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Punj Lloyd: Acquisition pangs - Views on News from Equitymaster

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Punj Lloyd: Acquisition pangs
Oct 24, 2009

Performance summary
  • Consolidated sales grow by 5% YoY during 1HFY10; drop by 2% YoY during 2QFY10.
  • Operating margins remain flat at 8.7% during the first six months of FY10. However, for 2QFY10, operating margins fall by 1.8% YoY.
  • Net profits during 1HFY10 fall by 30% YoY. This is on the back of lower other income and higher interest and depreciation costs.
  • Order backlog at the end of September 2009 stood at Rs 268 bn (2.3 times FY09 sales).


Consolidated financial snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net Sales 29,261 28,764 -1.7% 55,748 58,316 4.6%
Expenditure 26,536 26,596 0.2% 50,907 53,230 4.6%
Operating profit (EBITDA) 2,724 2,168 -20.4% 4,841 5,086 5.1%
Operating profit margin (%) 9.3% 7.5%   8.7% 8.7%  
Other income 280 (43) -115.3% 375 196 -47.6%
Depreciation 439 514 17.1% 830 1,055 27.0%
Interest 490 796 62.3% 859 1,539 79.3%
Profit before tax 2,076 816 -60.7% 3,526 2,688 -23.8%
Extraordinary income/(expense) - -   204 -  
Tax 647 301 -53.4% 1,177 923 -21.6%
Profit after tax/(loss) 1,429 515 -64.0% 2,553 1,765 -30.9%
Share in profits/(losses) of associates 9 31   (0) 12  
Minority interest 3 (18)   7 23  
Net profit 1,441 529 -63.3% 2,560 1,800 -29.7%
Net profit margin (%) 4.9% 1.8%   4.6% 3.1%  
No. of shares (m)       303.5 331.7  
Diluted earnings per share (Rs)*#         (9.2)  
P/E ratio (x)#         NA  
* Adjusted for extraordinary items; # On a trailing 12-months basis.

What has driven performance in 2QFY10?
  • Punj Lloyd’s (PUNL) topline fell by 2% YoY during 2QFY10. This performance is attributable to its process and infrastructure segments, where sales fell by nearly 37% YoY. However, the company’s pipelines division grew by nearly 100% YoY.

  • PUNL’s operating profits decreased by 20% YoY during the quarter. The operating margins contracted by 1.8% mainly on the back of higher raw material expenses (as a percentage of sales).

  • On the back of a weak operating performance, lower other income and higher fixed charges of depreciation and interest as compared to 2QFY09, PUNL recorded a fall in its bottomline (down 63% YoY) during 2QFY10.

What to expect?
PUNL continues to face challenges with regards to the performance of its wholly owned subsidiary Simon Carves UK, which was executing a bio ethanol project in UK and there were cost overruns owing to delays in completion of project and poor productivity from the company’s sub contractors. Simon Carves during the 2QFY10 incurred a loss of Rs 1,040 m on this project.

These were related to the construction part of this project as this is where most of the work is done through sub contractors which were paid on time costs basis. Thus Simon Carves has had to bear the costs of their low productivity levels. This, the company has expressed, was not anticipated and also happened due to the environment in the UK being such that productivity levels took a beating and it became difficult to control the contractors. The company has taken the stand of not signing any more such contracts in the UK from here on.

PUNL currently has an order backlog from infrastructure projects of Rs 98,481 m in Libya, however no revenues and margins for this projects has been booked in the period under review. The management has indicated that revenues and margin bookings on these projects are expected to start from 3QFY10. The orders from Libya currently from about 30% of the company’s overall order backlog.

The company as at the end of September 2009 had an order backlog of Rs 268 bn. During the entire 1HFY10, PUNL secured new orders of Rs 114 bn as compared to Rs 67 bn booked in 1HFY09, a growth of 70% YoY.

As per the PUNL’s management, few legacy orders from its acquired company Sembawang E&C are still left and have a value of about Rs 2.5 bn currently on which no cost overruns are expected going forward.

The company is seeing robust bidding activity happening currently and is optimistic about the future activity in the infrastructure and process industry spaces. Considering the level of uncertainty surrounding the investments environment and unexpected execution problems being continually faced by the company, it would be difficult to make any safe assumptions on the company’s performance going forward. However, we shall be able to have a more concrete view on the company post a meeting with the management.

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