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Punj Lloyd v/s Praj: A comparative study - Views on News from Equitymaster

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Punj Lloyd v/s Praj: A comparative study
Dec 26, 2008

Punj Lloyd (PUNL) and Praj Industries (Praj) are companies both highly dependent on crude prices and subsequently on the investments trend in their respective segments. Although in different areas of interest, both the companies are leading services and solution providers in their respective segments. In this article, we shall have a look at some of the important financials of these companies and compare them against each other.

Details PUNJ LLOYD PRAJ
P/L (4-yr CAGR)
Sales growth 48.5% 59.0%
Profit growth 35.5% 111.8%
Valuations
Current P/E 10.8 7.6
P/BV 1.7 3.3
Historical P/E band 10 to 160 1 to 49
Key ratios (5-yr avg)
ROE 13.1% 43.4%
ROIC 9.6% 64.0%
Dividend payout 2.3% 42.8%
Leverage ratios (FY08)
Debt to Equity 0.7 (incld FCCB) 0
Interest coverage 3.8 NA
Order details
Order Backlog (Rs bn) 217 10
Order backlog to sales (FY08) 2.8 1.3
Execution time (Avg) 24 to 36 months 12 to 14 months
1HFY09 Performance
Sales growth (YoY) 70% 15%
Profit growth (YoY) 72% -1%
Change in operating margins 0.0% 10.3%
Change in profit margins 0.1% -2.4%

Profit and loss

Like most of the capital goods sector companies, both these companies have seen their revenues grow at a strong pace over the past four years. However, Praj has overtaken PUNL in this aspect, registering a compounded growth rate of 59% over the past four years. PUNL, on the other hand, has recorded a compounded growth rate of 49%. Similar is the case with the bottomline as well. Praj has recorded a growth rate of a whopping 112% over the past four years. The reason for this strong growth has been due to the companyís ability to expand its margins significantly.

Valuations

In terms of valuations, Praj is currently trading at a price to earnings multiple of 7.6 its trailing twelve month earnings, which is relatively cheaper as compared to PUNLís multiple of 10.8. The stock of Praj has taken a beating in the year till date falling by nearly 76% from its 52-week high. The reason for the same is mainly due to the sharp fall in crude prices, which makes other technologies economically less competitive. However, on a price to book value parameter, PUNL is a better bargain.

Key ratios

In terms of return on equity (ROE), return on invested capital (ROIC) and dividend payout, Praj scores over PUNL in all aspects. The average ROE and ROIC over the past five years stood at 43.4% and 64% respectively for Praj. It should be noted that the company has been able to record impressive ratios despite zero debt. This puts the company in a better position during a downturn. In addition, its dividend payout ratio has been an impressive 42.8% over the last five years.

Order backlog position

A high order backlog to sales ratio provides strong revenues visibility for a company going forward. However, it very much depends on the nature of the companyís business. For example, PUNL carries out large scale projects which take anywhere between 24 to 36 months. On the other hand, Praj takes anywhere between 12 to 14 months to execute projects.

Keeping this in mind, we shall compare their order books positions considering that it is an important parameter for capital goods sector companies. PUNL has an order book to sales ratio of nearly 2.8 times, which is amongst the highest in the capital goods sector. The company has seen its order books surge over the past few years, especially after acquiring Sembawang Engineers and Construction in 2006. However, on the flip side, it should be noted that long duration contracts could possibility lead to deferments or cancelations. Even volatility in input costs is a factor that needs to be considered.

Praj, on the other hand, has an order book to sales ratio of nearly 1.3 times its FY08 revenues. As mentioned earlier, considering its shorter execution period, it provides a healthy revenue growth for the future.

On a comparative basis, both the companies are well placed when it comes to their order backlog position.

Conclusion

PUNL and Praj are both attractively valued at the current prices. However, itís the movement in crude prices that will really affect their business going forward. While Praj is completely dependent on the crude prices, the fact that the need for biofuels exists will drive its growth going forward.

On the other hand, PUNL has been growing quickly and improving its performance consistently over the past few quarters. While the company has built up a huge order backlog to work upon, itís the execution of the same that will remain the key. In addition, similar to Praj, the company is highly dependent on crude prices, which in turn will decide the investment scenario in the hydrocarbon and infrastructure spaces.

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