Punj Lloyd: Sound affair

Singapore buy and robust capex cycle bolstered FY07 numbers

Punj Lloyd reported an improved performance in FY07, thanks to its earlier acquisition of the Singapore-based Sembawang Engineers & Constructors, coupled with a robust domestic and overseas capex cycle. Though higher operational costs such as contractor charges put pressure on margins in FY07, the Q4 margins have been impressive.

The company's consolidated operating profit grew 115 per cent y-o-y to Rs 374.3 crore in FY07, on a net sales growth of 204.3 per cent y-o-y to Rs 5126.58 crore.

However, the results of FY07 are not strictly comparable with a year earlier, given its acquisition of Sembawang. Nevertheless, the merged entity's operating profit margin fell 300 basis points y-o-y to 7.3 per cent in the previous year.

Pressure on margins was owing to contractor charges as a percentage of net sales rising 690 basis points y-o-y to 27.7 per cent in the previous year.

The largest player in the business, L&T, grew its consolidated operating margin by 300 basis points y-o-y to 12.56 per cent in the previous year. Investors have been optimistic on the Punj Lloyd stock as it has gained over 60 per cent in the past three months. And, the reason is its Q4 consolidated operating margin, which stood at 10 per cent compared with 6 per cent in the nine months.

Its core business of pipelines did well in FY07, and is expected to continue the momentum going forward. Its order-book amounted to Rs 15,944 crore at the end of FY07 compared with Rs 14,400 crore levels at the end of Q3 FY07. The stock trades at about 23 times estimated FY08 earnings, given the buoyancy in margins and strong business growth ahead.

Aban Offshore: Margin pressure

Aban Offshore's performance in the March 2007 quarter was adversely affected by the dry docking of one its rigs Aban II for two months during the quarter, which curtailed revenue growth. In addition, its margins were under pressure owing to higher operational costs such as staff costs and repairs to machinery.

As a result, operating profit fell 30.5 per cent y-o-y to Rs 47.69 crore in the last quarter compared with 1.3 per cent fall in its income from operations to Rs 118.67 crore.

Operating profit margin also declined 1690 basis points y-o-y to 40.2 per cent in Q4 FY07. For FY07, Aban's operating margin fell 720 basis points y-o-y to 50.2 per cent.

However, it is understood that Aban's rigs like Aban II, have recently renewed their contracts with upstream players at about $80,000 per day levels compared with $27,000 a day levels earlier. Also, the company is expected to leverage synergies with its earlier acquisition of Norway-based Sinvest over the next few quarters.

Investor expectations of strong growth in the medium term has helped to ensure that this stock has outperformed the broader market over the past three months "" the Aban stock has gained over 50 per cent during the past three months compared with 12 per cent rise in the Sensex.

At 13 times estimated FY08 earnings, the stock price is reasonable given expectations of strong rigs rates over the next few years.

NIIT Ltd : It's Element-ary

Education major NIIT's stock, which has doubled in the past six months, declined 8 per cent as the market was not thrilled with its results.

Operating margin declined 646 basis points in Q4 to 8 per cent. While its revenues and operating profit in its existing business grew at 16 per cent y-o-y in FY07, its earlier acquisition of the US-based Element K and its new business pushed the overall operating margins lower.

The consolidated results include seven months of operations at Element K, which it acquired for Rs 164 crore. Element K added Rs 264 crore to the top line, and earned an operating profit of Rs 7.2 crore. Its existing business did well on the margin front, which went up 220 basis points in FY07 to 16 per cent.

The growth in individual business, which accounts for nearly half the company's existing business revenues, grew at 48 per cent y-o-y. Its China operations grew 100 per cent during the fourth quarter.

Capacity utilisation in this segment improved by 800 basis points in FY07, resulting in a 988 basis point improvement in segment operating margin.

Revenues declined by 28 per cent in the institutional business in the full year, though non-government business did well. The corporate business segment revenues grew 15 per cent in FY07. The new businesses of financial services training management education to working professionals lost Rs 9.1 crore at the operating level.

NIIT has managed to turn in an operating profit at Element K, and margins should improve going forward. For the consolidated company, operating margins declined by 363 basis points to 10 per cent in FY07. Valued at nearly 31 times consolidated FY07 earnings, the NIIT stock may stop for a breather.