The Hindu Business Line : Punj Lloyd: Buy

Punj Lloyd's inspiring financial performance for FY07, a strong order book buoyed by newly acquired subsidiaries and renewed focus on its core areas of oil and gas infrastructure solutions, are indicative of strong prospects for earnings growth. We recommend investors to buy the stock with a 2-3 year perspective to derive the full benefits of earnings arising from the present group order backlog of about Rs 16,000 crore. At the current market price, the stock trades at 13 times its expected consolidated earnings for FY09. Punj Lloyd's present order backlog is skewed towards oil and gas and petrochemicals (through subsidiary Sembawang). Civil and infrastructure works, as a source of orders, now receives less prominence. This changing revenue mix is likely to help the company's operating profit margins as the former yields relatively better margins.

The company's entry into the offshore platform segment (awarded by ONGC), which was earlier considered an exclusive domain of Larsen & Toubro, provides qualification to bid for lucrative marine oil and gas projects. This project has been bagged in alliance with its offshore engineering arm, which was part of the Sembawang acquisition.

The company has also won an order for construction of a wheat-based bio-ethanol plant in the UK, through its other subsidiary Simon Carves. If the European Union's mandate of at least a 10 per cent ethanol blending for transport fuels receives good response from its members, then this segment would translate into good business potential for Punj Lloyd. On the oil and gas side, spending by upstream and downstream oil companies is likely to remain robust, considering that firm trends in oil prices may continue. Punj Lloyd would be among the biggest beneficiaries of this trend in India, given that the area forms the nucleus of its operations.

Punj Lloyd's sales and net profits saw a three-fold expansion on a consolidated basis for FY07. Operating profit margins (OPMs), which remained healthy on a standalone basis, declined to about 9 per cent for the group. The company has stated that new orders booked by the ailing subsidiaries are likely to generate OPM of about 7.5 per cent. On the flip side, Punj Lloyd's increased focus on overseas projects can lead to currency fluctuation risks. Further, any increase in raw material costs can mute margins. However, price escalation clauses in road projects, supply of pipes by clients in some projects and planned procurement in anticipation of requirement may mitigate input cost increases. Increased working capital requirements for the huge order backlog may lead to higher interest costs.

Vidya Bala

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