Punj LLoyd !

A healthy order book and improving margins put Punj Lloyd on a strong wicket.

Since its listing in 2006, the Punj Lloyd stock did not perform too well on the bourses mainly because its valuations were considered expensive. On current value basis (adjusting for the recent five-for-one split), it made a low of Rs 108 in July 2006 as compared to its listing price at above Rs 213.

However, the stock is once again on the radar of most analysts and investors due to sustained higher earnings in the recent past. Also, the company is aggressively expanding its business offerings and spreading its reach in the newer markets through inorganic and organic route to grow.

Further, a vibrant domestic infrastructure industry, the ongoing global energy capex and rising industrial capex poise for the higher growth. Moreover, considering its strong consolidated order book of Rs 16,500 crore, the company’s earnings are expected to grow over 40 per cent annually over the next few years.

Punj Lloyd (PLL), which started as a pipeline laying company has today become one of the largest EPC (engineering, procurement and construction) contractors with a focus on oil and gas sector. PLL also has significant presence in the growing infrastructure projects such as roads, airports and power utilities.

Though it still generates about 43 per cent of its total revenue from laying pipelines, other segments are seeing an increase in their contribution to revenues– 23 per cent comes from infrastructure projects followed by 17 per cent from process plants, 7 per cent from tankages and 17 per cent from others different segments.

In terms of geographies as well, its business is spreading globally catering to energy and construction clients and moving into other verticals with acquisitions abroad and JVs with global players.

Global reach

PLL generates about 66 per cent of its consolidated revenues from its overseas operation. The company has a strong foothold in major oil producing countries such as the Middle East, Europe, Africa and South East Asia. The diversification in these markets has helped the company capitalise on the opportunities in the growing oil and gas capex.

According to estimates the Gulf Cooperation Council earned $1.5 trillion between 2002 and 2006. Moreover, with rising oil prices, these countries are flush with financial resources, which are further invested into oil and gas capex such as offshore and onshore oil exploration activities, laying pipelines and developing other supporting infrastructures. Analysts forecast an additional investment of $500 billion over the next few years in the Gulf region.

With the intention of strengthening its position further and grabbing opportunities in the energy and infrastructure segments, PLL has recently invested in new companies and a few joint ventures.

The company acquired 100 per cent stake in SembCorp Industries’ engineering and construction business Sembawang Engineers, Singapore in June 2006.

Sembawang has presence in 35 countries, including China, India, Mexico and the UK focusing on civil engineering, process engineering and in constructing buildings. This has enabled PLL to strengthen its presence further and improved the pre-qualification strength to bid for larger and complex projects.

After the acquisition, the company has won some large projects such as the Rs 5,400-crore residential community construction in Bahrain, Rs 864-crore EPC order for hydrocracker at Haldia in India and the Rs 666-crore Sentosa , Singapore construction project.

In addition, the purchase has also helped PLL to enter new areas such as airport construction, jetties, tunneling, sewerage and petrochemicals to its portfolio. The acquisition has already started resulting in flow of new orders where the company will be able to act as main contractor and leverage its existing capabilities.

Domestic market

The company’s domestic business is also growing as well, especially in the oil and gas sector and infrastructure. It has worked with almost all the oil and gas majors in India as the main contractor or as a sub-contractor. The company has the experience of laying maximum kilometers of pipelines in the oil and gas sector.

It will also invest Rs 403 crore to acquire 25.1 per cent stake in Pipavav Shipyard (PSL). Globally as well as in India there is a huge shortage of fabrication capability. With this investment, PLL, will be able to support the growth of its business in the offshore sector.

Considering the high oil prices and the substantial E&P activities in the country, there would be more opportunities for revamping existing offshore platforms and deploying new platforms by upstream oil and gas companies.

According to industry estimates about Rs 80,000 crore is expected to spent on offshore developments including platforms. The proposed investment in PSL will provide the company with required capabilities to serve this market more effectively.

PSL will give access to fabrication facilities for platforms, rigs and jackets. Punj Lloyd is currently executing the Heera field redevelopment project for ONGC. The facility at Pipavav Shipyard can also be used for fabrication of vessels for petrochemicals and refineries.

Real estate

Along with this growth opportunity in the oil and gas sector, the company is also active in the other infrastructure projects such as road and infrastructure projects from NHAI, Delhi Metro, UP State Highway and L&T.

PLL also announced its foray into real estate through a 50:50 JV with Ramprastha group for the development of multi-storied residential housing in Ghaziabad over 29 acres of land in the first phase.

In the second phase, substantial real estate development is proposed in Indrapuram and Gurgaon, where Ramprastha group holds a large land-bank of about 160 acres. In this venture Punj Lloyd will also leverage on the capabilities of Sembawang, which specialises in handling larger real estate projects. However, it will still take three-four years for the company to develop and sell the apartments and reflect into its top line.

Valuations

PLL is investing in different verticals and businesses to leverage its existing capabilities and integrate its offerings. Sembawang has an order book of about Rs 3500 crore, almost 1.6 times its FY07 turnover.

Sembawang, which contributes 42 per cent of consolidated revenues, is expected to improve its profitability. Its operating margin has improved from just 0.5 per cent when PLL acquired it, to about 3.5 per cent now.

The improvement in the margin will be key for the consolidated numbers. Punj Lloyd’s operating margin is expected to improve from 7.3 per cent in FY07 to about 9-10 per cent over the next two years. At the current market price of Rs 266, the stock is trading at 20 times its FY08E earnings and 15 times FY09E earnings, and can be bought at declines.