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Punj Lloyd: Libya adds to order book uncertainty - Views on News from Equitymaster
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Punj Lloyd: Libya adds to order book uncertainty
Mar 9, 2011

The management of Punj Lloyd recently hosted a conference call to discuss the status of the projects in Libya given the unrest in the country. The company has reported lackluster numbers for 3QFY11 with a YoY sales decline of 28% and a net loss of Rs 599 m. For 9mFY11, the sales declined by 35% YoY whereas the net loss stood at Rs 689 m. During 9mFY11, it derived around 68% of sales from international operations. The company was already facing execution issues in its African projects and was hoping for a revival in the next financial year (FY12). During the 3QFY11 results conference call the management was optimistic and expected the Libyan projects to gather pace during FY12.

However, the recent political turmoil in Libya has added more uncertainty over the future of these projects. The political upheaval in Libya will add to its topline woes. We have tried to ascertain the financial impact on Punj Lloyd amidst the uncertain Libyan orders.

Libyan projects - one third of order backlog

Of the total order backlog of Rs 278 bn as on Dec 31, 2011 the value of the group's Libyan projects is around Rs 98 bn. Thus Libyan projects account for around 35% of the total order backlog. The current political unrest in Libya raises concerns over the execution of these projects and puts the fate of these projects in jeopardy. The management tried to play it down by saying that since Rs 62 bn worth of projects had not moved for over a year they intended to remove them from the order backlog after reviewing the situation in the first quarter of FY12. They added that assuming a write off of the Rs 62 bn of orders that were not moving, the uncertainties would prevail on Rs 36 bn orders which account for nearly 16% of the order backlog.

According to the management, the impact of the uncertainty over the Libyan projects on revenues will be in the range of 4-5% during FY12 as the Libyan orders were to be executed over a longer period (around 4 years). The impact on overall profitability cannot be ignored as these Libyan order were amongst the high margin orders.

Net positive in receivables from Libya

On the positive side, the company has not lost anything in the recently stalled Libyan projects. In fact the company is net cash positive in these projects as it has recovered the cost incurred (inclusive of equipment cost) till date on these projects in Libya. It had received Rs 4.8 bn as advances towards the 5 civil and infrastructure projects from Libya. The cost incurred on these projects was 2.15 bn. The company is net cash positive by 2.65 bn. Of the total cash, Rs 1.75 bn was lying in banks outside Libya however the rest is in joint accounts in Libya. In addition to this the management said, for the Rs 62 bn inactive projects there was no cost incurred towards mobilization of resources and crew.

Continues to bear cost on stalled Libyan projects

Punj Lloyd will continue to bear employee costs relating to such Libyan projects until the employees are re-deployed into new projects. It had 1,384 employees (Indian Nationals) deputed in its Libya projects. This is nearly 9% of its total employees. The company was looking to evacuate all its employees and said that these employees will be re-deployed in other projects over a period of time.

Management's view

Despite the recent unrest in Middle East countries, the management of Punj Lloyd continues to remain positive on the Middle East strategy and said it will continue to pursue opportunities in the region. It believes in the event of fall of the government in Libya the projects may continue to move on because of the need for infrastructure projects in the country.

Our view

Punj Lloyd is facing difficult times since the previous two years on account of contractual disputes, cost overruns and delayed execution of projects. As concerns loom large over its future in the Middle East and as the company struggles to maintain its topline growth, we feel the revival will not be as quick as expected by the management of Punj Lloyd. The political crisis that started from Egypt is spreading to other parts of Middle East countries and this cannot be ignored completely.

Going forward, it may find difficult to sustain higher margins it commanded previously on account of competition from Koreans and Chinese; and the lower margins in domestic business. We maintain our negative view on the stock.

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Feb 20, 2018 09:35 AM


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