Punj Lloyd (PUJL.BO)
Maintain Sell: Business Turnaround Still Some Time Away
Maintain Sell (3M) — Though Punj Lloyd has been a significant underperformer
over various time frames, it has outperformed the BSE Sensex by 12% in the past
month due to investors’ interest in buying it as a laggard play. However, we once
again re-iterate that discretion is the better part of valour and maintain our Sell/
Medium (3M) risk rating. We cut our target price to Rs111 (from Rs115 earlier) to
factor in our 21-44% earnings cut and roll forward our target P/E multiple of 14x
to Mar12E (from Sep11E earlier).
And the reasons for this are — 1) 39% of the Rs256bn backlog consists of delayed
Libyan orders; 2) Order cancellations in 1QFY11 implied that despite inflows of
Rs32.8bn, backlog is down to Rs256bn (1QFY11) from Rs278bn (FY10); 3)
Recent top and middle management departures; 4) Deterioration in working
capital intensity/ client advances; and 5) If arbitration proceedings against ONGC
fail, the company will have to write off Rs3.1bn (Rs9/share).
ONGC Heera project — Punj Lloyd initiated arbitration against ONGC 3 months
back to recover dues of over US$250mn (Rs11.5bn) it incurred to execute the
project, allegedly due to a flawed design provided by ONGC. ONGC has rejected
these charges and said that the design was Punj Lloyd’s responsibility.
Libya orders update — Certain portion of the Libyan projects being handled by
Punj Lloyd totalling Rs39bn have started moving, with advances coming in and
running bills getting submitted. Company hopes to book some revenues from
these orders in 2QFY11E. The Sembawang portion of orders totalling Rs59bn is
now under re-design and will start moving only in 4QFY11E.
Ensus project update — The project operated at 98% utilization though 1QFY11
but the company saw a reversal of £2.5mn on settlement with a subcontractor.
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