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Punj Lloyd: Strong overall performance - Views on News from Equitymaster

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Punj Lloyd: Strong overall performance

May 31, 2008

Consolidated results performance summary
  • Consolidated net sales grow by 51% YoY during FY08, 38% YoY in 4QFY08. Actual topline figure 2% lower than our estimates.
  • Operating margins expand by 1% YoY owing to lower staff costs and other expenditure (as percentage of sales).

  • Consolidated bottomline surges 82% YoY during the fiscal. This robust growth largely aided by expansion in operating margins. Actual profit figure 3% lower than our estimates.

  • Recommends dividend of 40 paise per share (dividend yield of 0.1%)

Consolidated financial performance
(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Net Sales 17,036 23,467 37.8% 51,266 77,529 51.2%
Expenditure 15,329 20,981 36.9% 47,523 71,122 49.7%
Operating profit (EBITDA) 1,707 2,486 45.7% 3,743 6,407 71.2%
Operating profit margin (%) 10.0% 10.6% 7.3% 8.3%
Other income 164 (183) - 794 811 2.1%
Depreciation 329 409 24.3% 1,062 1,462 37.8%
Interest 258 326 26.3% 825 1,292 56.5%
Profit before tax 1,283 1,568 22.2% 2,650 4,464 68.4%
Exceptional item - - (3) 371
Tax 398 374 -6.0% 690 1,235 79.1%
Share in profit from associates 10 (17) 10 (17)
Pre-acquisition profits* (3) - - -
Minority interest (2) 0.4 3 1
Profit after tax/(loss) 889 1,177 32.4% 1,969 3,584 82.0%
Net profit margin (%) 5.2% 5.0% 3.8% 4.6% 3213
No. of shares (m) 261.3 303.4 4.14%
Diluted earnings per share (Rs) 6.5 11.8
P/E ratio (x) 27.1
*Adjusted against goodwill

What has driven performance in FY08?
  • Punj Lloyd (PUNL) recorded a strong 51% YoY growth in revenue during FY08. The company witnessed good contribution from all its areas of business. Its core competency - pipeline and tanks, combined, contributed nearly 32% to the topline. While the pipelines business recorded sales growth of 53% YoY during the fiscal, growth tankages stood at a whopping 123%, though on a low base. The other two major segments of infrastructure and process grew sales by 222% YoY and 463% YoY respectively during the fiscal and together formed 65% of sales (23% in FY07). This is positive news for the company as its dependence on its pipelines division is reducing steadily as other businesses are picking up momentum. Another positive for PUNL is that its ESO (engineering service outsourcing) company, Simon Carves India, although contributing very marginal figure to the topline, has emerged profitable in its very first year of operations, earning profit margins in excess of 9%.

  • PUNLís operating margins expanded by 1% YoY during FY08. This was mainly attributable to reduction in its staff costs and other expenditure (both as percentage of sales). The improvement in operating margins would have been better but for a sharp rise in raw material costs Ė from 31.9% of sales in FY07 to 36.5% in FY08.

  • On the back of a strong topline performance as also the expansion in operating margins, PUNLís grew its bottomline at a string rate of 82% YoY during FY08. During the year, the company earned an extraordinary item of Rs 371 m, which when excluded from the profits, leads to a bottomline growth of 63% YoY.

What to expect?
At the current price of Rs 320, the stock is trading at a multiple of 10.6 times our estimated FY10 earnings. The management of PUNL, in its press release, has stated that they are expecting and have been witnessing high investments happening in their core business spaces of hydrocarbon and infrastructure. The spiraling oil prices have been the main reason for such high investments in the hydrocarbon space. Just to put things in perspective, the company has stated that investments in Gulf countries alone are expected to cross US$ 1.2 trillion in the coming few years. The company also stated that the other sectors namely, power and petrochemicals have also been enjoying good traction.

At the end of May 2008, PUNLís order backlog stood at Rs 196 bn (2.5 times if FY08 consolidated revenues). This provides the company a strong visibility for growth over the next 2-3 years. On the back of opportunities in the oil & gas EPC (engineering, construction and procurement) space and PUNLís aggressive growth and business de-risking strategy, we estimate the companyís sales and profits to record strong growth going forward. Also, while the acquisition of SEC and Simon Carves have impacted the companyís margins on a consolidated basis (due to SECís low margin legacy orders), we expect cost control measures and economies of scale (owing to increase in average order size) to benefit the companyís profitability over the next 2-3 years. Overall, we maintain our positive view on the stock from a 2 to 3 years perspective.

The company reported in its conference call yesterday, that it expects some losses on account of cost over-runs in the future for which is has not made provision in FY08. These losses are around Rs 3 bn (4% of the companyís consolidated FY08 sales), and are expected on account of cost over-runs in one of its subsidiary, Simon Carvesí legacy contract. However, the management has also stated that the amount is currently in negotiation and that it is expecting a payment of about US$ 29 m from the client in the coming quarter and the balance in the coming future.

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