Punj Lloyd (PLL) has outperformed the Sensex since the beginning of this month due to positive news flow. The company's subsidiary PL Engineering signed a memorandum of understanding with Dassault Systems. PLL also won an engineering procurement and construction contract for the first polysilicon plant in Qatar, where it already has a presence in the oil and gas space.
However, the renewed optimism is expected to be temporary, feel analysts. They continue to remain concerned about the sustainability of improved execution in the June quarter, margin outlook amid huge interest cost burden and progress of Libyan projects, in addition to uncertainty over claims on receivables.
As a result, they remain negative on the stock, which is down 60 per cent over the last one year and far below its consolidated book value of Rs 90.
FINANCIAL PERFORMANCE
The company reported improved perfor mance in the June quarter with a 30 per cent jump in consolidated sales (Rs 2,263 crore), led by an improved execution in infrastructure and pipeline projects (54 per cent and 64 per cent of consolidated revenue and order backlog, respectively). The operating profit margin (OPM) at eight per cent improved 30 basis points.
| GROWTH AHEAD? | |||
| Consolidated (Rs crore) | FY11 | FY12E | FY13E |
| Sales | 8,166 | 9,680 | 11,151 |
| % chg | -22.5 | 18.5 | 15.2 |
| Operating profit | 621 | 819 | 964 |
| % chg | 184.0 | 31.9 | 17.7 |
| Adjusted net profit | 51.1 | 76.0 | 166.0 |
| % chg | LTP | ||
Even the order book and order inflows grew five per cent (sequentially) and 71 per cent year-on-year (yoy) to Rs 23,940 crore and Rs 5,627 crore (Rs 12,178 crore in FY11), respectively. However, it continued to report loss at the net level (Rs 13 crore), though lower yoy and the outlook is challenging.
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Says Atul Punj, chairman, Punj Lloyd, “Rising Inflation, interest costs and commodity prices, coupled with strong competitive pressures and political concerns, pose a challenging environment in many parts of the world.” However, it is confident of maintaining its OPM at 8-11 per cent.
KEY CONCERNS
Despite the recent positive trigger, analysts remain concerned about future prospects. There has been no progress on the pending arbitrations and auditor qualification (Rs 1,580 crore in Q1FY11) on various projects during the quarter. The company has more than Rs 10,000 crore of litigation pending in various projects (with various clients including ONGC, etc.) for cost escalation claims.
Arbitration proceedings are on, but the outcome is not expected in the next three-six months. More, it has not made any provisions for outcome and, thus, any adverse judgment can seriously impact financial performance.
Excluding the auditor qualifications, FY11 consolidated net debt-to-equity ratio is high at 2.4 times and the adjusted book value of Rs 42 is less than half of the reported book value. Also, the interest cost surged 40 per cent in the first quarter and formed five per cent of sales.
OUTLOOK
Analysts continue to remain cautious on the stock and maintain their negative view. Venkatesh Balasubramaniam, analyst at Citigroup Global Markets, maintains a sell rating. “The auditor qualification is 50 per cent of the net worth. The working capital has deteriorated significantly over the last five years and Libya, which is facing execution delays given the political unrest, forms 15 per cent of the order backlog,” he says. Amit Mahawar of Edelweiss Securities is worried about the impact of litigation and interest costs. “We remain concerned, given the huge quantum of litigation pending, coupled with interest cost impact. While execution has been improving, high interest cost has been impacting the bottom line, which is likely to continue.”