Punj Lloyd (PUJL.BO) Sell: WC + Leverage + Qualifications, Negate Strong Inflows  Citi Research

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Punj Lloyd (PUJL.BO)
Sell: WC + Leverage + Qualifications, Negate Strong Inflows
 2Q12 PAT 21% below expectations — 2Q12 PAT at Rs247mn +3% YoY was 21%
below CIRA at Rs314mn on the back of 1) 5% lower sales; 2) higher depreciation; 3)
higher interest costs; and 4) higher tax. Margins were marginally ahead at 7.9%.
 Strong inflows in a weak environment — Punj Lloyd booked Rs56.3bn and
Rs46.6bn of orders in 1Q12 and 2Q12 respectively. However, net addition to the
backlog is Rs85.1bn in 1H12. The company ended 2Q12 with a backlog of Rs267bn
+5% YoY. However, the backlog still contains Rs39bn (~15% of backlog) of orders from
Libya, which face execution delays given political unrest in the country.
 Stretched WC -> Increase in leverage — Over the past five years there has been a
steady deterioration in working capital (WC) intensity ((NCA – Cash)/ Sales) which has
risen from 10% to 47%. There has been no improvement in 1H12 given significant
delays for release of payments by PSU clients, which has led to net debt to equity
deteriorating to 1.40x at the end of 2Q12 from 1.12x at the end of FY11.
 Auditor qualifications - Still at elevated levels — Though total auditor qualification
have come down QoQ from Rs15.8bn to Rs14.2bn, it still at extremely high levels for
comfort. It is pertinent that management settles the same one way or the other for
investors to seriously consider the strong rebound in inflows in a weak environment
 Maintain Sell (3H); Revising our target price to Rs54 — Revising our EPS estimates
by -1 to +9% to factor in: 1) 2-9% higher sales; 2) 15-28bps higher EBITDA margins;
and 3) higher interest costs. We increase our target price to Rs54 (from Rs52 earlier) to
factor in: 1) our EPS revision; and 2) roll forward of target P/E of 9x from Dec12E to
Mar13E. However, we maintain our Sell (3H) rating on the stock given: 1) Rs14.2bn of
auditor qualifications; 2) stretched WC and high leverage; and 3) 15% of backlog
composed of Libyan orders facing execution delays given political unrest in the country.