Punj Lloyd Target 120

th

30 March, 2009

Punj Lloyd Ltd.

India

CMP:

Construction

Sovid Gupta

+911243024840 Equity Analyst: Fairwealth Securities Private. Ltd.

Rs. 86

Target:

Rs. 145

We initiate a buy on the stock on the basis of topline growth of 48% on a large base, its huge and continuously expanding order book, diversified operations, high dollar exchange rates and diversified operations. Currently the stock is trading at 8x FY08 EPS of 10.3. According to our estimates at current price of Rs. 86 P/E for FY09E and FY10E stand at 7.9 and 5.6 repectively. We believe that the stock has been oversold by the markets and has underperfromed sensex as well as other players in Contruction in Infrastructure segment like Larsen & Tubro and Patel Engineering over last 3 months. We initiate a buy on Punj Lloyd with a target price of 145. Our basis of valuation are sound fundamentals, aggressive growth and huge discounting to its peers.

Priced on March’30, 2009 ±% potential Target set on

+70% h

27 March

Future Estimates: Income Statement (Standalone Rs. Crore)

Market Data Beta 12M hi/lo Market cap, INR Crores Shares in issue (mn.) Reuters Bloomberg

1.3 376/ 69.2 2544.8 303 PUNJ.BO PUNJ.IN

Share Holding Pattern (%) Promoters FII Domestic Inst. & Corp Bod. Public & Others

44.0% 18.0% 16.0% 21.0%

FY11E

FY10E

FY09E

FY08

FY07

Net Sales

15408

12038

11250

7751

5139

Total Expenditure

14021

11075

10345

7128

4768

Operating Profit

1387

963

905

623

371

Interest

280

235

215

181

118

Depreciation Profit Before Tax before OI Other Income

205

180

175

145

106

902

548

515

298

144

120

120

112

183

122

PBT

1022

668

627

482

266

Tax

266

174

176

123

68

Net Profit

756

494

451

358

197

0

0

-92

26

2

EO Items & Min. Interest Adj Net profit

756

494

359

332

195

EPS

23.4

15.3

11.1

10.3

6.0

P/E

3.89

5.95

8.18

8.85

15.07

Source: Fairwealth Securities Research Estimates, Company data

Fairwealth Securities

Page 1

Punj Lloyd- Buy

Company has continued its outstanding topline growth of over 40% Y-o-Y.

Company’s profit however fell marred by: Other income of -96 crores due to forex losses on derivative contracts EO items to the tune of -214 crores effected by one time provisioning due to litigations.

Punj Lloyd JV secures Rs 1,311.19 crore contract for the execution of utilities in Souk Al Juma, Tripoli, Libya. The contract is Punj Lloyd’s fourth project in Libya taking Company’s total order book from Libya close to USD 500 million. This project includes EPC (engineering, procurement and construction) and commissioning of infrastructure networks, water-sewerage-stormwater mains & branch lines, roads & other facilities for Souk Al Juma. Punj Lloyd secured a contract from Municipal Corporation of Delhi for a value of Rs 304 crore for development of parking facility near Jawaharlal Nehru Stadium for the forthcoming Commonwealth Games- 2010.

Significant changes in Cost structure:

Won a contract worth Rs 264 crore from Airports Authority of India (AAI) to build Sikkim’s first Greenfield airport project in Pakyong.

Material Costs fell from 36% of sales to 27% of sales

Simon Carves Singapore has received a Letter of Intent of Rs. 152 crore from Exxon Mobil Asia Pacific Pte. Ltd for execution of an EPC for Jurong Strategic Study project, Singapore.

Contractor costs increased from 32% of sales to 41.4% in Q3FY09. EBITDA margins for the quarter went down by 80bps 7.3% from 8.1% in Q3FY 08 and 410 bps from 11.4% in Q2FY09.

Bagged a Rs. 105 crores contract from Cairn Energy India Limited for laying a crude oil heated and insulated pipeline for the Mangla Development Project in Gujarat. Punj Lloyd Indonesia bagged a Rs. 101 crore contract from PT Shell Indonesia for the EPC of new fuel terminal at Pulau Laut, Kalimantan, Indonesia.

Quarterly Result Round up: Q3 FY09 Net Sales Expenditure Material Cost % of Sales Contractor Charges % of Sales Employee Expenses % of Sales Other Expenses % of Sales Operating Profit EBIDTA Other Interest Depreciation PBT Tax PAT Extra-Ordinary PAT EPS

3,143 2,913 845 26.9 1,301 41.4 318 10.1 449 14.3 230 7.3 -96 62 43 29 41 -12 -214 -225 -0.4

Q3 Fy08 2,117 1,945 761 36 674 31.9 239 11.3 269 12.7 172 8.1 46 28 36 153 30 122 -31 92 4.2

Y-o-Y Growth(%) 48.5 49.8 11 92.8 32.7 66.7 33.6 -80 118.1 18.5 -80.9 34.8 -

Q2 FY09 2,953 2,615 1,047 35.5 842 28.5 269 9.1 458 15.5 337 11.4 -37 49 44 208 65 143 144 4.7

QoQ(%) 6.4 11.4 -19.3 54.5 18.2 -1.9 -31.7 -410 -159.4 26.5 -1.3 -85.9 -35.7 -

Source: Company Data, Capital Line

Fairwealth Securities

Page 2

Punj Lloyd- Buy Company Description: Punj Lloyd is a globally diversified conglomerate providing engineering, procurement and construction services in Oil & Gas, Petrochemical and Infrastructures sectors. Starting with construction of pipelines, the company is now into construction of refineries, tanks & terminals, civil infrastructure and power plants. It also provides broadband services on its optical fiber network. Presently has 16 offices worldwide with operations spread across Middle East, Asia Pacific, Europe, South Asia, the Caspian, Africa and China. In 2007, it tied up with Pipavav shipyard. The company ventured into defence equipment manufacturing by entering into a partnership with Singapore Technologies Kinetics in 2008. The company partnered with Thorium Power in 2008 for Nuclear energy making it the first company in India to partner with an American nuclear company.

Valuations: Company’s huge order book along with high growth on large base is witness to company’s EPC capabilities. Company has order book of ~ 190000 crore which is 2.5 times 2008 order book and second only to Larsen and Tubro among Indian Companies. Diversified operations both Geogrophically and in technical ability makes the company flexible to take advange of sectoral booms. Company has technical expertise in Power, Construction and Defence sectors all of which have huge financial commitments from the governments over next two 5 year plans, Punj Lloyd is well poised to take advantage of these opportunities. We expect revenue to grow by 10% for FY10E citing tough economic conditions, and 25% for FY11E on conservative estimates, lower Debt-Equity ratio will ensure that company doesn’t have much difficulty in raising new debt to fund its working capital requirement. We initiate a buy call on Punj Lloyd with target of Rs. 120 on lower side with further upside potential.

Fairwealth Securities

Page 3

Punj Lloyd- Buy

Key Risks: SABIC UK has invoked Rs. 218 crore bank gaurantees aganinst Punj Lloyd Ltd.Company has not yet written off these gaurantees, and the case is under litigation if the outcome is unfavorable it could lead to further one time write downs. 18% order book is delayed, although most of them are client led, there could be further delays in time to come. Foreign currency exchange rate fluctuation risks exist, however we believe they are managable. Uncertain future economic conditions have increased the risk weightage of all Engineering Procurement and Construction companies as many projects might not actually take off. There will be lesser new orders going forward for the 2-3 quarters as things are still in wait n watch scenario. Change in raw material prices is not a significant risk factor as projects costs are variable with raw material costs.

Punj Lloyd share prices have fallen by more than 80% over last one year, while share prices for Larsen and Tubro have fallen by only 60 th percent. Since 15 November there has been a huge dip in Punj Lloyd’s share prices while peer group companies like L&T and Patel Engineering have over performed the stock. We expect short term recovery in the stock to sustain riding on current uptrend, while the long term fundamentals remain sound.

Source: Capital Line

Fairwealth Securities

Page 4

Punj Lloyd- Buy

Investment Rational 

Punj Lloyd is a globally diversified conglemerate with 30% of the projects in South-



Asia and 70% in other countries. The company’s order book grew significantly during FY08 to Rs.195.96bn up 23% YoY and is 2.5 times its FY08 sales.

   

Company has strategic stake in Pipav Shipppping Yard Company which will help in taking part in marine defence proejcts of Indian Govt. Company has tied up with Thrium power for nuclear power projects and also has prior experience of establishing power plants. Growth in demand and supply of natural gas will result in demand for pipeline infrastructure for gas transportation. Punj Lloyd with established expertise in the same will beneift. High dollar exhange rate is aiding the company in posting increased topline.

TECHNICAL OUTLOOK: Punj Lloyd

Punj Lloyd has shown good support around. 78-80. The stock bounced back from lows of 69. One could buy stocks at dips for a target of 105 first and then 120.

Fairwealth Securities

Page 5

Punj Lloyd- Buy

Annexure: 1. Income Statement: Fund Flow Statement:

Income Statement

200803

2008(12)

2007(12)

2006 (12)

200703

200603

7760

5139

-8

-3

-2

7751

5136

1725

Raw Materials

2820

1635

549

Other Manufacturing Expenses

2371

1532

445

892

637

186

SOURCES OF FUNDS : Share Capital 61 Reserves Total 2657 Total Shareholders Funds 2718 Minority Interest 22 Secured Loans 1351 Unsecured Loans 256 Total Debt 1607 Total Liabilities 4347 APPLICATION OF FUNDS : Net Block 1411

1276

579

Capital Work in Progress

213

86

139

Investments

546

170

42

1686

804

INCOME Net Sales Stock Adjustment Total

1727

Expenditure :

Employee Cost Selling and Administration Expenses

622

558

258

Other Expenses

421

407

112

7126

4768

1551

Total Expenditure

52 1227 1279 6 1123 576 1699 2984

52 1069 1122 1 492 64 556 1679

Current Assets, Loans & Advances

Operating Profit

625

369

174

Inventories

2059

Interest

181

119

79

Sundry Debtors

2090

1223

394

Gross Profit

445

250

95

Cash and Bank

690

1003

112

Depreciation

146

106

60

Loans and Advances

743

497

237

Profit Before Tax before OI

298

144

35

Total Current Assets

5582

4410

1548

Other Income

183

122

49

PBT

482

266

84

Less : Current Liabilities and Provisions

Tax

123

69

29

3173

2728

539

139

165

29

Total Current Liabilities

3312

2892

568

Net Current Assets

2270

1517

980

-92

-65

-61

4347

2984

1679

541

1002

242

Net Profit EO Items & Min. Interest Adj Net profit

358

197

55

26

2

-1

332

195

56

Current Liabilities Provisions

Net Deferred Tax

Source: Company Report, Capital Line

Total Assets Contingent Liabilities

Source: Company Report, Capital Line

2. Cash Flow Statement: 200803 Cash Flow Summary Cash and Cash Equivalents at Beginning 995.54 of the year

200703

200603

95.38

43.18

59.99

-1.37

Net Cash from Operating Activities

-527.78

Net Cash Used in Investing Activities

-734.78

-222.56

-257.16

Net Cash Used in Financing Activities

901.72

1062.73

327.51

-360.84

900.16

68.98

634.7

995.54

112.16

Net Inc/(Dec) in Cash and Cash Equivalent Cash and Cash Equivalents at End of the year

Company has negative Operating cash flows, which is not abnormal for any high growth Constrcution industry company as it has huge working capital requirements.

Source: Company Report, Capital Line

Fairwealth Securities

Page 6

Punj Lloyd- Buy

Disclaimer This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. While the information contained therein has been obtained from sources believed to be reliable; investors are advised to satisfy themselves before making any investments. Fairwealth Securities Pvt Ltd does not bear any responsibility for the authentication of the information contained in the reports and consequently, is not liable for any decisions taken based on the same. Further, Fairwealth Research Reports only provide information updates and analysis. All opinion for buying and selling are available to investors when they are registered clients of Fairwealth Investment Advisory Services. As a matter of practice, Fairwealth refrains from publishing any individual names with its reports. As per SEBI requirements it is stated that, Fairwealth Sec Pvt Ltd., and/or individuals thereof may have positions in securities referred herein and may make purchases or sale while this report is in circulation.

Fairwealth Securities

Page 7