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Punj Lloyd (PUJL.BO): Upgrade to Neutral from Sell
Yet to show sustained operational improvement but historical trough multiples no longer warranted
Punj Lloyd’s current order book is dominated by long gestation, low-margin infrastructure and construction
orders (38% as of June 2011). This contrasts sharply with the company’s order book 3 years ago when it was
dominated by hydrocarbon orders (a high-margin, fast churn segment in its business).
Since we added Punj Lloyd to our Sell list on February 21, 2011, the stock has fallen 17% vs. a 10% decline in
the Sensex. Over the past 12-months Punj Lloyd has declined 46% vs. the Sensex which is down 8%. We
mainly attribute the stock’s underperformance to continued weakness in its operating margins and concerns
over Simon Carves (its UK subsidiary) and its Libyan operations.
16% of the company’s order book is in Libya, which we remove from our order book estimates as visibility on
any restart of work remains low.
The last two quarters have resulted in a marginal turnaround with revenue growth close to 30% yoy and
EBITDA margins close to 7% – sustaining this level of performance could lead to a rerating of the stock from
its current low level.
What prevents us from being more positive on the stock is: (1) Continuous auditor qualification on debtors
for certain projects and (2) any potential liability/write-off coming from its UK subsidiary, which is currently
being liquidated.
Catalyst
(1) Further delay in execution on slow moving infrastructure orders in Africa; (2) slower-than-expected pick
up in order inflows from the Middle East, and (3) further increase in debt levels to fund working capital
requirements over the medium term.
Valuation
We upgrade Punj Lloyd to Neutral from Sell as the stock is trading on trough multiples despite showing signs
of revival over the past two quarters. At the same time we raise our 12-month P/B-based target price on the
company to Rs65 (from Rs57) on a 0.7X P/B multiple to the average of FY12E-FY13E book value (increasing
from 0.6X earlier, due to improving ROEs on a PB-ROE framework).
We lower our FY12-FY14 EPS estimates by 19%-31% on the back of write-offs at its UK subsidiary and higher
interest expense for the next 2 years.
The stock currently trades as 0.6X FY12E P/B, which is near its historical trough multiple.
Key risks
Upside: (1) Faster-than-expected execution and collections, and (2) expansion in auditor qualifications.
Downside: Delay in execution ramp-up.
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