Engineering growth

IPO REVIEW

Given the enormous growth potential in the infrastructure segment, Punj Lloyd looks attractive.

When one of the largest engineering procurement and construction (EPC) companies in India, Punj Lloyd decided to tap the markets, it is bound to create a flutter.

PLL is tapping the equity markets to partly expand its investment in capital equipments, investments in projects, joint ventures and its subsidiaries and to retire its high cost debt. A total of 91,72, 937 shares are on offer including a fresh issue of 83,55,174 shares and offer for sale from management of 8,17,763 shares.

At the higher end of the price band of Rs 700 (lower end is Rs 600) the company expects to raise Rs 642 crore. Of the proceeds Rs 150 crore is expected to be invested in capital equipments, Rs 50 crore for investments in joint ventures and subsidiaries and around Rs 300 crore to retire the high cost debt.

At the higher end of the price band, the issue comes with a valuation of 30x, but given the enormous growth potential in the infrastructure segment, it is justifiable, say analysts.

Key drivers
The company has an order backlog of Rs 3700 crore till date. Nearly 54 per cent of the orders are from the energy sector (oil and gas) and the residual from the road projects.

A highly placed company official stated that orders from road projects account to Rs 1700 crore and Rs 2000 crore from the energy sector. An oil and gas project typically takes 8-12 months to complete, while the estimated time taken to complete a road project is 24-30 months.

The company is an experienced player in handling construction projects significantly in the offshore and onshore pipeline projects. Further it is equipped well with mechanical, civil and insulation work.

A part of the proceeds, approximately Rs 150 crore that are raised from the issue are expected to be invested in capital equipments which will further strengthen the company's equipment facilities.

Given the government's big push for development of road network in the country, the company should be able to maintain its robust order book position, say analysts.

The recent discoveries of large oil and gas reserves in various parts of India will provide another boost for the company's prospects going forward. The company has reputed clients and has long-term relationships with them and was able to secure repeat orders in the past.

Further, Punj Lloyd has a well diversified geographical coverage which lowers the risk of concentrated revenue earnings. In the year ended March 2004 and 2005, revenues from contracts executed outside India constituted 26.40 per cent and 57.54 per cent respectively. The clients include GAIL, Reliance Industries, British Petroleum, Cairn Energy to mention a few.

PLL has the reputation of completing the projects in stipulated time. With the recent explorations in the oil and gas segment, it is expected that the key driver for PLL's growth will be construction of pipelines for these oil majors.

"Punj Lloyd had earlier completed projects in time and oil and gas exploration companies like GAIL and RIL are likely to place orders with the company," said an analyst of a local brokerage house.

The company commenced its operations two decades ago in 1985 with a pipeline contract from Hindustan Petroleum Corporation Ltd. (HPCL). In 1995, the company received its first EPC contract.

Following this PLL, which was then primarily focusing on providing engineering and construction services for pipeline in oil and gas industry, tapped other project segments within energy sector by securing contracts for construction of oil tanks and process facilities.

During 1997 and 1999, with substantial growth in EPC contracts in the energy industry, PPL expanded its reach in industrial and infrastructure projects. PPL thus gradually made the transition from a pipeline construction company to an EPC contractor by delivering solutions to complex tanks and terminals for refineries, LNG and LPG terminals and expanded its reach by tapping industrial and civil infrastructure projects.

Margins under strain
On a standalone basis the PLL's topline has grown at a compounded annual growth rate of more than 20 per cent over the last five years.

However, in FY2005 the company grew at a slower rate of 12 per cent on a consolidated basis. The net sales in FY2005 were Rs 1790 crore compared to Rs 1594 in FY2004. The operating profit margins were at 11.94 per cent in FY05. The margins however declined steeply by 692 basis points over the previous year. 

FINANCIALS
(In Rs crore)	FY05	FY04	% Chg
Net sales	1790.00	1594.32	12.27
Other income	43.92	24.38	80.15
Total expenditure	1584.66	1302.70	21.64
Operating profit	205.34	291.62	-29.59
OPM (%)	11.47	18.29	682bps
Net profit	100.60	106.29	-5.35
NPM (%)	5.62	6.67	105bps
EPS (Rs)	39.87	51.48	-
P/E at Rs 600	26.16x	-	-
P/E at Rs 700	30.52x	-	-

Analysts attribute this to higher input costs, mainly steel and cement. An analyst pointed out that the steel prices have recently tapered off from its highs and is likely to benefit PLL, though cement prices have stayed firm in the recent past.

Further in FY2005, substantial portion of the projects were performed on a fixed-price basis. Of the consolidated sales and revenues 41.6 per cent were derived from fixed contracts.

Having said that the company official maintain that of the total backlog of Rs 3700 crore, the company has only miniscule part on a fixed pried basis and has managed to rope in an escalation clause which allow the company to pass-on high input cost to its customers. However, analysts are of the view that even with the escalation clause, the company will have to absorb the price rise beyond a point.

The financial cost of the company is expected to be lower in the near future with the retirement of the high cost debt. The total term loans were at the end of FY05 were nearly Rs 600 crore (nearly 300 crore of the issue proceeds will be utilised for the same.) As stated by the company official this will help the company to reduce its interest cost on term loans to Rs 60-65 crore.

The interest outgo in FY2005 on terms loans was Rs 79.62 crore. Analysts believe that this will help PLL to improve its net profits.

On the basis of the net profits of Rs 100 crore at the end of FY2005, the price to earning multiple stands at 30.52x at the higher end of the price band. Among its peers, IVRCL is currently trading at a P/E of 27.53x while Nagarjuna Construction commands a P/E of 34.13x.

Issue closes: December 16, 2005