Punj Lloyd

 

 

In recent times, Punj Lloyd (PLL) has been in the headlines for the wrong reasons. First, it announced that it was writing off Rs 160 crore in Q4FY10. And now the company has divested its stake in Pipavav Shipyard (PSL) for Rs 700 crore. The timing of the deal and the pricing have raised questions.

 

The company's woes started when (in 2006) it bought Sembawang Engineers and Constructors (SemCorp) of Singapore along with its wholly owned subsidiary Simon Craves (SCL), UK. At that time, PLL was betting that this acquisition would enable it to enter into the construction of SEZs, among other verticals.

 

Prior to the acquistion (FY06), SemCorp recorded revenue of $1 billion with an order book of $1.9 billion while SCL's revenue stood at $350 million. PLL bought both for just $40 million. When asked by analysts about the low valuation and the low profitability of the companies, Atul Punj, chairman and managing director had said: "I am not complaining when people ask me what their profit numbers are. In this kind of opportunity landscape, to get a company with this kind of pre-qualification itself is the real steam, if I may use the term. I am really happy that their numbers are where they are. I think we have got a great deal for a very, very good price.

 

Troubles begin

But three years down the line, SCL is losing money fast. First, it lost the adjudication proceedings against Sabic Petrochemicals, UK. For this PLL had to take a one-time charge of Rs 470 crore in the books of SCL. It is contesting this adjudication in higher courts.

 

Now SCL has been penalised for delaying completion of a project by Ensus for whom it was setting up a bioethenol production facility. Till Q3FY09, PLL had written down losses of Rs 300 crore. And in this quarter it is all set to write down another Rs 160 crore. Some analysts, like those from HSBC, fear that PLL might report a loss for FY10.

 

Divestment raises questions

On top of all these woes, the management's decision to offload its stake in Pipavav Shipyard, which it got into to support its offshore business, is not a sign of confident decision making. More so when the exit price (Rs 49.80) is at a 15 per cent discount to the IPO price (Rs 58) and at a 20 per cent discount to the current market price (Rs 63.85) of Pipavav Shipyard.

 

If PLL was a PE investor or an institutional investor, then an exit after almost doubling its investment might have been justified, but not for a strategic investor that invested for better synergies. SKIL (a co-promoter), by buying out PLL's stake, has laid to rest any speculation regarding Pipavav Shipyard.

 

But the reason behind PLL's exit remains shrouded in mystery. The Street has already made provisions for PLL's lower earnings. Year-till-date (till March 29, 2010) the stock has lost 13 per cent while over the same period the Sensex has gone up by 1 per cent. Shailesh Kanani, research analyst, Angel Broking, says that the claim by Ensus was expected

 

However, the stake sell-off is not something analysts have factored in. This could only mean that the company is facing cash flow problems and had to resort to a fire sale to keep its head above water. With the stock under a cloud, most analysts are today recommending a "Hold" on it. The annual results should help clear up the picture regarding its performance.