Punj Lloyd: Still far from reality

Apart from lowering debt and costs, the company must improve order inflows, execution and margins

Over the past few days, Punj Lloyd’s share price saw a spurt after the management indicated hopes of a strong order flow in the current financial year and its plans to bring down debt. The news that some of its project-related litigation (such as the one with ONGC) are being settled further aided sentiment. Although it has shed part of the gains, investors need to be cautious, as the rally is largely built on hopes.

Punj Lloyd’s biggest worry has been its net debt, which at end-FY14 stood at Rs 5,635 crore or 2.5 times its equity. While Punj Lloyd is hopeful of getting Rs 1,100 core from ONGC towards claim settlement, it also plans to monetise some non-core assets, which should reflect from the second quarter of FY15. Besides, it is looking at converting part of its high-cost debt to low-cost foreign loans, needed to reduce the interest burden and make cash profits. In the March quarter, on a consolidated basis, the interest expense has  Rs 268 crore. In FY14, it incurred interest expense of Rs 882 crore. While earnings before interest and tax (Ebit) stood at Rs 246 crore, it ended the year with a net loss of Rs 548 crore. Through some of these steps and working capital management such as inventory and receivables, the company hopes to cut debt by almost 40 per cent.

On the other hand, the company is expecting higher project execution, as well as margins, which should have a positive impact on operating profits. In the March quarter, the firm made an operating loss of Rs 128 crore, as its total income (down 26 per cent year-on-year to Rs 2,405 crore) was not enough to cover the operating expenses. Part of the loss, however, can be attributed to high-cost orders and related expenses, written off in the quarter. While higher revenues and margins can help generate profits at the operating level, to cover interest costs and return to profit at the net level, it needs to do more. Concerns also emerge from the high proportion (62 per cent) of pledged promoter holding.

Positively, the company has an order book of Rs 20,222 crore (1.8 times its FY14 revenue). Although visibility is low, considering some of the slow-moving orders in the current order book, the Street is betting on potential fresh orders and expected increase in turnover. The management is also expecting to bag orders worth Rs 12,000 crore in FY15, which would rub off well on profits.

However, since a lot of uncertainty remains and optimism is built on hopes, investors should wait for the critical issues to get resolved. Successful monetisation of assets, recovery of dues, reduction of debt and increase in flow of fresh orders are critical for the company’s turnaround.