The adjudicator announced its decision on the ongoing case between Punj Lloyd (PLL) and SABIC. The interim decision was given in favour of SABIC.
This in our view is a setback for PLL as SABIC can call for Rs2.2bn performance guarantee. Incase it does, it will strain the PLL’s cash flows. PLL has already provided Rs2.1 billion during Q3 FY09 towards non-payment by SABIC, resulting into a quarterly net loss of Rs2.3 billion.
The management plans to appeal to the higher authorities of the SABIC case and does not expect the outcome over the next 12-14 months.
Simon Carves, the wholly owned subsidiary of PLL, was executing the SABIC contract. Apart from this, Simon Carves has only two other legacy orders that are currently under execution both of which are currently progressing well.
Punj Lloyd is confident that these projects are progressing well and do not attract any risks like SABIC. Apart from these Simon Carves has no other legacy order on hand.
The interim ruling against Punj Lloyd has surprised us, as the management had always maintained a positive stand on the ruling.
The management now plans to appeal to the higher authorities, the result of which will be announced over the next 12-14 months, thus increasing uncertainty. As a result, SABIC may call for Rs2.2bn towards performance guarantees.
We have not factored this into our estimates, as there is low visibility in this regard, thus leaving further room for earnings downgrade.
In light of these events we reduce our target price to Rs108 / share from the earlier Rs122 / share.