Punj Lloyd Expectations at unrealistic levels: Macquarie

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Punj Lloyd
Expectations at unrealistic levels
Event
 Punj Lloyd hosted a conference call post its Q2FY11 earnings. Margins have
started to stabilise though risk of further contractual liabilities remain. PUNJ
expects revival in order inflow in H2FY11 followed by revenue growth in FY12.
We maintain Underperform with price target of Rs84 till uncertainty remains.


Impact
 Risk of contractual liabilities remain: In the worst-case scenario, PUNJ
might have to provide for another Rs4.9bn of potential costs related to ONGC
platform project, Ensus project and disputes with sub-contractors. These
issues would remain overhang on the stock. On the other hand, PUNJ has
raised claims of above Rs13bn against ONGC in the arbitration proceedings.
 Libya projects – some good, some bad news: The company has started on
part of the projects for infrastructure allocated to PUNJ with revenues of
Rs1.7bn on these projects to date. However, land acquisition issues mean
these projects could take 5 years or more to be executed. Further, the
integrated resort project awarded to subsidiary Sembawang has not seen any
progress and is unlikely to contribute to revenues for next 3 quarters or so.
 Company expects order inflow to rebound in 2HFY11: The company has
been disappointed with the pace of award activity in the last six months.
However, based on the bid activity, it expects to win US$2-2.5bn of projects
mainly in the oil & gas space in 2HFY11. PUNJ is focussing on large ticketsized
contracts which would increase the execution cycle of the company.
 Consensus numbers are at significant risk: Consensus is still building 4%
top-line growth in FY11 while it has reported 39% decline in 1HFY11. We are
forecasting 21% decline in sales for FY11. Similarly, consensus expects EPS
of Rs5.8 while 1HFY11 has been Rs -0.2. Finally, FY12 consensus forecasts
of 19% topline and 67% bottomline YoY growth on unrealistic FY11
expectations are bound to be disappointed.
Earnings and target price revision
 We have cut FY11 sales and EPS numbers by 8% and 29%, respectively, due
to slower revenue growth in 1HFY11. FY12 numbers have marginally
decreased.
Price catalyst
 12-month price target: Rs84.00 based on a EV/EBITDA methodology.
 Catalyst: Resolution of contractual liability issues
Action and recommendation
 Risk reward still not favourable given uncertainty on revenues and
liabilities: Two most critical issues would be ramp-up of revenues in Libya,
which account for 40% of order book, and any further losses. Given this
uncertainty, we retain our Underperform call. Our revised target price of Rs84
is based on 6x FY12 EV/EBITDA. The multiple is a slight discount to our
target multiple for mid-cap construction companies.