Punj Lloyd is a global engineering firm with exposure to the Middle East, Southeast Asia, South Asia, North Africa and the Caspian regions.
The company specializes in engineering, procurement and construction (EPC) projects for the oil & gas industry. Additionally, Punj Lloyd is an EPC contractor for the infrastructure industry.
The mid-and downstream oil and gas industry contributes approximately 70% of the company’s revenue.
The sudden sharp decline in crude oil and natural gas prices, demand, and the global credit crunch has resulted in delays and cancellations of several new projects across the Middle East and Southeast Asia.
We expect the slowdown to gather momentum over the near term; so, new projects may be deferred until the prevailing conditions improve.
Over 49% of the company’s total debt is short-term in nature and will have to be renewed within the year. Renewal itself may be a challenge in the current environment due to the long gestation nature of the projects in the infrastructure industry.
The prevailing high interest rate environment will also have an adverse impact on profitability. We estimate a 140bp increase in the blended interest cost in FY10 over current levels. Our sensitivity analysis indicates that a 100bp change in interest cost results in a 3.4% change in our FY10 EPS estimate.
Auditors had qualified at the time of the FY08 results that the company had not provided for a potential loss on one of their projects.
The company claims that the project should not result in a loss as the dispute with the client is over the change in scope of the project.
At the end of Q2FY09, the amount under dispute is Rs2.2 billion or approximately 50% of our FY09 net profit estimate and approximately 8% of net worth (FY08). We expect the negative sentiment to persist until the dispute is resolved.
We have arrived at our target price of Rs146 based on 9x our FY10 consolidated EPS estimate of Rs16.24. Our 9x multiple is the lowest 1-year forward multiple that the stock has traded at since its listing. Our target price implies a 15.8% downside from the current levels.