Punj Lloyd: Well-oiled

This week, Punj Lloyd added to its already robust order book by bagging two contracts. The first is an $800 million contract (Rs 3,636 crore) from Qatar Petroleum for a gas transmission project, while the second order is much smaller at $42 million (about Rs 190 crore) for an onshore drilling project in Libya.

With this, the order backlog for the engineering and construction firm stands at Rs 24,063 crore. In the June 2008 quarter, the order book stood at 20,162 crore a growth of 32 per cent y-o-y. While the top line will get a boost, typically margins for international projects tend to be lower due to higher costs. In FY08, margins for international subsidiaries, which contribute about 60 per cent to total revenues, fell by over 250 basis points to 3.9 per cent.

Punj Lloyd did exceedingly well in the June quarter-- net sales grew by 90 per cent to Rs 2,648 crore y-o-y — with the company executing several projects. However, operating profit margins declined by 70 basis points to 8 per cent mainly because contractor charges increased by 150 per cent and staff costs by 99 per cent.

As a percentage of sales the contractor charges were up 840 basis points at 34 per cent. In FY08, operating margins rose 100 basis points at 8.3 per cent, driven more by stand-alone operations and mainly the result of better operating leverage with staff costs in particular, coming off.

The company’s audiitors had noted that the company had not provided for potential losses around Rs 360 crore, relating to a particular order for SABIC. The management has reached an interim agreement with SABIC where the latter has agreed to pay about Rs 110 crore while the remaining portion is expected to be settled by March 2009. Analysts are not too concerned because even in a worst case scenario the management does not expect to lose more than Rs 25 crore.

Since June this year, the stock has outperformed the market, gaining 6 per cent compared with a 16 per cent fall in the Sensex. The stock has come off by 7 per cent over the past month and, at the current price of Rs 303, trades at 20 times its estimated FY09 earnings.