Punj Lloyd – 3QFY2011 Result Update -Angel Broking

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Punj Lloyd – 3QFY2011 Result Update

Angel Broking maintains a Neutral on Punj Lloyd.

Punj Lloyd (Punj) witnessed another quarter of weak performance with

disappointment coming on all the fronts. In 3QFY2011, order backlog stood at

`27,780cr with order inflow of `4,429cr. We are downgrading our FY2011 and

FY2012 estimates to factor in the weak results. We maintain a Neutral view

on the stock owing to the concerns on the execution and margin front.

Weak performance: For 3QFY2011, Punj posted 27.4% yoy de-growth in top-line

to `2,119cr (`2,918cr), but 6.6% growth on sequential basis. Revenues were

impacted as some of the company’s projects continue to be at an early stage of

execution, dismal order inflow in the last few quarters and client-side delays.

EBITDA margin declined by 320bp to 4.5% (7.7%) yoy primarily on account of

escalation of costs due to extra work on few projects (claims have been filed for

the same). Consequently, the company reported loss of `59.9cr (`9.6cr profit),

de-growth of a substantial 724% yoy.

Outlook and Valuation: The Punj stock has been underperforming since the

last 12 months reflecting the company’s weak fundamentals. We believe that

the stock has fallen broadly in line with its peers in the last couple of months

and fundamentals of the company are not witnessing any improvement. In

2QFY2011, the company did show some signs of improvement, which it

however failed to maintain and reported weak results for 3QFY2011. At

current levels, the stock is trading at a PE of 19x and P/BV of 0.9x on FY2012

basis. Our Target Price of `91 based on 1.0x FY2012E P/BV offers 17%

upside from current levels. However, we remain Neutral on the stock owing to

low visibility on the revenue and margins front and execution woes.

Top-line disappoints

For Punj, 3QFY2011 was another lacklustre quarter as it disappointed on all

fronts. On the top-line front, Punj posted yoy de-growth of 27.4% to `2,119cr

(`2,918cr), though on sequential basis it reported growth of 6.6%. Revenues were

impacted as some of the company’s projects continue to be at an early stage of

execution, dismal order inflow in the last few quarters and client-side delays.

On the Libyan orders front, Punj has five infra projects with an order backlog of

~US $770mn. As per management, lack of master plans caused delays in

commencing these projects. However, master plans have been completed and

Punj has received 15% advance from these projects. These projects are expected to

start contributing from FY2012 onwards with the execution period between 4-5

years. However, for the Libyan orders to the tune of US $1.2bn pertaining to

Sembawang, there has been no progress this far.

For orders from the Middle-East, management admitted it was facing stiff

competition from the Koreans who have bagged majority of the new orders

resulting in lower order booking for Punj.

Pending litigations in Simon Carves with the subcontractors amount to £18mn,

while for the Ensus project the client is still retaining ~£7.7mn as retention money

and there is a guarantee of ~£2.3mn with the warranty period expiring in

March-April 2011.

Extremely weak margin, earnings back in the red

EBITDA margin declined by 320bp to 4.5% (7.7%) yoy primarily on account of

escalation of costs due to extra work on few projects (claims have been filed for the

same). Management has guided for EBITDAM of ~8-9%, going ahead. Hence, we

believe that margins would remain subdued in the ensuing few quarters as well

and have factored in the same in our estimates. Thus, on the back of the poor

show on top-line and EBITDA front, in 3QFY2011 the company reported a loss of

`59.9cr (`9.6cr profit) yoy, a substantial de-growth of 724%.

On standalone basis too, the company’s performance disappointed with top-line

de-growing 48% to `1,103.2cr (`2,126.4cr) during the quarter. EBITDA margin

came in at 8.9% (12.4%), down by 350bp yoy. The muted performance on the

top-line front, lower EBITDA margin and increase in interest cost led to a loss of

`2.3cr in 3QFY2011 v/s profit of `117.5cr in 3QFY2010.

Order book analysis

Order inflow during 3QFY2011 and 9HFY2011 stood at `4,429cr and

`9,238cr respectively, taking the outstanding order book to `27,780cr (3.4x

FY2011E revenues). Going ahead, management expects the momentum of order

inflow in energy and infrastructure segments to continue.

The company’s order book is dominated by the infrastructure (56%) and process

and others (27%) segments. Geographically, Africa contributes 35% to the order

book followed by South Asia and SE Asia-Pacific, which contribute 30% and 23%,

respectively.

Revision in estimates

For FY2011 and FY2012, we have pruned our top-line estimates to `8,129cr and

`10,048cr from `9118cr and `12,371cr, respectively. We also revised downwards

our margin estimate to 7.4% and 8.4% for FY2011and FY2012, respectively. To

factor in the loss reported for 9MFY2011, we have downgraded our bottom-line

estimates for FY2011 and FY2012.

Outlook and Valuation

The Punj stock has been underperforming since the last 12 months reflecting

the company’s weak fundamentals. We believe that the stock has fallen

broadly in line with its peers in the last couple of months and fundamentals of

the company are not witnessing any improvement. In 2QFY2011, the

company did show some signs of improvement, which it however failed to

maintain and reported weak results for 3QFY2011. At current levels, the stock

is trading at a PE of 19x and P/BV of 0.9x on FY2012 basis. Our Target Price

of `91 based on 1.0x FY2012E P/BV offers 17% upside from current levels.

However, we remain Neutral on the stock owing to low visibility on the revenue

and margins front and execution woes.