>PUNJ LLOYD LIMITED (INDIABULLS)

Stock run-up offers limited scope for upside

Punj Lloyd reported a robust revenue growth of 53.7% yoy in FY09, closely in line with our estimates. However, the performance remained disappointing at the operating level with the Company having to provide for the cost overruns for Heera Project and SABIC order, as well as the guarantee claims for the SABIC order. Thus, the Company reported a net loss of Rs. 2.4 bn for the year.

Revenue visibility declining, top-line growth to be subdued in FY10: Punj Lloyd’s book-to-bill ratio declined from 1.90x in FY08 to 1.65x in FY09. Going forward, we believe that order inflows in the Company’s Petrochemicals and Oil & Gas segments are likely to slow down as CAPEX plans are being reviewed cautiously by clients across all geographies. However, given the re-elected UPA government’s thrust on infrastructure, we expect the order inflows in this segment to be quite strong; it would however fail to completely offset the weakness in the other two segments. Hence, we expect the order backlog to decline by 14.1% yoy and revenue growth to slowdown to 7.1% yoy in FY10.

Operating performance dips in FY09, Company to focus on improving bottom-line: During Q4’09, Punj Lloyd recorded cost overruns in ONGC’s Heera Project and also made provisions of Rs 2.2 bn related to guarantee claims of SABIC order (in addition to the provision of Rs. 2.0 bn for cost overruns in Q3’09). As a result, EBITDA margin nosedived 605 bps yoy to a mere 3.2% in FY09. The Company has indicated its strong focus towards improving the bottom-line. We believe that the profit maximisation measures being taken by the Company under ‘Project Hawk’, coupled with the new project take-up at margins of ~9%, would help in pulling up the margins in the coming quarters.

Valuation: With the re-election of the Congress-led UPA government, we expect an increase in the thrust on infrastructure development, which we believe will support Punj Lloyd’s long term growth. Our DCF-based fair value estimate of Rs. 215 offers a limited upside potential from the current market price. The stock is trading at an EV/ EBITDA of 8.6x and a PEG of ~0.80x. We maintain Hold.

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