>PUNJ LLOYD (EDELWEISS)

■ Play on global engineering and construction demand
Punj Lloyd (Punj) is one of the largest engineering and construction companies in India in terms of revenues and order backlog. Since its inception, the company has constructed more than 9,000 km of pipelines (up to 48” diameter) and 4 mn cubic meters of storage tanks and terminal capacity. Acquisition of SEC and its subsidiary Simon-Carves in June 2006 provided Punj the armory to become a large global EPC player and consolidate its position in the oil & gas space, along with opening doors to the fast growing urban infrastructure space.

■ Leading player in mid stream and down stream oil & gas sector
Punj is a leading player in mid stream and down stream oil & gas sector in India and abroad. In the down stream oil & gas space, India’s refinery capacity is expected to increase from 155 MMTPA to 240 MMTPA by FY12E. Currently, around USD 40 bn projects in the refinery vertical have been announced. We believe, Punj will benefit with the sector’s growth prospects looking bright.

■ Civil infrastructure and oil & gas segments to boost order inflows
On the back of strong economic growth (till FY08), especially in South East Asia, Asia Pacific, and India, coupled with high crude oil prices (till July 08), Punj experienced exponential growth in order intake, in excess of INR 100 bn in each year (during FY07-FY09). We believe such rapid scale up in order inflows, implies high growth over the long term.

■ Outlook and valuations: Bright prospects; initiating coverage with ‘BUY’
We arrive at one-year fair price of INR 336/share for Punj, through the SOTP methodology (valuing the parent at INR 323/share and its holding in Pipavav Shipyard at INR 13/share). We have valued Punj using the DCF method, while its holding in Pipavav Shipyard is valued at FY09 P/B of 2.5x, in line with global peers in the ship building industry. Over its 3.5-year history since listing, it has traded at average one-year forward P/E of 44x. However, over the past one year, it has traded at 20x one-year forward. At current estimates, the stock is trading at P/E of 18.9x and 15.3x for FY10E and FY11E, respectively. We believe upsides exist from current levels and initiate coverage on the stock with ‘BUY’ recommendation. On a relative return basis, the stock is rated as ‘Sector'.

To see full report: PUNJ LLOYD