GVK Power and Infrastructure, Unitech, Asian Paints, Cement Sector

GVK Power and Infrastructure, Unitech, Asian Paints, Cement Sector

Sobha Developers

Sobha Developers

AIA Engineering

AIA Engineering

HEG

HEG

Jet Airways

Jet Airways

Dish TV

Dish TV

Bharti Airtel

Bharti Airtel

Sun TV

Sun TV

Federal Bank

Federal Bank

Weekly Watch - Nov 8 2009

Weekly Watch - Nov 8 2009

Market Outlook - Nov 8 2009

Market Outlook - Nov 8 2009

Weekly Newsletter - Nov 8 2009

Weekly Newsletter - Nov 8 2009

Punj Lloyd

A repeat instance of cost overruns by Punj Lloyd’s subsidiaries, albeit with a different client, has sprung a surprise on investors. This comes after the management’s comments in the June quarter that the company has made adequate provisioning for other projects where it anticipated cost overruns. Slow-moving contracts in Libya and Jurong Island also cast doubts on timely execution of projects.

Volatility and unpredictability on the cost front and uncertainty in revenue growth as a result of delayed projects reduces comfort from an investment perspective, even as Punj Lloyd continues to be well placed to bag more orders in the oil and gas and infrastructure space.

Investors can consider exiting the stock of Punj Lloyd on the back of recent developments. The company’s performance over the next two quarters, coupled with the outcome of the troubled contracts, would determine the company’s growth prospects over the medium-term.

At the current market price of Rs 212, the stock trades at 20 times its likely per share earnings for FY-10. The recent happenings pose a challenge for earnings to keep up with this valuation.
Slipping up

Punj Lloyd’s consolidated sales for the September quarter fell 2 per cent while net profits dropped 63 per cent to Rs 52 crore, over its year-ago numbers. The company has stated that orders from Libya, which account for 37 per cent of its current order book, yielded neither revenues nor profit margins in the September quarter. The revenue booking is expected to begin in the third quarter. Given the large-size of these orders (Rs 9,850 crore), any further delays in the execution of projects in Libya would dent revenue growth.

Punj Lloyd’s profits plunged as a result of a fresh case of cost overrun, this time for an Engineering Procurement and Construction (EPC) contract for a bio-ethanol plant for its client, Ensus. The company was forced to book cost overruns of Rs 104 crore, claimed to be a result of low productivity and delays attributable to sub-contractors. Neither the agreement with the contractors nor the local laws provide scope for claiming the same from them.

There are two discomfiting factors to this event: One, the earlier project in which cost overrun was incurred was a legacy order of the overseas subsidiary, Simon Carves. That is, the order was bagged before Punj Lloyd acquired the company. This bio-ethanol plant project is, however, stated to have been bagged post acquisition — which suggests that the project may have been verified for its feasibility by Punj Lloyd as well. Two, a less significant Rs 30 crore was booked as losses from the current project in the June quarter itself; this did not however find any separate mention in that quarter. These two factors cause some uneasiness from a standpoint of greater transparency.

Punj Lloyd’s woes came to light in December 2008, when its auditors qualified non-provision of certain costs. This issue later ballooned into Rs 430 crore of losses by FY-09. The company meanwhile had to provide for Rs 360 crore of additional costs incurred in ONGC’s Heera project in March ’09. There appears more hope for recovering this, as changes in specifications and resulting excess costs are common in such projects.

The company is once again facing trouble on a project awarded by Ensus. Another £16 million (Rs 125 crore) might be demanded by the client as liquidated damages. Punj Lloyd’s management hopes to enter into a production-sharing agreement with this client as the plant is being built with a 15 per cent additional capacity than was planned originally. Even if such a favorable pact is entered into, the cost recovery may be over two years. The litigation with the earlier client, SABIC, and the negotiation with the present one, may affect the earnings growth of Punj Lloyd over the next few quarters.
Strength in order book

The biggest strength for Punj Lloyd currently is its healthy order book of Rs 26,808 crore (2.2 times FY-09 consolidated sales), originating largely from infrastructure and hydrocarbon segments. The order inflows though, have declined sharply compared with a year ago. We believe that oil and gas projects would, however, provide traction to the company’s order intake. Such orders, typically pipelines and storage tanks, may provide lucrative margins than infrastructure projects. Operating profit margins for the September quarter fell 3 percentage points to 7.2 per cent.

Another concern on the financial front is the mounting interest cost, despite raising funds through qualified institutional placement and non convertible debentures. Clearly, working-capital requirements appear stretched.

SBI November 2009 futures at discount

Turnover declines

Nifty November 2009 futures were at 4797, near spot closing of 4,796.15. Turnover in NSE's futures & options (F&O) segment was Rs 77,394.87 crore, sharply lower than Rs 96,498.50 crore on Thursday, 5 November 2009.

State Bank of India (SBI) November 2009 futures were at discount at 2186 compared to the spot closing of 2202.

Tata Steel November 2009 futures were near spot price at 500 compared to the spot closing of 500.50.

Housing Development & Infrastructure November 2009 futures were near spot price at 363 compared to the spot closing of 363.10.

In the cash market, the S&P CNX Nifty rose 30.60 points or 0.64% at 4,796.15.

Weekly Support and Resistance Levels

October, 2009
COMPANY NAME	S3	S2	S1	CLOSING PRICE	R1	R2	R3
ABB	638	675	707	740	776	813	845
ACC	615	650	683	715	750	785	818
Ambuja Cem	74	77	81	85	88	91	95
BHEL	1,949	2,046	2,123	2,200	2,297	2,394	2,471
BPCL	473	486	498	510	522	535	547
Bharti	246	274	292	309	337	366	383
Cairn	237	250	259	267	281	294	302
Cipla	245	261	276	290	306	322	337
DLF	284	320	344	367	404	440	463
Gail	302	329	344	360	386	413	428
Grasim	2,019	2,065	2,123	2,181	2,227	2,273	2,331
HCL Tech	245	267	283	298	321	343	359
HDFC Bank	1,524	1,568	1,596	1,625	1,669	1,712	1,741
Hero Honda	1,336	1,402	1,464	1,526	1,591	1,657	1,719
Hindalco	89	103	112	120	134	148	157
HUL	254	259	267	274	280	286	293
HDFC	2,439	2,540	2,601	2,661	2,762	2,862	2,923
ICICI Bank	706	760	794	828	883	937	971
Idea	42	45	48	51	54	57	60
Infosys	2,016	2,089	2,146	2,203	2,276	2,349	2,406
ITC	225	232	241	251	258	266	275
L&T	1,395	1,465	1,510	1,555	1,625	1,694	1,739
M&M	795	863	905	947	1,015	1,083	1,125
Maruti	1,282	1,348	1,405	1,462	1,528	1,594	1,651
Nalco	317	340	354	368	391	413	427
NTPC	191	198	203	209	216	223	229
ONGC	1,057	1,096	1,120	1,144	1,183	1,221	1,245
Powergrid	94	99	102	105	110	115	118
PNB	771	815	844	873	918	962	991
Ranbaxy	342	370	386	402	431	459	475
Rcom	144	157	166	174	187	200	208
Reliance	1,676	1,785	1,848	1,912	2,021	2,130	2,194
Reliance Infra	831	926	998	1,070	1,165	1,260	1,332
Reiance Power	121	130	136	142	150	158	164
Satyam	91	95	99	103	107	112	116
Siemens	445	475	495	515	544	573	593
SBI	1,931	2,036	2,100	2,163	2,268	2,374	2,437
SAIL	140	150	157	163	173	182	189
Sterlite	631	698	737	777	843	910	949
Sunpharma	1,281	1,325	1,358	1,391	1,436	1,480	1,513
Suzlon	43	52	57	63	72	81	86
Tata Com.	283	311	338	364	393	421	448
TCS	568	587	603	620	638	657	673
Tata Motors	502	525	547	568	591	615	636
Tata Power	1,104	1,151	1,225	1,299	1,345	1,392	1,466
Tata Steel	379	426	453	480	527	574	601
Unitech	63	72	78	83	92	102	107
Wipro	541	562	578	595	615	635	652
Zee	200	216	227	239	255	271	282
Zee	224	234	243	253	263	273	282