Concerns still exist

Engineering major Punj Lloyd posted a mixed set of numbers for the September quarter. While top line and bottom line growth were below expectations, the company’s operating margins were better than what analysts had estimated.

Notably, things seem to be getting smoother for Punj Lloyd, given that its performance was better than the June quarter. Overall, while there has been some improvement, concerns over execution still exist while the flow of new orders has been muted.

Improving, but not comforting
On a year-on-year basis, Punj Lloyd’s revenue and net profit was down 31 per cent and 55 per cent, respectively, for the September quarter. However, operating profit margins (OPM) expanded 185 basis points (bps) to 9.2 per cent and came as a surprise helped by lower input costs — raw material cost as a percentage to sales dropped 1,000 bps to 56 per cent.
 

TURNING AROUND?
in Rs crore	Q2FY11	% chg	FY11E	FY12E
Net sales	1,988	14.60	9,118	12,371
Op profit	183	36.60	830	1,151
PAT	24	-

168 363 % chg is over June quarter; E: Estimates;                            Source: Angel Broking

On a sequential basis though, the company’s performance is indicating revival. Its consolidated sales rose 15 per cent quarter-on-quarter (over the June quarter) while the operating profit margins expanded 150 bps in the September quarter. Analysts say orders from Libya, which form a large chunk of the total order book and had disappointed in the last few quarters, have seen some improvement in execution. Likewise, the absence of any one-time write-offs has also helped margins. That apart, lower rise in interest and depreciation charges helped the company post a net profit of Rs 23.9 crore versus a Rs 30.6 crore loss in the June quarter.

Outlook
The company expects $2-2.5 billion (approximately Rs 11,000 crore) worth of order inflows in the second half of 2010-11, partly led by infrastructure projects (currently 71 per cent of the order book as against 57 per cent in H1 2009-10) followed by oil & gas, thanks to better growth in the South and South East Asian region compared to the Middle East and Africa. However, analysts advise caution as it is in sharp contrast to the past several quarters, which have shown a poor order inflow trend.

The slow movement of Libyan orders, worth Rs 9,400 crore or 38 per cent of the total order backlog of Rs 25,470 crore, is also showing little progress. Of this, about Rs 5,900 crore of orders (23 per cent of the total order book and 63 per cent of the total Libya-based orders) are stuck for six-nine months due to redesigning issues at the client’s end. The company’s pending litigation, including with clients like Ensus and ONGC which involves an amount of £15-17 million, could hit its profitability if the decisions go against the company. Overall, given the cautious medium-term outlook, the company’s stock at Rs 126, which translates into a PE of 12.6 times its 2011-12 estimated earnings, looks fairly valued.