Citigroup on Punj Llyod

Citigroup downgrades Punj Llyod’s rating to `Sell’ and cuts the target price to Rs 197 from Rs 228. It also reduced FY10E-12E EPS to 8-11% to factor in:

(1) 4-5% lower sales growth and
(2) 28-40 bps cut in EBITDA margins on potential write-offs in projects.

Citigroup values the shipyard on the west coast at a 50% discount to book since at the current stock price, the risk reward trade off seems unfavourable given:

(1) risks of additional write-offs in the Ensus project;

(2) chances of potential LDs in the Ensus project;

(3) cost over-runs on the ONGC Heera project;

(4) Auditor qualifications of Rs 69.6 crore at the end of Q2FY10; and

(5) Inconsistent earnings delivery. Earnings downgrades of 8-11% lead to a lower target price.

Every months’ delay beyond 12 December ‘09 will cost Simon Carves £5m on the Ensus bio ethanol project. Technically, Ensus can also claim liquidated damages on this project in the future. According to the FY09 annual report, estimate revisions on the ONGC Heera project have resulted in costs and revenues on the project increasing by Rs 360 crore and Rs 150 crore respectively. The company has filed claims with ONGC amounting to Rs 510 crore against the increase in cost estimates. Pending acceptance, these claims have not been accounted for in the books.