Macquarie Research: Punj Lloyd -Disappointment never ends

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Punj Lloyd
Disappointment never ends
Event
 Punj Lloyd reported yet again disappointing 3QFY11 results. Both revenues
and earnings were much below our and consensus estimates due to slower
execution.
 We remain concerned about slow pickup in execution and sustainable
margins being at lower levels. We cut our target price to Rs56 from Rs84 to
factor in cut in revenue and margin estimates.

Impact
 Libyan orders remain a drag on execution pickup: Revenue has declined
by 33% in 9MFY11 as execution in Libyan orders have not yet picked up. As
per the management, there has been no progress on one Libyan order worth
Rs58bn (20% of order book) booked in its subsidiary - Sembawang.
Cutting our FY11-12 revenue estimates by 4-12%: This has been done
to factor in slow pickup in execution.
New estimates factor in strong pickup in execution: Our new revenue
estimates build in a strong pickup in execution. Any slippage could lead to
serious downside to our revenue estimates.
 Sustainable margins a big unknown: Margins have remained quite
subdued at 7.7% in 9MFY11 and 4.5% in 3QFY11. Current order book (exLibyan orders) would have margins in 6-8% range while Libyan orders would
have higher margins. Unless Libyan orders pickup meaningfully, margins are
unlikely to exceed 8%.
Building in normalised margins of 8.5% in FY12-13: We are building in
8.5% normalised margins in FY12-13 assuming some revenues from the
execution of Libyan orders.
 Severe downside risks exist to consensus estimates: Consensus is
building in EPS of Rs4.3 and Rs8.7 in FY11 and FY12 while in 9MFY11 the
company had a negative EPS of Rs2.1. We are 56% lower than consensus
currently and see downside risks even to our new FY12 numbers.
Earnings and target price revision
 We have cut our FY12 EPS by 48% and our target price by 33% from Rs84 to
Rs56.
Price catalyst
 12-month price target: Rs56.00 based on a EV/EBITDA methodology.
 Catalyst: slow pickup in execution and drop in margins
Action and recommendation
 High uncertainty on revenues and margins: Two most critical issues are
ramp-up of revenues in Libya, which account for ~35% of order book, and
sustainability of margins at 8-9%. Given these uncertainties, we retain our
Underperform call. Our revised target price of Rs56 is based on 6x FY12
EV/EBITDA – in line with our target multiple for midcap construction
companies


We are cutting our FY11-12 revenue estimates by 4-12%...
 FY11 revenues to fall by at least 20%: In 9MFY11, PUNJ has reported revenue decline of 33%.
Execution is unlikely to pick up significantly in 4QFY11.
 Assuming recovery in execution rates in FY12: We are building in improvements in execution
rates in both the segments of PUNJ – Infrastructure and Oil and gas - in FY12. Company’s failure
to ramp up its execution rates from current levels would pose a serious downside risk to our new
forecasts as well.
 We are cutting our FY11-12 revenues estimates by 4-12%: We are now forecasting Rs82bn
and Rs97bn revenues in FY11 and FY12.


… and building normalised margins in FY12
 EBITDA margin of existing order book in 7-8% range: The management in the conference call
conceded that the EBITDA margin of the existing order book is in the range of 7-8%.
 Margins would improve only when Libyan orders contribute to revenues: Libyan orders have
higher margins (~12-14%). Hence, margins would improve significantly from current levels only
when there is an execution pick up in Libyan orders.


Serious downside risks exist to consensus estimates
 Consensus building in strong revenue growth in FY12 despite disappointing 9MFY11:
Consensus estimates currently forecast a strong revenue growth of 26% in FY12 despite a major
disappointment in 9MFY11. Consensus is being too optimistic in hoping a faster execution of
Libyan orders, in our view.
 Consensus building in strong margin recovery in FY12: Consensus estimates of 8.8%
EBITDA margin in FY12 build in strong rebound in margins.
 EPS numbers to be cut by 40-50%: FY12 consensus EPS estimate would be cut by 40-50% as
revenue and margins estimates are scaled down by consensus.


Highly leveraged balance sheet to be hit by rising interest rates
 Net debt: equity remains high at 1.1x: PUNJ’s net leverage remains high at ~1.1x due to high
working capital and low internal accruals.
 Refinancing of FCCB due in March 2011: PUNJ’s outstanding FCCB of US$49mn is due by end
of FY11. Refinancing of this debt would increase the interest burden as the revised interest rate is
likely to be higher given weak fundamentals of the company and rising interest rate environment.


Valuation – cutting our target price to Rs56/share
 Cutting our target price by 33%: We have cut our target price from Rs84/share to Rs56/share
primarily due to lower revenue and margin assumptions for FY12.
 Sensitivity of EBITDA margin to target price is extremely high: For every 1% swing in EBITDA
margin, our target price would change by Rs18/share (33% swing).