Punj Lloyd: Eyeing future

Punj Lloyd's new subsidiary will begin bearing results in the long run

Engineering construction company Punj Lloyd's announcement of forming a new subsidiary for the back-office engineering operations of the group led to the stock zooming 8.5 per cent, helped by the overall bullishness in the market.

But, analysts are not too enthused about this new company, as it will begin providing engineering services to the Punj Lloyd group to begin with, which means that some of the project revenues will get transferred to the books of the new subsidiary Simon Carves India from Punj Lloyd, which will not change things on a consolidated basis.

However, over time, Simon Carves India will start providing engineering services to other companies.

Simon Carves India will cater to the engineering requirement initially on verticals, such as process engineering, pipeline and refinery, and gradually build up its expertise to provide offshore engineering in verticals, such as auto, aeronautics, telecom and utilities.

The management's intention seems to make this subsidiary a profit centre and integrate the engineering expertise of its recent acquisition "� the Singapore-based SembCorp and SembCorp's subsidiary Simon Carves, UK.

According to the company, the global engineering services outsourcing market is expected to triple by 2020 and India could see its share rising from the current 12 per cent to 25 per cent.

The Punj Lloyd stock has been an underperformer on the bourses for the past year, having declined 4 per cent since its listing in January, as its sales declined 4.28 per cent in FY06.

While other companies in the engineering construction space have done rather well over the past year, a delay of its road projects in Assam resulted in the revenues and profit shifting from FY06 to FY07.

For the half year ended September, its net sales increased by 92 per cent, helped by the acquisition.

Though operating profit improved by 132 per cent, its consolidated operating profit margin fell by 150 basis points to 6.06 per cent.

However, the company is sitting on an order book of over Rs 13,000 crore. At its current price, the stock trades at an expensive 30 times estimated FY07 earnings, but analysts believe that the company should do much better in FY08, given the current order book.

Indian Hotels: Boom time

Indian Hotels reported buoyant growth in the September 2006 quarter, despite the period being a lean phase in the tourism industry, owing to the monsoon season.

No doubt, foreign tourist arrivals were up 9 per cent to 0.91 million in the last quarter, but analysts highlight that Indian Hotels has relied largely on a variety of packages for domestic travellers in a bid to drive growth.

Improved average room realisations (ARR) and occupancy levels in the last quarter helped the company's operating profit grow 46.2 per cent y-o-y to Rs 57.3 crore in Q2 FY07 as compared with a 27.9 per cent growth in its sales to Rs 266.6 crore. Its operating profit margin also grew 270 basis points y-o-y to 21.5 per cent in the last quarter.

Meanwhile, in Q2 FY07, overall ARRs improved 35 per cent y-o-y to Rs 7,583 per night, coupled with a 200 basis point rise in its occupancy rate to 66 per cent.

In the June 2006 quarter too, the company had improved its overall occupancy levels by 100 basis points to 66 per cent. Strong growth in its top line, had helped offset rising operational costs in the last quarter.

For instance, its staff costs had risen 25.8 per cent y-o-y in the September 2006 quarter, while other expenditure rose 26.2 per cent.

Indian Hotels is shortly expected to complete all the formalities relating to the acquisition of the Boston-based 273-room Ritz Carlton for $170 million.

Clearly, this acquisition is aimed at ensuring the company's presence in key cities across the globe. The tourism industry is already in the peak season, but with the stock trading at 20 times estimated FY07 earnings, it leaves little room for further upside.

With contributions from Priya Kansara and Amriteshwar Mathur