BackAmbit Capital recommends Punj Lloyd
Ambit Capital recommends Punj Lloyd
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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.
Key Risks
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.
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