Punj Lloyd’s strong revenue growth of 39% y-o-y was muted by negative earnings arising out of few one-time items.
It reported a net loss of Rs2.5 billion against a profit of Rs1.2 billion in the corresponding period last year, primarily on account of Rs2.2 billion provisioning towards SABIC case.
In addition to this, loss at Simon Carves due to higher cost added further pressure on the overall margin.
Even after adjusting for the Rs2.2 billion provisioning towards SABIC case, Punj Lloyd’s operating margin was lower by 497bps y-o-y to 4.9% during the quarter.
Higher contractor charges by 69% y-o-y coupled with 48% higher material costs pressurized margin. Consolidated margins were also lower due to higher costs at Simon Carves.
However, the management is confident that the current order backlog should allow them to witness higher margins going forward.
Margins have been partially cushioned due to the reversal in accounting for foreign exchange differences and change in accounting policy of recognizing Middle East branches as non-integral.
The management expects to execute its Rs208 billion order backlog over the next 24 months. They indicated that the margins on these orders were in line with that of Punj Lloyd standalone entity, i.e. 9%.
The management expects the company to maintain its growth momentum; and operating margin for FY10 will be close to 9%. The Jurong Island project is yet to achieve financial closure.
Dialogue with the clients have indicated that this will be achieved over the next 3 months, failing which Punj Lloyd will exclude the project from its order book.
Apart from this, the Dighi project and the GVK Power project are slow moving. The management has indicated that the GVK project will cleared over the next couple of days, thus will begin execution in full swing then.
A slowing book-to-bill ratio has continued to remain one of our key concerns for the company. Despite the management hinting at increasing order backlog position during the Q3 analyst meet, this has actually shrunk sequentially.
We do not expect the order backlog to grow rapidly especially given the current global economic scenario. However, as the high margins orders will be executed over the next year the company’s operating margins will improve materially from FY09 levels.
We expect the company witness 26% earnings CAGR over FY09-11E. The stock has run up 32% over the past few trading sessions, thus leaving no room for further appreciation.
We upgrade the target price in line with improving margin and bottomline growth to Rs155/share, but continue to rate it as MARKET PERFORMER.