even the remaining amount of Rs.3500 crore may turn unexecutable if the company does not make smart moves with the new Libyan regime. If the Libyan orders are cancelled, the company’s future revenue projection will suffer a jolt. Cost wise, the company may not suffer seriously right now as it has incurred an expenditure of only Rs.215 crore as against Rs.480 crore of advances it has received. Punj Lloyd has a history of terminated contracts and cost overruns because it its subsidiaries.

Bagging many projects

Punj Lloyd has been awarded a contract for the construction of 194 villas at Kolkata West International City, a satellite township. The contract is worth around Rs.100 crore. Punj Lloyd has been awarded a BoP order worth Rs.1195 crore by Haldia Energy Ltd, a wholly owned subsidiary of Calcutta Electric Supply Co for a thermal power project. Punj Lloyd has bagged a Rs.678 crore engineering, procurement and construction (EPC) order from Nuclear Power Corporation. The order is for piping work at four pressurised heavy water reactors of Nuclear Power Corporation. Punj Lloyd has bagged Rs.114 crore order to build a railway siding for the Uttar Pradesh Rajya Vidyut Utpadan Nigam Ltd. The work includes construction of bridges, signalling and telecommunication to augment the merry-go-round system and railway siding for the supply of coal to two thermal power plants of 500 MW capacity each at Anpara. Punj Lloyd bagged three oil and gas contracts in Oman, India and Indonesia worth Rs.645 crore. The Oman contract is the largest of the three and it entails the development of a new water treatment plant at the oil production field of Petroleum Company Occidental Mukhaizna. Punj Lloyd has concluded a 25-year power purchase agreement with NTPC Vidyut Vyapar Nigam Ltd for sale of power from a 5 MW PV-based solar plant to be constructed at Phalode area of Jodhpur district in Rajasthan. Punj Lloyd’s subsidiary Punj Lloyd Infrastructure bas bagged a Rs.735 crore NHAI project to upgrade a 140 km stretch of NH-31 from Khagarea to Purnea in Bihar State to a new lane. The contract is on BOT (Build, Operate and Transfer) basis. Punj Lloyd is entitled to annuities worth Rs.56 crore.

Do not invest now

At the current share price of Rs.56, investors are advised not to enter into the company’s shares because of the following reasons:

  • Punj Lloyd’s results are inconsistent. At one time it posts a loss, at another time it posts a profit
  • Punj Lloyd is treading on thin margins. Any time, it may slip into losses again
  • Wait for the action front on the Libyan order backlog of the company. If these orders worth Rs.9500 crore are cancelled, the company’s revenues projection may suffer

The company has not done anything positively to inspire confidence in the minds of the investors.

Punj Lloyd share price movement

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Punj Lloyd Results

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