The Hindu Business Line : Cost overruns continue to haunt Punj Lloyd

Reporting quarterly numbers that have disappointed, the company has clarified that its UK subsidiary, Simon Carves, is again faced with cost overruns totalling Rs 104 crore (£13.5 million). This time, the burden has come from an engineering procurement and construction contract for a bio-ethanol plant.

Punj Lloyd reported a 2 per cent decline in consolidated revenues while net profits plunged 63 per cent for the quarter ended September 2009, compared with year-ago numbers. Punj Lloyd has been troubled by cost overruns and litigation from this subsidiary since December 2008.

The company, in its earnings call, stated that the cost overrun was largely due to low productivity and delays by sub-contractors in the construction part of the project. As the contractors are reimbursed for actual costs incurred, it is unlikely that Punj would be able to claim any amount from them. Punj Lloyd’s only hope would be a production sharing agreement that it is negotiating with the client – Ensus.

As the plant is being built with a 15 per cent additional capacity than planned originally, the company hopes to recover the costs at least partially over two years. However, the near-term worry would be another £16 million that the client might demand as liquidated damages for the delay. The plant is expected to be commissioned by December. Legacy orders of Simon Carves, which could well last until the end of this financial year, continue to remain a key source of concern.

While Punj Lloyd has managed strong numbers on a standalone basis, net profits on a standalone basis declined by 52 per cent for the quarter. The company has not been able to book revenues from its projects in Libya as the progress of the projects are not sufficient to book them as sales under accounting laws. This shortcoming could be made up in the next quarter.

Punj Lloyd’s order book stands at Rs 26,808 crore. The order flows, however, do not provide much comfort given the slowdown and delays in execution.

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