Stock Review: Punj Lloyd

Punj Lloyd's stock has significantly underperformed the broader markets in the last one year, thanks to volatile earnings (and losses at the net level) (see chart). The quarter ended December 2010 was no different. Not surprisingly, its stock fell almost 19 per cent to Rs 71.25 on last Friday, compared to a one per cent rise in the BSE Sensex. Though the company's order book has been on an uptrend in recent quarters, concerns over project execution and cost overruns have gathered pace. Additionally, the impact of higher commodity prices, interest cost and risks related to some of the existing orders also needs to be watched. Overall, even as analysts estimate the company to turn around from next financial year, they believe the business environment remains challenging, and, hence, expect its share prices to remain under pressure in the near term.

Disappointing quarter

The company's revenues fell 28 per cent to Rs 2,093 crore in the quarter ended December 2010, due to slow execution in some of its ongoing projects in the pipeline and process plants segments. This, along with higher expenditure, affected operating profits, which declined by 57 per cent to Rs 95.8 crore. However, these profits were not enough to cover the interest and other fixed costs. Therefore, the company ended the quarter with a net loss of Rs 62.13 crore.

The good news is that it Rs 9,238 crore worth of new orders, which took its order book to Rs 27,800 crore (equivalent to 2.7 times the revenues in 200910), providing revenue visibility.

Some ray of hope

Given that the company has reported losses of Rs 68.8 crore in the nine months to December 2010, the current financial year is likely to end with the company reporting a loss estimated at Rs 60 crore. However, led by a huge order book, expected improvement in execution and easing concerns over onetime costs, analysts expect it to return to profits in 2011-12. They expect Punj Lloyd's sales to grow by about 20 per cent annually over the next two financial years, and operating profit margins to improve from about 6 per cent in 201011 to 8 per cent in 2012-13, leading to strong growth in earnings.

The road ahead

While these expectations assume strong demand from sectors like pipelines and terminals and focus on other segments in the infrastructure space, the overall business environment continues to remain challenging for the company, given the higher commodity prices. Also, given that it has an estimated net debt of Rs 3,200 crore and a high working capital requirement (150 days), there will be pressure on these counts too, as interest rates are on the rise.

Among other potential risks are delay in Libya projects (about a third of the order book), dispute in Ensus project and overhang of claims with ONGC, which could have a bearing on its financials. To sum up, while there is some ray of hope, the risk-reward equation does not look exciting currently. Hence, it would be better to wait for afew quarters for more clarity.