Punj Lloyd’s de-risked business model is expected to provide order book safety. Current account surplus (for 2008) regions, Qatar (18%), Libya (48%), and Abu Dhabi, contributed about 55% to PLL’s new order inflows for 9MFY09. These orders are largely Government backed.
Moreover, these economies have re-iterated continued investments in infrastructure amidst a slowdown.
Contax, the energy industry analysts, expects capex for energy projects to go up from $60 billion in 2008 to $70 billion in 2009.
This, along with sovereign stimulus and tapping of oil profits invested in SWFs, augurs well for PLL. The company is the lowest bidder for the $0.5 billion contract currently under negotiation.
Audit qualification on account of project cost overruns of Rs2,070 million in SABIC UK has been removed, post write-offs, in Q3FY09 P&L. Moreover, the company has also provided for all cost overruns in current projects.
a) SABIC UK has invoked Rs2,176 million bank guarantee against PLL
b) Working capital cycle has expanded by 7-10 days to 112 days
c) 18% order book is delayed
d) Currency risk
We initiate coverage on Punj Lloyd Ltd with a BUY rating and a SOTP target of Rs110 (valued PLL at Rs98 based on 8x FY10E earnings, Pipavav Shipyard at Rs12 (book value). PLL currently trades at 5.7x FY10E earnings.