Indiabulls Securities puts SELL on Punj Lloyd

Report by Indiabulls Securities

Punj Lloyd reported a strong performance in H1’09 with a 69.5% y-o-y jump in the consolidated revenues and a 62.3% y-o-y surge in the adjusted net profit.

While Punj Lloyd’s order backlog remains robust at Rs216.75 billion (as on 30 September, 2008) and provides revenue visibility for the next 18-24 months, the order inflow is likely to take a hit due to the deepening credit crisis and the consequent global slowdown.

We believe that the growth in the order backlog will decelerate to 9% in FY10, compared with 22.9% in FY08.

Consequently, we expect the top-line growth to slow down to 27% in FY10, compared with 51.2% y-o-y in FY08, and decline further in FY11 as the lag effect of the slowdown in the order backlog growth is felt on the top line.

We expect the EBITDA margin to improve by 74 bps to 9% over FY08-10 as its low-margined legacy orders are nearing completion and the new order inflows to the subsidiary Sembawang Engineers and Constructors (SEC) are at 7%–7.5% margins.

The Company has recently secured quite a few pipeline projects, which have higher margins than the infrastructure projects. Meanwhile, the average order size is expected to rise, leading to economies of scale. Moreover, commodity prices have also started softening.

However, Punj Lloyd’s EBITDA margin is likely to remain lower than that of its closest but much larger peer, Larsen and Toubro, whose EBITDA margin is expected to be in the range of 12%-13% over the same period.

The stock is currently trading at a forward P/E of 10.3x for FY09. Our DCF-based fair value estimate of Rs174 reflects a potential downside of 12.4% from the current market price.


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