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RESULTS FIRST LOOK
1QFY12 revenues and margins were above expectations but the company reported a loss at the net level due to higher interest expense. Net debt/equity rose further to 1.26 at end-1QFY12 from 1.12 at end-FY11. Adjusted for Libyan orders, book-to-bill ratio is low at 2.5x. FY12F order inflows will likely be key for growth in FY13F and for stock rerating, in our view. Further, PUNJ might have to take write-offs on loans given to its subsidiary, SCUK. With fears of a slowdown in international markets and overhang of legacy issues, we believe stock outperformance is unlikely. Maintain REDUCE.
Revenues grew 40% y-y on a low base
PUNJ reported revenues of INR 22,483mn for 1QFY12 in line with our estimate of INR 22,579 mn but above
Revenues grew 40% y-y on a low base
PUNJ reported revenues of INR 22,483mn for 1QFY12 in line with our estimate of INR 22,579 mn but above
consensus (source: Bloomberg) estimate of INR 19,745 mn. Y-y, sales grew by 40% in the quarter on the low base of 1QFY11 vs. our estimate of 41% growth. On a q-q basis, sales grew 3% from 4QFY11 levels in spite of the stoppage in execution of the Libyan orders, indicating some pick up in the execution rate of some of the other projects in India and Middle East.
EBITDA margins above expectations
PUNJ reported core EBITDA of INR 1,659 mn for the quarter, above our estimate of INR 1,400mn and consensus estimate of INR 1,511mn. Core EBITDA margin was 7.4% above our estimate of 6.2% for 4QFY11. We believe PUNJ has reduced sub-contracting, which has contributed to better margins vs. our estimates. Sub-contracting costs declined to 22% of sales in 1QFY12 as against ~30% in FY11 and 28% in 4QFY11.
Slips into net loss again
PUNJ reported interest expense of INR 1,133 mn, 40% above 1QFY11 levels and 17% above our estimate. Effective annualised interest rate (defined as interest expense in the quarter multiplied by 4 divided by average debt in the quarter) rose to 12.6% in the quarter from 9.1% in 1QFY11, implying an increase of 360 bps in interest rates over year-ago levels. Apart from the increase in interest rates, increase in net debt of ~INR 5bn also contributed to higher interest expense.
The company reported a loss at the net level vs. our and consensus expectations of a marginal profit, primarily on account of the higher interest expense.
Order backlog remains low; order inflow remains key
As on Aug 12, 2011, the order book stood at INR 239bn, implying an order backlog ratio of 2.8x. The order book still has INR 25bn of orders from Libya which are non-moving and adjusted for this, book-to-bill ratio would be lower at 2.5x. The company has won orders worth INR 56bn till date in FY12. The company has maintained a quarterly run-rate of ~INR40bn for the last three quarters – better than the average run-rate of INR 30bn in FY11, implying an improvement in order inflow outlook. We believe that order inflow will be the key driver for stock performance given its low backlog ratio, as it could lead to higher revenue growth in FY13F and beyond.
Leverage increases further
PUNJ’s net debt increased to INR 38.3bn at end-1QFY11 from INR 33.5bn at the end of FY11. We believe the increase could be on account of an increase in working capital. The company has not shared the details of working capital, and we expect to get it at the analyst call. The company’s net worth at the end of the quarter stood at INR 31bn. This implies a net debt-to-equity ratio of 1.26, up from 1.12 at the end of FY11.
Legacy issues remain
On July 07, 2011, the Board of Directors of Punj Lloyd decided to withdraw financial support provided to a step down subsidiary, Simon Carves Limited (SCUK) incorporated in England and Wales as a consequence of prevailing market conditions and the financial condition of SCUK. As of June 30, 2011, SCUK had assets of INR 1.34bn. But since it has far greater liabilities than assets, the company will likely go into liquidation without any financial support from the parent. There might be unsecured loans or receivables outstanding from the parent to SCUK, which might have to be written off in the case of liquidation. We expect to get the quantum of possible write-offs, if any, in the analyst call. Management is hopeful of recovering some assets through administration.
But the positive aspect of this decision in our view is that there should be no more liabilities or claims from the subsidiary that the company would have to pay up in the future. Also, the creditors to the subsidiary cannot claim anything against the parent, according to PUNJ. Punj Lloyd, meanwhile has bought all the good assets and contracts from Simon Carves through another subsidiary, paying it around GBP 1mn. This money can be used by Simon Carves to pay up some of the liabilities.
PUNJ’s has other legacy issues that also remain. The auditors for the company have qualified various amounts recognized/not accounted by the company. We list the key qualifications below:
· On the Heera redevelopment project, management has claimed INR 2.43bn in cost over-runs and not accounted for liquidated damages of INR 655 mn. The case is under arbitration.
· PUNJ has claimed an amount of INR 897 mn on two projects, based on management’s assessment of cost over-run arising due to delay in supply of free issue material by the customers, changes in scope of work and/or price
