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Punj Lloyd : A brief overview (Part II) - Views on News from Equitymaster

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Punj Lloyd : A brief overview (Part II)

Jul 11, 2007

In our previous article, we covered the various segments in which Punj Lloyd operates. In this article we will analyse the financials of the company and understand the reasons behind the past underperformance as well as the future prospects of the company. Financial Performance: In the period between FY04 and FY07, Punj Lloyd reported a 47% CAGR in revenues. However, save for the strong performance registered in FY07 (204% growth YoY), the topline growth during the period has been lackluster. In fact, the company witnessed de-growth of 6% YoY in FY06. Although, the performance of the oil and gas division has been satisfactory, there have been huge delays in execution of road projects undertaken by the company in Assam and Rajasthan on account of non-availability of right-of-way. These road projects together accounted for 24% of the total order book in FY06.

Consolidated numbers
Particulars (Rs m) FY04 FY05 FY06 FY07UA CAGR/Average*
Net Sales 15,943 17,900 16,847 51,266 47.6%
Expenditure 13,004 15,788 15,105 47,523
Operating Profit (EBIDTA) 2,939 2,112 1,742 3,743 8.4%
EBITDA margin (%) 18.4% 11.8% 10.3% 7.3% 12.0%
Other income 244 720 319 794
Interest 1,184 1,333 627 825
Depreciation/amortisation 689 887 604 1,062
Profit before tax 1,310 611 831 2,650
Extraordinary items 0 584 0 0
Tax 256 194 292 690
Profit after tax 1,054 1,001 540 1,960 23.0%
Share of profits in associates 7 3 8 10
Minority intrest 2 2 7 3
Adjustment of pre-acquisition profits - - - (3)
Net profit 1,063 1,006 555 1,969 22.8%
Net profit margin (%) 6.7% 5.6% 3.3% 3.8% 4.9%
Effective tax rate 19.5% 31.7% 35.1% 26.0%
No. of Shares (m) 20.6 24.3 52.2 52.3
Diluted earnings per share (Rs)** 51 41 11 38
* 3 year CAGR and 4 year average ** not adjusted for split in face value of shares

Order flow for the company has been robust in the past few years, especially in FY07. As can be seen below, the growth in order backlog stood at a robust 206% YoY. This shows that the company has been able to exploit the upsurge in capex cycle in its area of competence i.e. oil & gas and petrochemicals.

Operating parameters
Particulars FY04 FY05 FY06 FY07
Order book 24,458 32,400 52,318 160,000
% change - 32.5% 61.5% 205.8%
Orderbook/sales 1.5 1.8 3.1 3.1
Execution rate - 73.2% 52.0% 98.0%

Operating margins have witnessed a continuous decline over the past few years. Considering that the company undertakes complex projects, the lower operating margins would come as a surprise. As mentioned earlier, the profitability of the company has been affected by the delays in the road projects undertaken by the company. For FY07, the decline in margins was mainly due to the acquisition of Sembawang E&C (SEC). The idea behind the acquisition was not to increase profitability, but to expand the competency. In FY07, SEC operated at a margin of mere 1.2%. Hence, although the company has contributed to the topline (around Rs 21 bn), the contribution at the net profit level has been nil. On a standalone basis, the company witnessed an improvement in operating margins, which stood at 9.3%, compared to 7.3% at the consolidated level.

Due to lower operating margins and higher depreciation costs, the growth in profits has been considerably lower in the past. However, due to increase in margins of the standalone business, net profit for FY07 grew by 255% YoY compared to 204% growth in topline. This substantiates the argument that the company is back on track as far as the standalone performance is considered. What lies ahead? The consolidated order book of the company at the end of FY07 was around Rs 160 bn, which is expected to be executed over the next 24 to 30 months. Out of the total order book, SECís share is around Rs 40 bn and from the remaining, 55% to 60% are legacy orders, which have been booked at a margin of 1.5%, while the rest are new orders, which have been booked at 7.5%. As far as Punj Lloyd is considered, the margins for the new order book is in the range of 11.5%. Hence, going forward, the operating margins for the company will depend upon the growth witnessed between these two entities. The company expects to do a capex of Rs 4 bn each for the next three years. Going forward, we expect company to witness huge order inflows, especially with the recent upsurge in oil& gas sector on the back of strong oil prices.

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