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Punj Lloyd: Maintains strong momentum - Views on News from Equitymaster

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Punj Lloyd: Maintains strong momentum

Jul 30, 2008

Performance summary
  • Consolidated net sales surge by 90% YoY during 1QFY09, led by strong growth in the company’s engineering and construction business.
  • Operating profits increase by 74% YoY. However, margins contract by 0.7% on the back of higher contracting charges, staff costs and other expenses (all as percentage of sales).
  • Net profits grow by 88% YoY during the quarter. This however includes a one time extraordinary income on sale of the ISP division. Even excluding the same, the net profit growth stands at a strong 64% YoY. This would have been even higher but for a decline in other income and substantial rise in tax expense.
  • Order backlog at the end of June 2008 stood at Rs 202 bn.

Consolidated financial snapshot
(Rs m) 1QFY08 1QFY09 Change
Net Sales 13,950 26,488 89.9%
Expenditure 12,735 24,371 91.4%
Operating profit (EBITDA) 1,214 2,116 74.3%
Operating profit margin (%) 8.7% 8.0%
Other income 230 94 -59.1%
Depreciation 355 392 10.5%
Interest 289 368 27.5%
Profit before tax 801 1,451 81.1%
Extraordinary income/(expense) - 143
Tax 206 469 127.5%
Profit after tax/(loss) 595 1,124 89.1%
Share in profits/(losses) of associates - (10)
Minority interest (0) (4)
Net profit 595 1,119 88.0%
Net profit margin (%) 4.3% 4.2%
No. of shares (m) 261.3 303.4
Diluted earnings per share (Rs)*# 13.5
P/E ratio (x)# 23.0
* Adjusted for extraordinary items
# On a trailing 12-months basis

What has driven performance in 1QFY09?
  • Punj Lloyd (PUNL) recorded a topline growth of 90% YoY during 1QFY09. This performance can be attributed to strong showing by the company’s pipelines, process and infrastructure divisions. The company’s order backlog has increased at a robust pace since last year. In addition, the company’s average ticket size of orders has increased to a level of US$ 200 m from US$ 30 m two years back. The order backlog at the end of June 2008 stood at Rs 202 bn as compared to Rs 156 bn at the end of June 2007.

  • PUNL has had strong order inflows from projects in the hydrocarbon space in the past few quarters. As compared to infrastructure projects, these projects have lesser gestation period. Because of quick revenue recognition from the hydrocarbon space, coupled with other segments, the company has been able to achieve such a strong growth in sales during 1QFY09. Geographically, PUNL earned twice as much revenues from regions such as Africa, Europe and South East Asia during the quarter. Its wholly owned subsidiary Sembawang E&C (SEC), contributed a major portion of the South East Asia region. Domestic sales contributed to nearly 30% of the total sales during 1QFY09.

  • PUNL’s operating profits increased by 74% YoY on the back of a strong growth in revenues. However, due to a faster growth in expenditure the company’s operating margins declined by 0.7% YoY. During the quarter, the contracting expenses were 34.1% of sales as compared to 25.7% during 1QFY08. Raw material costs dropped significantly from 37.2% of sales in 1QFY08 to 26.5% during 1QFY09.

  • PUNL’s net profits grew by 88% YoY during the quarter, on the back of a strong topline performance. However, the bottomline includes a one-time income of Rs 143 m on account of sale of the ISP division. Even after excluding this, the bottomline growth stands at 64% YoY.

What to expect?
At the current price of Rs 272, the stock is trading at a multiple of 9.6 times our estimated FY10 earnings. The company’s management, in its conference call held today, mentioned that they are not witnessing any slowdown in investments. As a matter of fact, they mentioned that investments have been growing strongly in the global space, especially in the high growing regions like North Africa and the Middle East. During the quarter, PUNL won three large contracts, the largest being Rs 6.5 bn motor spirit quality upgradation project from IOCL. Also, earlier this month, PUNL won one of the largest power sector orders in the country till date worth Rs 10 bn from GVK Power for setting up civil structures (on EPC basis) and balance of plant work.

1QFY09 also saw the company make its foray into the defense sector by tying up with ST Kinetics, a Singapore based company, for manufacturing of defense equipment. This joint venture will primarily target the Indian defense sector and gradually move to the export markets. As these contracts have long gestation periods (2 to 3 years), revenue recognition from this segment is not likely in the medium term. The company acquired 74% stake in Technodyne International, a UK based cryogenic and large-scale tanks specialist providing engineering, design and consultancy services. This strategic acquisition will benefit PUNL by strengthening its capabilities in this segment.

During the previous quarter, PUNL had made a provision of Rs 3 bn for losses on certain legacy orders (due to cost overruns). However, during 1QFY09, the legacy order’s original client agreed to compensate for nearly 36% of the cost. The company’s management expects the balance payment to be made some time in the future. We maintain our positive view on the stock from a 2 to 3 year perspective.

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