Punj Lloyd’s stock has risen 20 per cent in the last two weeks on hopes of a turnaround. However, analysts are sceptical of a sustainable recovery in the near term given the subdued macro environment and company specific issues.
Punj Lloyd, once touted as India’s next L&T, had floated an IPO in 2006, which got subscribed 39 times; the stock listed at Rs 1,057, a premium of 50 per cent on its issue price. Thereafter, it made a life-time high of Rs 2,885 (adjusted stock split price works out to Rs 577). However, today, for all the wrong reasons and after the recent run-up, it is at just Rs 57.
Slowdown in new business, high working capital needs, arbitration over receivables, project execution delays, subsidiary’s losses, problems in its Libya business and high debt, together took a toll on Punj’s and the stock’s performance.
While there is some improvement on some of these fronts, which has led to better sentiments, the same needs to be seen with caution. Because, there are major hurdles for the company to cross and those may take time to overcome. The company, though, is not worried.
| DEBT WOES | |||
| In Rs crore | FY12 | FY13E | FY14E |
| Sales | 10,527 | 12,150 | 12,996 |
| OPM (%) | 7.5 | 8.0 | 8.0 |
| Net profit | 44.7 | 56.7 | 68.4 |
| EPS (Rs) | 1.3 | 1.7 | 2.1 |
| PE (x) | 42.7 | 32.7 | 26.5 |
| RoE (%) | 2.1 | 2.6 | 3.0 |
| Net Debt/ Equity (x) | 1.5 | 1.8 | 1.7 |
| E: Estimates RoE is return on equity Source: Emkay Global | |||
“We do not see any slowdown so far in the international business, which is about 75 per cent of the business. Most projects in the oil and gas sector are of a long-term nature and their capex does not fluctuate every quarter unless crude oil prices crash to below or near operating levels, which is not the case,” says Atul Punj, chairman, Punj Lloyd. He adds he is confident of turning around the company in the next one or one-and-a-half years, as a result of the initiatives taken.
Analysts, though, are not confident, as they see lingering concerns. “Punj Lloyd has now shown a better execution pace compared to the last two years, while also improving the order backlog coverage (2.6 times on FY12 revenues). However, we continue to be concerned on low and volatile margins, high leverage (1.54 times net debt to equity as of FY12) and decline in order inflows in Q4,” says Ishan Sethi, analyst at Goldman Sachs, in his report.
Analysts also believe the recent rise in share price might not sustain. “I have my apprehensions about the recent run-up. Even if the company reports better operating performance in the first quarter of the current year, investors should wait and clearly see over at least the next two quarters if the company can sustain the performance before calling it any kind of turnaround,” says S P Tulsian of sptulsian.com.
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The year 2011 was the most challenging for Punj Lloyd, marred by poor financial performance, wherein sales dropped significantly and there were losses at the net level. However, 2011-12 was better. Helped by new orders, the order book by the end of the year reached Rs 27,276 crore, compared to about Rs 22,000 crore in 2010-11. The company’s execution also improved, which led to a 31 per cent growth in consolidated sales, a 240 basis points improvement in operating profit margins and a return to profits (Rs 92 crore versus a loss of Rs 60 crore in 2010-11).
Though the performance has improved in the last few quarters, analysts remain cautious, given that order inflow has again weakened in the March 2012 quarter (see chart). Even for the June quarter, there are no major project announcements. The management believes this is because of the nature of the business, where the flow of orders is sometimes lumpy.
“We have seen the operating performance improving. However, one will have to see if the company can maintain this in the coming quarters. Worries on high debt, working capital and flow of new orders still remain,” says Nitin Arora, research analyst at Angel Broking.
Positively, if it’s business in Libya and contracts there resume (Rs 3,900 crore of orders), it should start contributing to business and improve the cash flow and working capital.
But, in terms of receivables, too, the arbitration with ONGC with regard to the Heera project is still on and there are long overdues from some of its old customers. Punj is hopeful of sorting out these dues and is working to realise these in the current year.
Higher receivables have put pressure on the company’s working capital (almost 113 days), keeping its profits under check. In 2012-13, the company is expected to report Ebitda of about Rs 626 crore, but interest expenses alone are projected at Rs 565 crore.
In this scenario, it is critical not only to maintain the operating performance but also to bring down the working capital and debt, so that there is less pressure on profitability.
While addressing these issues, Atul Punj says, “Things like improvement in receivables, resumption of work at Libya and other measures should help us in working capital. Also, since our turnover is improving, there will be good cash flow, which should help us in tackling the issue of working capital. Regarding debt, 75 per cent of our business is outside India and 85 per cent of debt in is in India.
This year we will restructure the same and transfer some of the debt into the international subsidiaries”. The company believes this will help bring down its interest cost (as international rates are lower). However, the impact of these will only be visible in next year’s profitability.
In this backdrop, it will be prudent for investors to monitor these developments and wait for cues regarding further improvement in Punj’s business and balance sheet.