>PUNJ LLOYD LIMITED (CITI)

Upgrade to Buy on Strong Order Booking

■ Upgrade to Buy (1M) from Sell (3M) — After losses of Rs2.3bn/tepid backlog of Rs208bn up 6% YoY in FY09, Punj Lloyd started FY10 with ~ Rs94bn of orders in 3 months. Following a lull in Jan-Feb, bidding activity has picked up, and the company has identified US$30bn+ of projects for the next 2 years.

■ Underlying business is more robust — Punj Lloyd’s skill sets have not translated into superior profitability like that of L&T, and the answer lies in Simon Carves. Removing Simon Carves from Punj Lloyd suggests that the business is delivering 5.5-5.9% PAT margins (upper end of mid cap E&C). Punj Lloyd needs to restructure Simon Carves and integrate the same fast.

■ Earnings revised upwards — By 2-7% over FY10E-12E on higher inflows, sales and margins. Rs701mn of qualifications (~ 12% PBT) continue to be a worry.

■ Target price revised up to Rs263 — From Rs217 earlier to factor in: (1) our earnings revision, (2) hike in target P/E multiple to 17x (from 15x earlier) post robust order inflows in 1QFY10 & (3) value of shipyard at 50% discount to book value. Our target multiple is pegged at a small premium to mid cap E&C peers like IVRCL at 16x and Nagarjuna at 15x and set at ~ 23% discount to L&T.

■ Big international bias — ~ 80% of Punj Lloyd’s business comes from outside India. Big international exposure implies jobs are being picked up in a more competitive environment, and there could be worries on profitability. On the positive side, it also implies with time the scale and ability to counter competition can be transferred to India to take on the formidable L&T.

To see full report: PUNJ LLOYD