Punj Lloyd: Buy

>> Tuesday, September 1, 2009

Punj Lloyd is a key beneficiary of the revival in activity in global oil and gas exploration and production, trigerred by a revival in crude oil prices. Order inflows of Rs 10,000 crore in the June quarter alone is a clear indicator of the revival.

The worst of the impact from the contentious contract of its subsidiary also seems to be over. Investors with a two/three-year perspective can consider investing in the stock, which currently trades at 13 times its expected consolidated per share earnings for FY-11. The equity base includes the recent institutional placement.

After two consecutive quarters (ending March 2009) of losses and tepid order flows, Punj Lloyd has made a positive start in the first quarter of FY-10. Apart from moving into the positive earnings territory with a healthy 14 per cent growth in consolidated profits in the June quarter, the company surprised markets with a massive order inflow that took its order book to Rs 27,900 crore, up 38 per cent over the year-ago period and 2.3 times its FY-09 revenues.

This surge in orders can be attributed to two reasons: One, a revival in capex spends in the areas of oil and gas pipeline, storage tanks and terminals and process facilities, on the back of stabilisation in crude prices as well as recent discoveries. Two, the crude oil price rally in 2009, which means a revival in the spending activity of economies such as West Asia and North Africa. In fact, it is the latter (Libya being a key contributor to orders) that has triggered the order flow for Punj Lloyd. With crude oil remaining range bound and contract values lower than a year ago, we expect Punj Lloyd to receive a spate of projects in the infrastructure space from these geographies.

Another key development is the company’s successful qualified institutional placement of Rs 670 crore in August. The funds would provide for the company’s heightened working capital requirement, and replace high-cost debt. This could, in turn, ease interest costs which have doubled over the past one year.

Punj Lloyd saw a two percentage point increase in its operating profit margins to 10.4 per cent in the latest quarter. However, with the present orders tilted in favour of infrastructure rather than pipelines, Operating Profit Margins are unlikely to cross the 10 per cent mark in the medium-term. Cost over-runs in fixed-price projects could also cause volatility in earnings.
Source : Hindu Business Line

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