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Sunday, March 22, 2009
Punj LLoyd
At a time when a number of established infrastructure companies have reported sedate December quarter numbers, due to the macro economic slowdown, Punj Lloyd’s order flows and revenue growth have remained relatively healthy. But profits have been under pressure, with internal issues such as cost overruns and revocation of bank guarantee by its foreign subsidiary’s client weighing on the company’s consolidated profits.
For the quarter ended December 2008, the company posted consolidated losses of Rs 225 crore, on revenues of Rs 3,120 crore. This, together with delays in execution of some orders (delay being from the client’s end), may depress the near-term earnings picture for the company. Strong order flows, together with a shift in focus to segments that are less affected by the slowdown, however, continue to lend visibility to Punj Lloyd’s long-term growth story.
We, therefore, recommend a hold on the stock at this stage. Those with a three-year perspective can consider accumulating the stock on declines linked to broad markets. At the current market price of Rs 80, the share trades at six times its estimated consolidated earnings for FY10.
Dragged by subsidiary’s misfortunes
Over the past few quarters, Punj Lloyd has been disclosing details of cost over-runs that its UK-based subsidiary, Simon Carves (a subsidiary of Sembawang), has been facing on its legacy projects. While the company has been partly providing for this over the past few quarters, the issue appears to have escalated to a point where the concerned client SABIC has invoked a bank guarantee as well as performance guarantee, thus terminating the contract.
While Punj Lloyd’s management claims that the project had attained over 98 per cent execution and that Simon Carves has initiated court proceedings against SABIC, the former decided to provide for cost overruns of Rs 207 crore from the project in the December 2008 quarter.
Further, Rs 106 crore of expenses, on account of forex translation losses, had to be provided for Simon Carves’ loans as well as other loans. As a result, the company witnessed operating losses of Rs 73 crore (before interest depreciation and taxes) in the December quarter. But for these losses, operating profits would have grown by 28 per cent.
Aside of these issues, Punj Lloyd has demonstrated strong revenue growth of 48 per cent confirming that there have been no execution delays from its side on its on-going projects.
The management has stated that it has provided for cost over-runs on all existing projects, which could suggest that these losses may be one-off in nature. The company’s current debt equity ratio at less than one (although borrowing costs have gone up) also provides comfort on the financial front. If so, what other concerns are likely to mute the company’s earnings in the near term?
Current concerns
For one, the invocation of guarantee of Rs 200 crore has not been written off in the company’s books. If the final outcome of the Court proceedings, which may take anywhere between a year-and-a-half or two, is not in the company’s favour, another one-time expenditure can drag profits.
Two, Punj has also had cost-overruns in its offshore project with ONGC, as a result of engineering modifications made by ONGC, increase in inputs as a result of the changed specification and transportation costs. While Punj has been fairly conservative in providing for these over-runs, the company has prepared variation orders and claims to recover the same.
Even as there appears little reason to believe that the company cannot regain these additional costs incurred, it does cast a doubt on the company’s ability to build cost structures that cause less volatility to earnings. Having said this, it needs to be borne in mind that orders of a similar nature are not a regular feature.
Three, the company has stated that about 18 per cent (four orders) of its current order book of Rs 20,900 crore face the risk of delay in execution in the short term, either due to projects kept on hold by the client or delays in land acquisitions or financial closure on the client’s part.
While these delays could be as a result of funding constraints on the client’s side, near-term revenue flow from these projects may have to be discounted. Therefore, even after excluding these, the company’s revenue visibility over the next two years remains steady.
Assuming a revenue growth of about 20 per cent compounded annually between FY08-10, this increase, although it appears healthy, could well suggest a slowdown from the aggressive growth levels of 48 per cent CAGR witnessed over the four-year ended FY08.
Order picture
Punj Lloyd has been able to receive about Rs 2,300 crore of order inflows during the December quarter. Muted as it may seem, the company has further received over Rs 1,400 crore of orders in the last two months alone, suggesting that demand, though not enormous, has been fairly consistent.
The sedate growth could also be a result of the company becoming more choosy in obtaining a less risky business mix. Punj has been slowly shifting its focus to infrastructure/construction projects, which accounted for 75 per cent of order inflows in the third quarter and make for 33 per cent of the overall order book of Rs 20,900 crore.
The company’s business in overseas countries has also not come under serious threat so far, although the slowing of the West Asian economies could reduce capex activities. Such a slowdown could, however, be attributed to the fund crunch rather than a crude price correction.
Recent projects won in Libya, Indonesia and Singapore suggest that the company’s order inflows from overseas has remained strong. Further, according to the company, none of the national and international oil company projects are witnessing a slowdown in projects, although there could be fewer project awards in the petrochemical space.
From countries such as Qatar, which is high on gas exports, Punj expects incremental orders. Going forward, given the strength of its subsidiary, Sewbawang, in infrastructure projects, Punj is well-placed to comfortably diversify further into such projects in the event of orders drying up in the oil sector.
Everest Kanto
Investors with a long-term perspective can consider accumulating the stock of Everest Kanto Cylinder (EKC), on declines linked to the broad markets. Attractive valuations apart, revenue potential from the commencement of the KG Basin gas supply and the company’s planned entry into city gas distribution in Kolkata underscore our recommendation.
While the stock price had corrected significantly in the last couple of months on concerns that falling crude oil prices and slackening demand in the auto sector could curb demand for its CNG cylinders, such concerns appear factored into the stock’s rock-bottom valuations. At the current market price of Rs 103, the stock trades at about 6 times its estimated FY10 per share earnings, using very conservative growth estimates. However, there is no denying that EKC will face the heat from the economic downturn — the company already has had order cancellations due to the slowdown in commercial vehicle sales. But the demand for CNG cylinders over the long term would still receive support from its being a cost-effective option; countries are likely to continue to invest in ensuring their energy security over the next few years.
Despite the slowdown in commercial vehicle sales, the company has received orders from Tata Motors and Ashok Leyland for buses in Delhi, corroborating the potential of CNG as fuel. In the near term, the availability of surplus gas supply for transportation from the KG Basin holds the key to the company’s prospects. While EKC is yet to strike a formal deal, that it has over 80 per cent share of the domestic market puts it in a strong position to tap this business opportunity. This will also help the company improve its product mix, as gas transportation will entail the use of industrial as well as high-margin jumbo cylinders. EKC had earlier announced its planned entry into city gas distribution in Kolkata by way of a joint venture with a local company with gas distribution rights, and this also presents a diversification opportunity.
For the quarter-ended December 2008, while EKC’s sales continued to expand strongly (99 per cent growth year-on-year), much of this was driven by the company’s UAE and US operations. Net profits grew 30 per cent, on the back of operating profit margins of about 28 per cent. Driven by the decline in demand from India and China, the company has deferred the second phase of its expansion for its Chinese operations. While changing product mix may help it sustain margins at current levels, earnings may continue to lag topline growth, due to the higher depreciation and interest burden. Earnings registered a growth of 30 per cent year-on-year; it, however, fell 11 per cent sequentially.
Geodesic
Investments with a two-year horizon can be made in the stock of Geodesic considering its niche business focussed on instant messaging, and the stock’s attractive valuation. At Rs 64, the stock trades at a throwaway valuation of two-three times its likely 2008-09 earnings.
With a net profit margin of over 45 per cent, much higher compared to most other listed, products-focussed technology companies, Geodesic operates in the high-growth areas of instant messaging and VoIP. The company has a large roster of well-established clients.
In a possible trigger to valuations, Geodesic has announced a buyback of up to 25 per cent of the paid-up equity share capital (maximum of Rs 109.8 crore) from the open market, at a maximum price of Rs 75. This is expected to be executed over the next few months.
The company has managed a compounded annual revenue growth of 67 per cent and profit growth of 68 per cent over the past three years. For the nine months of the current fiscal, Geodesic has managed a 119.4 per cent growth in its revenues and 106.5 per cent expansion in its net profits compared to the same period in FY08.
Geodesic derives most of its revenues from developing instant messaging platforms/services and licensing them to enterprises as well as retail users (directly or indirectly) under the ‘Mundu’ brand. The company’s products (Mundu ICE stack) cater to clients ranging from portals and publishers to telecom operators, mobile handset manufacturers, system integrators and even retail consumers. Geodesic also licenses its instant messaging platform to mobile handset manufacturers and telecom operators, thus providing it with sustainable revenue streams, with scope for expanding margins.
Instant messaging is a rapidly expanding mode of real-time communication across the world. The global messaging market, which was $65 billion in 2007, is predicted to touch $117 billion by 2012 according to Portio Research. A more recent report also states that Mobile Instant Messaging, which generated $2.5 billion in 2008, is expected to increase to $12.4 billion by 2013.
Sustainable revenue-mix
For its enterprise and portals and publishing clients, Geodesic charges a licence fee, a customisation fee, annuity based service charges and charges for upgrades and updates. For retail customers, it charges a fee based on subscription. This model clearly provides a sustainable revenue stream.
Recently, Geodesic won a deal from Idea Cellular in India, for Internet radio services on a revenue sharing basis. This makes for better risk-sharing as downloads or logins to access Internet radio on the mobile would be clearly measurable.
The company has also launched its messaging services in Nokia and Sony Ericsson smartphone handsets and has an agreement with players such as BenQ. Mio Digi-walker, a key player in the mobile GPS navigation space, is another client. The company also recently joined the Blackberry ISV alliance to offer its services on smartphones. This should provide further revenue opportunities.
The client base for Geodesic also includes portals such as Naukri, bigadda.com, Edelweiss Capital Ltd, First Global Stock Broking, Business Standard and Dialog Telekom. As players constantly upgrade their Web sites and offer more cutting edge-services, this client base offers long-term revenue visibility for Geodesic.
The company has launched an instant messaging platform for the iPhone and may be well-placed to capture a share as and when Apple allows third-party software platforms on its phones.
Key developments
This apart, the company has also developed voice over Internet protocol (VoIP) products to work mobile phones and desktops, for PC-to-PC calls. VoIP is also an ever expanding market providing for cheap communications. It already averages 60,000 minutes a day.
Agreement with ITI Ltd to promote Geodesic’s products (such as its Amada 10k Simputer) to cater to various State Government E-Governance projects in India and with Glodyne Technoserve as part of Glodyne’s solution for Public Distribution System for various States in India have also been recently signed. The Simputer has an integrated Smartcard reader/writer which can be used for identification, sharing and security.
The company has also forayed into publishing by acquiring the Chandamama children’s magazine brand. The subscriptions have doubled in the last two years after the acquisition.
With its Telugu, Hindi and Tamil versions available online, this may help capture regional audience as well. An increased subscription may lead to increased ad revenues. Plans are also afoot to launch a full length animation film.
Key risks to this recommendation are technological obsolescence and competition from entrenched platforms such as IBM’s Lotus Sametime.
Weekly Newsletter - March 22 2009
Alls well that remains well. The signs dont seem to be very encouraging for the time being. The comforting factor is they are not so bad either. From an atmosphere of panic and shock, markets around the world are turning less erratic. But investors remain reluctant to bet their money as yet.
Besides the global cues, our market also has to reconcile with the F&O expiry next week. Not much choppiness is expected this time though. Among other news, Monday will see the official launch of the peoples car Nano in Mumbai. It may not cause much impact on the Tata Motors' stock for now but it sure will create a lasting impact on the auto industry for years to come. We may just get back to Monday Morning blues unless bright sunshine comes our way from the global markets.
Telenor to buy higher stake in Unitech's wireless arm
Norwegian telecom major Telenor said that it plans to buy a higher stake in India's Unitech Wireless than it had earlier envisaged. While Telenor's initial investment under the agreement will continue to be the previously agreed Rs61.2bn, its stake would rise to 67.25% in Unitech Wireless (subject to regulatory approval), up from a previously planned 60%. Upon completion of the first phase of the investment, Telenor's ownership percentage will be 33.50%. The transaction, and the first phase of investment will be completed shortly, as the closing formalities related thereto have been finalised, Telenor said. On October 28, Telenor executed an agreement to acquire a controlling interest in Unitech Wireless, through subscription for new shares. The subscription for new shares in Unitech Wireless will, as previously announced, be completed in four phases. Telenor and Unitech have agreed to proceed with completion of the transaction with certain adjustments.
HCL Tech wins US$350mn outsourcing deal
HCL Technologies Ltd. has entered into a total IT outsourcing services engagement with the Reader's Digest Association Inc (RDA), a global multi-brand media and marketing company. The value of the agreement is estimated to be approximately US$350mn over a seven year contract term. The scope of this complex transformational includes applications development and infrastructure support across the applications stack of Oracle Universe. Open Technologies and Mainframe; infrastructure support for network, security storage, end user computing and data centers (DC), including disaster recovery services are also part of the contract. The scope also includes DC and Application Portfolio optimisation to consolidate applications globally and refresh of legacy assets to modernize RDA's IT environment. As part of this engagement, HCL will also rebuild and migrate RDA's mainframe environment in its New Jersey Data centre facility. Additionally HCL will implement cutting-edge tools framework to provide business-aligned, unified real-time visibility into the health of the IT environment.
India adds 13.44mn wireless users in Feb
A total of 13.42mn telephone connections have been added during February compared to 15.26mn connections added in January. The total number of telephone connections reached 413.47mn at the end of February compared to 400.05mn in January. With this growth, the overall teledensity has reached 35.62 at the end of February as against 34.50 in January. Total wireless subscribers' base stood at 375.74mn at the end of February. A total of 13.44mn wireless subscribers have been added during February as against 15.41mn wireless subscribers added during January. In the wireline segment, the subscriber base decreased to 37.73mn in February as against 37.75mn subscribers in January, registering a drop of 0.02mn. Total broadband subscribers base reached 5.85mn by the end of February as compared to 5.65mn by the end of January.
Direct tax mop-up grow 19% yoy
The net direct tax collection till March 17 stood at Rs3,12,800 crores with the Central Board of Direct Taxes (CBDT) expressing confidence of achieving the revised target of Rs 3.45 lakh crores by the close of this fiscal. The growth in tax collection has been 18.8% over the year-ago period. The total direct tax collection for the fiscal 2008-09 has so far already surpassed the net tax collection of Rs 3,12,202 crores made in the fiscal 2007-08. Till March 17, 2008, the net tax collection was Rs 2.63 lakh crores. A CBDT official said, corporate advance taxes have shown a growth of 17.5% against an 18% rise in the last fiscal. The corporate advance taxes collected so far stood at Rs 1,23,400 crores against Rs 1,05,100 crores made last year.
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