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Punj Lloyd: What the future holds - Views on News from Equitymaster

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Punj Lloyd: What the future holds
Aug 21, 2008

FY08 was a very significant year for Punj Lloyd. The company recorded a sales growth of 52% YoY while its profits increased by an incredible 82% YoY (including an extraordinary item). Apart from a strong set of results, the company also made some positive developments during the year. It made its foray into several diverse segments like upstream (rigs), shipping, defense and aviation. However, revenues from most of these forays are likely to come in the books after a period of 2 to 3 years.

  • Also read - Punj Lloyd: A brief overview

    In the company’s 1QFY09 conference call, the management gave its views on the global and Indian economic environment and how they were not really seeing signs of sharp slowdown in business activity. The management’s views remained very optimistic about the investments in infrastructure and hydrocarbon spaces especially in the other high growth regions like North Africa and Middle East. A quote from the company’s annual report described the management’s outlook on the Indian opportunity – “In the years to come, the pace of infrastructure development is only expected to increase. Regardless of the impediments along the way over the next few years, the sector is expected to continue to record high rates of growth”.

    The management has further indicated that "macroeconomic fundamentals continue to inspire confidence and the investment climate is full of optimism. FDI inflows have jumped by almost three times to USD 15.7 billion in 2006-07 as against USD 5.5 billion in 2005-06. With positive indicators such as high GDP growth, rising foreign exchange reserves, a booming capital market and rapidly expanding FDI inflows, India is on the fulcrum of an ever-increasing growth curve. India Inc invested an overwhelming 81 per cent of its planned total investment of USD 104 billion during April-December 2007-08 in developing core, physical and service infrastructure. The Government has undertaken many proactive measures like opening up the infrastructure sector to private players, permitting Foreign Direct Investment into various segments, introducing model concession agreements, significantly increasing allocation to road infrastructure, taking up new projects like the National Highway Development Project, generating additional power capacity of about 70,000 MW, adding capacity in major and minor ports, modernising and redeveloping railway stations and metro and non-metro airports, etc."

  • Also read - Opportunities in infrastructure

    We believe that for India to sustain a strong GDP growth going forward, continued investments in building good quality infrastructure is the key. Hiccups such as the current inflationary and economic scenario will come along the way. However, India being one of the fastest growing countries in the world will continue to witness investments flowing into infrastructure activities over the next many years. As such, companies from the capital goods and engineering space are likely to continue to benefit from the large investments, though not in equal proportions.

    In the last few years, Punj Lloyd has been one of largest beneficiaries from the global infrastructure spending. At the end of June 2008, the company had an order backlog of Rs 202 bn as compared to Rs 24.5 bn in FY04 (compounded annual growth of 69%). In the annual report, the management has also mentioned that the company's average ticket size of orders has risen to nearly US$ 150 m in FY08 as compared US$ 100 m in the previous year.

    What to expect?
    At the current price of Rs 279, the stock is trading at a multiple of 9.8 times our estimated FY10 earnings. Given the growth visibility and discounting the execution risks that it entails, we maintain our view on a stock from a two to three years perspective.

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