There is no doubt that Larsen & Toubro (L&T) is the emperor in the offshore, process and infrastructure E&C segments. Punj Lloyd (PUNL) on the other hand, is one of the largest and experienced players in the pipeline and storage tanks terminal business.
For the sake of comparison, we will only look at L&T's E&C division performance in this article.
Click here to compare L&T AND Punj Lloyd.
A brief about the companies:
L&T is the largest player in the Indian E&C space. The company's overall capabilities include E&C, electrical and electronics, machinery & industrial products, IT & technology services, finance & HR and financial services. However, it's the company's E&C division that contributes nearly 70% of the organisation's revenues. The E&C division's capabilities include engineering, procurement and construction (EPC) projects for buildings, roads and bridges, marine projects, airports, offshore segment, process & power plants, defence systems and water treatment & distribution.
PUNL, on the other hand, is a smaller version of its peer's E&C arm. However, the company is considered to be among the largest and fastest growing engineering players in India, especially with vast experience in the pipelines business. PUNL provides EPC services to the oil & gas and infrastructure sector. The company's capabilities include pipelines, tanks and terminals, power, process plants, offshore, civil construction and infrastructure services. Like L&T, PUNL has recently ventured into providing equipment and services to the defence sector.
Order backlog and topline comparison:
L&T's E&C arm has an order backlog of nearly Rs 537 bn as on June 2008 (2.6 times its FY08 E&C divisions sales) while PUNL's order backlog stood at over Rs 200 bn (2.6 times its FY08 sales). PUNL's topline and order backlog have been rising rapidly over the past three years. As we can see in the adjacent chart, in FY04, L&T's order backlog was 7.1 times that of PUNL's, but at present times, it has come down to 2.7 times its peer's order backlog size. During the same period, the sales have tapered down to 2.7 times from 5.6 times in FY04. PUNL's acquisitions of Sembawang E&C (SEC) and its wholly owned subsidiary Simon Carves (SC) have been one of the main reasons behind this high growth. While PUNL's sales have been growing at a four-year CAGR of 49%, L&T's topline has been growing at a CAGR of 25% over the past four years.
Financial performance comparison:
Due to reasons such as the delay of road projects and the acquisitions' low margin legacy orders, PUNL's consolidated margins have significantly dampened since FY06. Infact, the company's EBIT margins have reduced to 7.4% as of its FY08 results as compared to 13.5% margins in FY04. On the other hand, L&T's performance has been steadily improving over the past few years. In FY08, the company's EBIT margins were 9.8% as compared to its FY04 margins of 7.5%.
Stock vs index performance:
The BSE Capital Goods index is one of the worst hit indices since the beginning of this year. Infact, L&T has fallen nearly 53% from its 52 week high, while PUNL has fallen a whopping 61% from its 52 week high as compared to the index, which fell by 49%. If one would have had invested Rs 100 in Punj Lloyd, L&T and the BSE Capital Goods index in January 2006 (since PUNL got listed then), it would have been worth Rs 120, 251 and 146 respectively as of today. Currently, PUNL is trading at Rs 222, a trailing twelve months price to earnings of 21x. L&T on the other hand, is trading at Rs 2,217, a price to earnings of 31x on trailing twelve months basis.
We believe that both these players will continue to dominate the E&C space going forward. We are positive on both the companies' future outlook, as the potential remains immense in the hydrocarbon and infrastructure space. Due to L&T's vast experience, size and long history, it will always continue to play a dominant role in the domestic E&C space. However, looking at PUNL's fast growth, it will not lag far behind its peer group leader.