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When Punj Lloyd declared an uninspiring performance for 2007-8, analysts wrote it off as a company that had not delivered. The immense potential of its global presence and multifarious business mix in construction/EPC remained unrealised, it seemed. The fourth quarter consolidated revenues were up 38% at Rs 2,347 crore, while the net profits moved at 32% to Rs 89 crore.
The full year revenues showed an absolute growth of 51% at Rs 7,753 crore, but were not comparable with the previous year’s figures (due to acquisitions). At under 6%, one-third of which were the “other income” and exceptionals, Punj Lloyd’s net profit margin for the year was falling below the danger mark.
A design and EPC specialist across oil and gas, power, petrochemical and infrastructure sectors, Punj Lloyd came out with a public issue three years ago and was present in the Middle East, Caspian, Africa, South Asia and China. It added Asia Pacific and Europe after acquiring the Singapore-based Sembawang, and its UK subsidiary. After two years of aggressive acquisition and expansion, it was faltering. Especially when its auditors made a critical reference to a potential business loss of over Rs 300 crore on a legacy order in Sembawang. It was disappointing for investors who had subscribed to its FCCBs (convertible at Rs 243 a share) and preferential issue (Rs 273 a share) as Punj Lloyd slid to Rs 190 from its early-2008 peak of over Rs 600.
As is to be expected in any fundamentally solid business, the best time to invest is when it’s in trouble. This happened soon after Punj Lloyd’s fourth quarter numbers were out. Sentiment hit rock bottom in sync with the upheaval across the Dalal Street.
It’s in this context that Punj Lloyd’s first quarter numbers seem like a fairy-tale comeback. Revenues are up 90% year on year, EBIDTA margin (adjusted for notional forex losses) improved 110 bps to 9.8%, and adjusted PAT grew 145% YoY to Rs 146 crore. Auditors scaled down the potential loss in the legacy order by a third, as fresh order inflows crossed $600 million for the quarter, taking the order book to Rs 21,000 crore. It also made two new forays in this period.
The management’s appetite for growth indicates many years of action. The topline growth of 30% plus seems likely for at least two years running, which should take revenues to over Rs 13,000 crore by 2009-10. Diversification across geographies and currencies shields it from the vagaries of fluctuating economic cycles in one country. Besides, it has investments in a number of lucrative businesses.
What can go wrong ? There could be a hole of nearly Rs 195 crore in its books as the dispute with the Saudi Basic Industries Corp is partly resolved. The margins on newer orders may not be as lucrative as assumed and a severe slowdown could affect the order books. Still, adjusted for an embedded value of about Rs 75 in its JVs and upstream subsidiaries, its CMP of Rs 275 is 10 times its consensus earnings a share for 2009-10 as estimated by analysts. Clearly, there’s solid investing value in Punj Lloyd.
Dipen Sheth is Head of Research, Wealth Management Advisory Services. He can be reached at dipen@wealthmanager.ws
