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Sell
Punj Lloyd (PUJL.BO)
Return Potential: (11%) Equity Research
Headwinds continue, risk-reward still unfavorable: reiterate Sell
Source of opportunity
We reiterate our Sell rating on Punj on continuing near-term headwinds to
growth given 1) minimal contribution to FY12E revenues from Libya orders
(16% of order backlog); 2) longer execution-cycle infrastructure orders are
roughly 40% of order book, suggesting that an execution uptick is still
some time away; and 3) we see risk of further write-offs on the back of
incremental Rs12bn auditor qualification on Libya projects in 4QFY11.
Though we increase our FY12-13E EBITDA margin estimates by 60-80 bps,
high debt (1.3X net debt/equity for FY12E) and low interest coverage (1X
for FY11) mean that the positive impact on net profits is limited.
Catalyst
We see the following negative catalysts for Punj: 1) weak order inflow
trend continuing in FY12; 2) further deterioration in execution and
receivables cycle; and 3) lower-than-expected FY12 margins. We lower our
FY12/13 revenue estimates by 14%/18% as we build in slower-thanexpected order inflows as well as execution over this period. This, coupled
with high interest expenses, leads to a 71%/35% cut to our FY12/13 EPS
estimates. We also introduce our FY14 EPS estimate of Rs 8.62.
Valuation
We revise our valuation methodology to P/B from P/E given limited visibility on
earnings growth over the next 12 months. Our new 12-month target price is Rs
57 (from Rs 62), based on 0.63X FY12E BVPS, close to its 5-yr trough P/B. Punj’s
Indian construction peers trade at FY12E P/B of 1.5X with an average FY12E ROE
of 8% vs the 2% ROE that we expect for Punj in FY12E. We reiterate our Sell
rating as we see higher relative upside elsewhere in our coverage universe.
Key risks
Risks to our target price include faster-than-expected improvement in
execution and receivables collection; a pickup in order inflow activity from
the Middle East; and stronger-than-expected margin improvement in FY12.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Sell List
Coverage View: Neutral
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sell
Punj Lloyd (PUJL.BO)
Return Potential: (11%) Equity Research
Headwinds continue, risk-reward still unfavorable: reiterate Sell
Source of opportunity
We reiterate our Sell rating on Punj on continuing near-term headwinds to
growth given 1) minimal contribution to FY12E revenues from Libya orders
(16% of order backlog); 2) longer execution-cycle infrastructure orders are
roughly 40% of order book, suggesting that an execution uptick is still
some time away; and 3) we see risk of further write-offs on the back of
incremental Rs12bn auditor qualification on Libya projects in 4QFY11.
Though we increase our FY12-13E EBITDA margin estimates by 60-80 bps,
high debt (1.3X net debt/equity for FY12E) and low interest coverage (1X
for FY11) mean that the positive impact on net profits is limited.
Catalyst
We see the following negative catalysts for Punj: 1) weak order inflow
trend continuing in FY12; 2) further deterioration in execution and
receivables cycle; and 3) lower-than-expected FY12 margins. We lower our
FY12/13 revenue estimates by 14%/18% as we build in slower-thanexpected order inflows as well as execution over this period. This, coupled
with high interest expenses, leads to a 71%/35% cut to our FY12/13 EPS
estimates. We also introduce our FY14 EPS estimate of Rs 8.62.
Valuation
We revise our valuation methodology to P/B from P/E given limited visibility on
earnings growth over the next 12 months. Our new 12-month target price is Rs
57 (from Rs 62), based on 0.63X FY12E BVPS, close to its 5-yr trough P/B. Punj’s
Indian construction peers trade at FY12E P/B of 1.5X with an average FY12E ROE
of 8% vs the 2% ROE that we expect for Punj in FY12E. We reiterate our Sell
rating as we see higher relative upside elsewhere in our coverage universe.
Key risks
Risks to our target price include faster-than-expected improvement in
execution and receivables collection; a pickup in order inflow activity from
the Middle East; and stronger-than-expected margin improvement in FY12.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Sell List
Coverage View: Neutral
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