Punj Lloyd-- Too early to cheer ::Macquarie Research,

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��



Punj Lloyd
Too early to cheer
Event
 We attended Punj Lloyd’s 1Q FY12 results con-call. We remain concerned
about auditor qualifications on 55% of net worth and think it is too early to
cheer the execution revival. Retain Underperform with a target price of Rs50.
Impact
 1Q FY12 – company delivers on EBITDA: PUNJ reported 40% revenue
growth at Rs22.5bn with an 8% EBITDA margin, which were in line with our
and the street’s estimates. However, the net loss, at Rs123m, missed
estimates.
 Execution revival to drive revenue growth: After a disappointing execution
profile over FY10/11, we expect PUNJ to deliver 23% revenue growth in
FY12. We think the growth should primarily be driven by oil & gas sector
orders won in FY11.
 Margin normalisation underway: We expect margins to normalise to 8.5%
given the legacy orders of subsidiaries – Sembawang and Simon Carves –
have completed. Management claims that incremental orders are coming with
a 10–12% margin.
 Outlook on order inflow is cautiously optimistic: PUNJ saw net order
inflows of Rs34bn (flat YoY), driven mainly by oil & gas sector orders. We
think the recent global sovereign debt crisis raises questions on
management’s optimism on order inflow, especially from the Middle East.
 Working capital situation worrisome, net leverage remains high: PUNJ’s
working capital cycle has worsened significantly, from 141days in FY10 to
167days in FY11. The increase has been mainly driven by an increase in
inventory and debtor levels. We do not expect much improvement in FY12
given that disputed customer claims (ONGC Heera project, etc) are unlikely to
get resolved in the next three to four quarters. Net leverage for the company
remains high at 1.1x, with an average interest cost of 10.5%.
 Rising auditor qualification remains a matter of grave concern: QoQ,
qualifications have increased by Rs1.35bn, mainly due to its subsidiary –
Simon Carves. While the company remains hopeful of recovering its disputed
claims, significant balance sheet risks exists, with 55% of net worth being
qualified by auditors.
Earnings and target price revision
 We are reducing our FY12/13E EPS by 20% and 11%, respectively, to factor
in higher interest costs. Retain target price of Rs50.
Price catalyst
 12-month price target: Rs50.00 based on an EV/EBITDA methodology.
 Catalyst: slowdown in execution and delay in settlement of customer claims.
Action and recommendation
 Retain Underperform with target price of Rs50: We think it is too early to
cheer the company’s execution revival. Rising working capital requirements
(due to debtors and customer claims) and auditor qualifications on 55% of net
worth highlight significant balance sheet risks. Favourable outcome on
customer disputes could be a trigger for a re-rating. Retain Underperform with
a target price of Rs50