Punj Lloyd: deteriorating fundamentals

Punj Lloyd: deteriorating fundamentals

After a positive blip in the September quarter, engineering firm Punj Lloyd Ltd put up a poor show in the December quarter. Consolidated revenue dropped by 27% year-on-year to Rs2,118.9 crore, though it was slightly higher on a quarter-on-quarter basis.

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The bigger disappointment was that the firm posted a net loss of Rs62.1 crore against a net profit of Rs12.5 crore a year ago and Rs24 crore in the preceding quarter. Both revenue and net profit were significantly below Bloomberg consensus estimates for the quarter at the consolidated level.

What’s worrisome is the lack of clarity in operations and pace of execution. Management assurance in the analyst conference call was without any positive quantifiable guidance.

The reasons stated were not any different from the last several quarters—project approval delays from the clients’ end in international waters, mainly Libya, and uncertainty on litigations and guarantees in some projects.

In fact, Libyan orders constitute about one-third of Punj Lloyd’s total order book—at Rs27,800 crore. Note that the order book is almost flat compared with Rs27,770 crore at end-fiscal 2010, though a few orders did trickle in during the quarter.

Profitability seems to have been put to the test again this quarter. In the September quarter, operating profit margin registered a sharp rise to 9.4%, which was the highest in eight quarters and lifted investor confidence. In December, it fell to 4.5%, down even from 7.4% a year ago.

Contractor charges and employee costs rose as a percentage of sales compared with a year ago. Like in the previous quarters, project delays, money stuck in guarantees and consequent cost overruns have led to high interest costs. Net debt is at Rs3,300 crore, marginally higher than the preceding quarter.

As concerns remain and problems do not appear to recede in the company’s international operations, analysts are sharpening pencils for a downward revision in earnings. This comes after a 26-30% downward revision in earnings following the September quarter results.

The stock has plunged by 56% from the beginning of fiscal 2011 to Rs77 and has underperformed most construction sector peers and the Nifty mid-cap index of the National Stock Exchange. For now, there seems to be no light at the end of a rather dark tunnel.

Graphic by Naveen Kumar Saini/Mint

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