Though order inflows have improved lately, revenue growth will be critical for the company to service its debt burden.
Rakesh Jhunjhunwala, who till about last year was holding almost two per cent in Punj Lloyd, exited the stock at the beginning of this year. One of its pioneer institutional investors, Warburg Pincus International has also pared its stake in the company and is reportedly planning to bring it down further. It had a 5.09 per cent stake in September 2007, which now stands at 4.46 per cent. This can partly be attributed to the issues Punj has faced in terms of project execution, slowdown in orders, high debt and pressure on profitability.
No wonder, even as Punj Lloyd’s initial public offering was oversubscribed 39 times in December 2005, the company, after five years of its listing, has seen an erosion of 80 per cent of its shareholders’ wealth. The concerns are not over; the company is under pressure due to weak demand outlook, high debt, increase in receivables and higher working capital requirements, leading to erosion in margins. These concerns are also partly reflected in its valuations. At Rs 38.15, the stock (a shade above its all-time low of Rs 37.30) trades at six times its 2012-13 estimated earnings and 0.4 times book value. While valuations are down, investors should wait for a clear signal of a reversal in fortunes before considering the stock.
Debt overhang
Punj Lloyd’s debt has gone up at a time when the business outlook remains subdued. In the last three years, revenue growth has remained flat, whereas debt has grown at over 40 per cent annually. Most debt has gone into working capital, rather than into fixed capital investments, leading to pressure on its profitability. Consolidated debt has risen from Rs 4,542 crore at the end of March to Rs 5,150 crore at the end of September. Interest costs, thus, are expected to remain at elevated levels at around Rs 450 crore for the next two years, which is not encouraging given that the company’s profit before interest (interest coverage ratio) is just about one. And, importantly, this is after factoring almost 40 per cent growth in revenue this year and five per cent next year.
| DEBT CONCERNS | |||
| In Rs crore | FY11 | FY12E | FY13E |
| Sales | 7,850 | 10,946 | 11,477 |
| Ebit | 353 | 557 | 563 |
| Interest costs | 357 | 503 | 542 |
| Net profit * | -512 | 174 | 200 |
| EPS (Rs ) | -1.5 | 5.2 | 6.0 |
| RoE (%) | -1.7 | 5.7 | 6.2 |
| Debt/equity (x) | 1.1 | 1.5 | 1.4 |
| PE (x) | -25.2 | 7.4 | 6.4 |
| E: Estimates; EBIT is earnings before interest and tax * includes non-operational income Source: Citi Investment Research report (November 8, 2011) | |||
Any slippage in the revenue growth will only put further pressure on the profitability. “The biggest worry is its mounting debt and interest burden. The management says it will restructure debt, but that does not seem to be happening in the near term, given the current industry environment,” said Sneha Poddar, infrastructure analyst at Sharekhan.
Growth in revenue
In this scenario, the growth in revenues and margins will be critical. Punj Lloyd is sitting on an order book of Rs 26,700 crore, or almost 2.4 times its 2011-12 estimated revenues. Order inflows (on a quarterly basis) have also improved and averaged a little over Rs 5,100 crore in the first two quarters of 2011-12, compared to Rs 3,900 crore in the December 2010 and March 2011 quarters. This is good enough for revenue growth as long as the company does not falter on execution.
However, most projects have relatively long execution cycles. Venkatesh Balasubramaniam of Citi Investment said in his note: “The order backlog still contains Rs 3,900 crore (15 per cent of backlog) of orders from Libya, which face execution delays, given the political unrest in the country.” According to the accounting notes in its half-yearly report, the company’s subsidiary in Libya had assets aggregating Rs 1,066 crore in September and it had received customer advances of Rs 553 crore. Due to civil and political disturbances and unrest in Libya, work on all projects has stopped. However, the note mentioned as things were getting stabilised and considering the present environment and economic conditions in Libya, the management was confident of realisation of aforesaid amounts.
“The macro-environmental conditions in Libya are expected to improve and going forward, we hope to resume execution of our projects there and also bid for some new ones,” said Atul Punj, chairman, Punj Lloyd, in the company’s September quarter result presentation. However, analysts continue to fear about delayed payments for some projects, particularly in the government segment. In the current financial year, its revenues are expected to be near 2009-10 levels, but receivables will be higher by 33 per cent. This, along with higher inventories, could lead to pressure on working capital and, hence, interest costs.
