Punj Lloyd in a legal tangle - Views on News from Equitymaster

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Punj Lloyd in a legal tangle

Jan 9, 2009

Disclosures and confessions seem to be in vogue these days. Punj Lloyd has now joined the party. However, it is not a new piece of information. However, it is the first time the company has shared the details of this contract relating to what actually went wrong. Punj Lloyd has a subsidiary called Simon Carves (SCL), which it acquired in October 2006. SCL does engineering work in the petrochemical segment. SCL had received a contract from Huntsman Petrochemicals (UK) in early 2006. Huntsman Petrochemicals was later acquired by SABIC. The scope of this contract was to design, build and pre-commission a low density polyethylene plant (LDPE) plant in the UK.

SABIC had paid an advance payment to SCL. However, later SABIC went on to terminate the contract claiming that SCL had failed to undertake completion of the contractual works with due diligence. In addition, it is also asking for a performance bond, which is a bond given to protect the recipient against loss in case the terms of a contract are not fulfilled. The total value of these claims amount to £ 28.5 m.

Punj Lloyd has been claiming that SCL has completed a major part of the contract and the contract was within the relevant scheduled completion date specified in the contract with SABIC. It has taken this case to the UK court. In fact, the company is asking for additional damages due to cost over-runs and losses arising on account of the contract cancellation by SABIC. All this is in addition to seeking a compensation of £ 28.5 m. The company believes that SABIC has wrongfully terminated the contract.

It should be noted that if this case doesn’t go in favour of Punj Lloyd, it would be a big blow to it. To put things in perspective, it would wipe out nearly half its FY08 profits. These claims were not accounted for in last year’s profit and loss sheet.

However, the management of Punj Lloyd has stated that it is positive on winning this case. In addition, it mentioned that such issues are very common to the engineering sector and that they are part and parcel of the same.

While we maintain our view on the stock, we are trying for a meeting with the management to get further details on this issue.

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Aug 14, 2020 03:37 PM


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