We believe that Punj Lloyd is set to become a player of reckoning in the domestic and global infrastructure space due to its diverse operations.
Punj’s diverse operations have, to a large extent, not only insulated it from any potential slowdown, but also helped it gain experience in niche areas.
We are optimistic about the company’s future growth prospects and estimate it to cross the US $5bn mark on the Top-line front in future.
In FY2009 the company posted huge adjusted losses of Rs250 crore due to the SABIC episode.
However, our recent interaction with management suggests that there are no further liabilities on the SABIC order and its overall legacy order book is mere Rs300 crore, which is insignificant compared to its total order book of Rs30,436 crore.
Hence, we expect an uptick on the OPM front and expect Punj to post strong earnings CAGR of 63.4% (over bottomline of Rs241.5 crore excluding exceptional losses of Rs473 crore) FY2009-11E.
At Rs244, the stock is trading at 11.5x FY2011E EPS and 2.1x FY2011E P/BV. For the core construction business, we have assigned a 14x P/E similar to other mid-size construction companies like IVRCL Infra, Nagarjuna Construction, etc.
Though we believe that Punj deserves a premium over these mid-size companies owing to its scale of operations and diversified presence, on the conservative side we have assigned the same P/E multiple since Punj has a history of litigations and topline growth is expected to be subdued in the near future.
The company has invested Rs352 crore in Pipavav Shipyard, which we have valued at 1.0x equity.
Based on the current market price and our target price, we do not expect the FCCB to get converted. Therefore, we have assumed a liability of Rs317 crore in FY2011.
Our SOTP target price is Rs299 based on FY2011E numbers, translating into a potential upside of 23% from current levels. We initiate coverage on the stock, with a BUY recommendation.