a report on financial forecasting of punj lloyd

8/7/2019 A report on Financial Forecasting of Punj Lloyd

1/13

XLRI JAMSHEDPUR

Punj Lloyd Ltd.

Valuation for Equity Investors


2/13

Punj Lloyd Ltd. 2010

BACKGROUND

PLL, commenced operations as a pipelinelaying company in 1989, is currently the

secondlargest player (based on revenues) in the EPC (engineering, procurement and

construction) segment in India. PLL operates through four business segments pipelines, infrastructure, storage tanks and terminals & process plants. It provides

comprehensive engineering, procurement and construction services to the hydrocarbon

sector, which includes the setting up of complex storage tanks and terminals, refinery

and process facilities, crosscountry oil and gas pipelines, offshore pipelines and

platforms.

The acquisition of a 100 per cent stake in Singaporebased Sembawang Engineers and

Constructors (SEC) and UKbased Simon Carves Ltd in 200607 has enabled the

company to enhance its capabilities and widen its skill set in the construction space, as

well as expand its global footprint. The company mainly operates in four segments oil

& gas, petrochemicals, civil and infrastructure construction and power.

Over the last three years, PLL has registered tremendous growth in terms of both order

book and geographical presence, mainly on the back of acquisition of a 100 per cent

stake in SEC and Simon Carves UK. The order book of Punj Lloyd has grown at a CAGR of

59 per cent over the last 4 years, from Rs 42.8 billion in March 200506 to Rs 277 billion

as of March 200910. As on June 2010, PLLs order backlog stood at Rs 256 billion which

is 2.5 times the net sales of the company in 200910. PLL had witnessed an order inflow

close to Rs 172 billion in 200910.

As of March10, the order book of Punj Lloyd was highly concentrated in infrastructure;

more than 60 per cent of the orders are from infrastructure sector. While

geographically, PLL is largely concentrated in Africa as orders close to 30 per cent oftotal order book amounting to Rs 77.7 billion are from Libya in infrastructure sector in

200910.

In the power segment, PLL initially operated in the thermal and nuclear segments. The

company has now entered the solar energy space by forming a joint venture with Delta

Solar, a Singaporebased company. Punj Lloyd Delta Renewables (JV) will develop,

engineer and execute renewable energybased projects throughout the world.

Strength

One of the largest engineering construction companies in India with a stronginternational presence.

Significant experience and strong track record. Operations in diverse industries and economies. Long term relationship with worldclass clients. Well positioned to capitalize on the global demand in the energy industry and

infrastructure development

Highly qualified and motivated employee base and proven management team. Large fleet of sophisticated construction equipment. Furthermore, as the Company has technical expertise in Power, Construction and

Defence sectors, it is well poised to take advantage of the Governments plan toraise investments in infrastructure development to ~9% of GDP by 2014. This


3/13


would result in an increase in order inflow from new opportunities like Metro

Rail Networks, Indian Defence and Ports and Marine, where Public Private

Partnership is being encouraged.

Result Highlights & Key Events

Punj Lloyd secured an order worth Rs. 275.79 bn from IndianOil PetronasLimited for design, detailed engineering, supply and construction of gas terminal

at Ennore, Tamil Nadu on EPCC basis.

The Company secured an order of Rs. 5.50 bn from Manglore Refinery andPetrochemicals Limited for engineering and procurement of Coke Drum

structure projects.

A subsidiary of the Company has secured three projects worth Rs. 59.04 bn in

Libya to build commercial and residential developments.

Dayim Punj Lloyd, a JV between the Punj Lloyd and His Royal Highness PrinceKhalid Bin Bandar Bin Sultan, Kingdom of Saudi Arabia, announced winning a

contract worth Rs. 12.10 bn for engineering, procurement and construction of

port tank farm of the Jubail Export Refinery Project in Saudi Arabia

Punj Lloyd announced three new contractwins valued at Rs. 18.73 bn. Thecontract will include designing, procurement, installation and commissioning of

utilities for three towns of Libya.

Sembawang Engineers and Constructors, a wholly owned subsidiary of globalconglomerate Punj Lloyd Group secured a major contract worth over Rs.12.63 bn

to construct two key stations of Singapore.

Contract from GAIL for gas pipe laying and terminal work from Dabhol toBangalore worth Rs 5390mn

Project from PUB, the national water agency of Singapore for construction of anew waterworks worth Rs 6140 mn

Sembawang Engineers and Constructors Pte Ltd, was awarded a contract worthapproximately Rs. 13.94 bn from Sentosa Pte Ltd Singapore for construction of

Hotel, Spa, Beach Villas, an Oceanarium and Water Theme Park in Singapore

Punj Lloyd was awarded a contract from the Rajiv Gandhi Institute of PetroleumTechnology to construct their technical institute at Rae Bareli, Uttar Pradesh for

Rs 1.8 bn.

Contract worth Rs 960 mn from the Hyundai Engineering & Construction Co.Limited for the Steel Structure, Equipment and Piping installation Works on

Habshan5 Utilities & Offsites Project in UAE.


4/13


EPC project in consortium with Technicas Reunidas worth Rs 20560 mn fromAbu Dhabi Gas development Company Ltd.

Contract from the Ministry of Health & Family Welfare for construction of

Medical College and Hostel Complex at AIIMS, Raipur for a value of Rs. 1150 mn

Contract by Nagarjuna Oil Corporation Ltd for installation of Inside Battery Limit(ISBL) units and interconnection Pipe Rack at Cuddalore Refinery Project in

Tamil Nadu worth Rs 3200 mn

EPC contract from Public Health Engineering Department of the Government ofBihar for turnkey implementation of 850 solarpowered water treatment plants

for an aggregate value of Rs 2320 million

EPC contracts worth Rs 1798 mn for refinery construction projects at Mangalore

refinery

Net profits impacted by increase in interest and depreciation charges

Net profit growth is impacted by lower than expected revenue growth, increasein borrowings as well as higher depreciation and interest charges.

Risk

Construction projects are vulnerable to execution delays on account of nonavailability of requisite permission, manpower, etc. PLL has faced such delays on

account of the Rs. 8 bn Assam road project. Any such delay may have a significant

impact on future growth.

Punj Lloyd's operations are spread across geographies; this exposes theCompany to currency risk.

As international projects are a predominant part of the order book the Companyis subject to geopolitical risks associated with the respective countries where it

operates.

The outlook going forward remains optimistic although the growth rate mayrationalise owing to a higher base, hardening of interest rates and an

unpredictable scenario of energy and commodity prices. Any volatility in raw material prices could impact margin, especially for EPC

projects.

Overall market sentiment can have momentary impact on the stock price. Stock prices have already moved up, though not reflective of embedded values.

We would expect volatility in the stock.

The earlier aggressive bidding by Punj Lloyd to secure projects has taken a toll on its

profitability.

Punj Lloyd has undergone huge increase in Working Capital during 2009 and 2010.Its mainly due to the nature of business. The economics of this sector are interesting. It


5/13


is not capital intensive, but working capital intensive. It does not need huge capital

expenditure to set up manufacturing plants, etc., but it needs a lot of free cash to keep

the projects going. Approximately 1520 per cent of the billing value of a project is

locked up as Working Capital.

In many cases, significant amount of the working capital is required to finance

the purchase of material and performance of engineering, construction and other

works before the payment from Client. Working Capital also may increase

because the company had to advance to complete projects under lumpsum

contract and have been involved in lengthy arbitration and litigation proceedings

to recover these amounts.

In 2010, main reasons for escalated Working Capital for Punj Lloyd are:

1) Huge increase in WIP inventory. Probably, most of the projects of 2008 and

2009 got completed in late 2010. Due to this delayed realization of projectsCurrent asset increased.

2) Huge amount of Loans and advances given to subsidiaries. But growth of this

amount is coming down.

3) Pursuant to an agreement dated March 27, 2010, entered into with some

parties (Purchasers), the Company agreed to sell its investments in

49,999,000 equity shares of a company to Purchasers subject to fulfilment of

certain conditions by the Company and the Purchasers. The Company has

booked the sale of investment amounting to Rs. 2,537,300 thousand during

the year.

Deductions by customers: Customers have deducted or withheld INR1243m towards

payment to Punj Lloyd for projects undertaken (INR655mn by ONGC and significant

portion of balance amount, INR588m relates to the DahejVijaipur pipeline project).

Delay at ONGC Heera project: Cost overruns in ONGCs Heera Platform development

project due to design changes and increases in the scope of work. Punj Lloyd had

booked INR2.4bn of revenue or this cost overrun; however, the customer has yet to

agree to these escalations.

We reduce our revenue estimates to incorporate execution delays at its projects in

Libya (worth INR 98bn, onethird of total order book). New EPS is lower than what it

was in FY 0910.


6/13


Assumptions taken for calculating the forecasts

1. Sales growth for 2011 FY is calculated using the 2010 order backlog/ revenue

ratio multiplied by the order backlog reported by the company in the half

financial year of 201011. Order backlog reported by the company is Rs. 28,500Crore out of which around 30% is distressed because of its order status in some

projects being undergone in Libya. Due to rising costs and less than budgeted

completion full revenue as per percentage of completion cannot be realized. We

have assumed 20% less revenue recognition thus the order book amounts to Rs.

26790 Crore. This revenue is however assumed to be recognized by the

organization in the following year and thus the growth rate comes back to match

its CAGR figure over 5 years which is 30%

2. Growth in other income is around 1% which is a CAGR figure over the last five

years3. Manufacturing expenses and operating expenses of Punj Lloyd have historically

amounted to 44% each of their revenue figures

4. Capital workinprogress is assumed to grow at 10% which is the trend over the

last 5 years. Growth in Fixed assets is also commensurate to the revenue

increase.

5. Current assets and liabilities are assumed to grow\ (decline) at the same rate as

that of the revenue growth. Provisions are growing at the historical rate of 4%.

6. Average interest rate for the loan funds that the company is paying is 10%. This

is taken from the annual report.

7. Tax rate is used as 35% which has been the historical figure barring the last year

in which it was around 11% because of some amount of tax credit entitlement


7/13


Key Financials:

Profit & Loss Account

2009 2010 2011E 2012E

Net Income 6852 7117 6832.3 8882.0

Other Income 105 425 106.1 107.1

Total Income 6957 7542 6938.4 8989.1

Expenditure

COGS 2382 3253.0 2937.9 3996.9

Opearing Expenses 3709 3314.0 3006.2 3996.9

EBITD 866 975.0 994.3 995.3

Depriciation 120 133.0 140.0 164.3

EBIT 746 842.0 854.2 831.0

Interest 251 429.0 375.0 409.6

PBT 495 413.0 479.2 421.4

Tax 174 45.0 167.7 147.5

PAT 321 368.0 311.5 273.9

Less : Dividends 9 5.0 5.0 5.0

Less: Corp Dividend Tax 1.55 0.8 0.8 0.8

Addition to Retained Earnings 310.5 362.2 305.6 268.1

Num of shares In millions 303 322 322 322


8/13


EPS 10.59 11.43 9.67 8.51

Balance Sheet

2009 2010 2011E 2012ECapital 61 66 66 66

R/S 2548 3511 3816.646 4084.732

Net Worth 2609 3577 3882.646 4150.732

Secured Loans 2370 3031 3278.333 3624

Unsecured Loans 568 472 472 472

Deferred Tax Liability 118 120 120 120

Capital Employed 5665 7200 7753.0 8366.7

Application of Funds

Gross Block 1541 1767 1967 2414.4

Less:Depreciation 469 587 727.025 891.3275

Net Block 1072 1180 1239.975 1523.073

Capital WIP 124 134 147.4 162.14

Investments 993 676 676 676

Inventories 2950 3506 3365.8 4375.5

Sundry Debtors 1524 1498 1438.1 1869.5

Cash and Bank Balance 360 181 1077.4 444.6

Loans and Advances 1097 1735 1450.0 1450.0

Other CA 92 341 327.4 425.6

Current Assets 6022 7261 7658.6 8565.2

Finances

Creditors 2401 1904 1827.84 2376.19

Provisions 146 147 141.12 183.46

Current Liabilities 2547 2051 1968.96 2559.65

Net Current Assets 3475 5210 5689.60 6005.52

Employment of Capital 5665 7200 7753.0 8366.7


9/13


Cash Flow Statement 2009 2010 2011E 2012E

Cash Flow from Operating Activities

Profit Before Tax 495 413 479.2 421.4

Adjustments for

Depreciation, Amortization and impairment 120 133 140.0 164.3

Amortization of foreign Currency 33 47 0.0 0.0

Foreign exchange(gains)/losses 13 100 0.0 0.0loss/(Profit) on sale of FA -37 2 0.0 0.0

Loss/(Profit) on sale of LTI 2 -307 0.0 0.0

Loss & disposal in ISP Business 17 0 0.0 0.0

Interest expense 189 264 375.0 409.6

Interest Income -32 -26 -26.0 -26.0

Loss/(Profit) on sale of benficial rights 0 -4 0.0 0.0

Income from Investments -0.05 -0.02 0.0 0.0

Bad Debt Written off 18 13 0.0 0.0

Unspent Provision & Liabilites written back -1.3 -12 0.0 0.0

Diminution on value of investmens 4 0.6 0.0 0.0

Operating Profit before WC adjustments 820.65 623.58 968.3 969.3

Adjustments for Changes inInventories -1448 -556 140.2 -1009.7

Debtors -570.2 -8.2 59.9 -431.4

Other CA -12.3 4.1 13.6 -98.2

Margin Money Deposit -2 -20 0 0

Advances -312 -665 285 0

CL and Provisions 983 -535 -82.04 590.688

Cash Generated from operations -540.85-

1156.52 1385.012 20.6401

income tax including fringe benfit tax -109 -113 167.7 147.5

Net cash from operating activities before EI -649.9 -1269.5 1217.3 -126.9

compensation under VRS 0 0 0

Net cash from operating activities -649.85

-

1269.52 1217.294

-

126.853

Cash Flow from Investing activities

payments for asset acquisition -341 -282 -213.4 -462.14

proceeds from sales of FA 112 6 0 0

proceeds from sale of division 0 0

purchase of investments -272 -33 0 0

sale/Redemption of investments 0.1 407 0 0

Income from investments - Dividends 0.05 0.02 0 0

Interest Received 33 27 26 26

0 0

0 0

Net cash flow used in investment activities -467.85 125.02 -187.4 -436.14

Cash flow from financing activitieslong term borrowings - Raised 788 1052 247.3 345.7

Repaid -197 -243 0.0 0.0

Short term working capital loan 930 -216 0.0 0.0

0.0 0.0

Interest paid - Net -185 -227 -375.0 -409.6

Dividend paid and tax thereon -14 -10.5 -5.8 -5.8

Equity capital raised 0 5.7 0.0 0.0

Share issue expenses 0 -24 0.0 0.0

Increase in premium on issue of share capital 0.5 674 0.0 0.0

Net cash flow from financing activities 1322.5 1011.2 -133.5 -69.8

Currency Fluctuation 11.5Net cash inflow/(Outflow) 204.8 -121.8 896.4 -632.8

Opening cash and cash equivalents 211.0 364.8 181.0 1077.4Closing cash and cash equivalents 364.8 181.0 1077.4 444.6


10/13


Competitive Position FY 2010

Parameter PLL L&T IVRCL NCC Gammon

Revenue 7,116.70 36,870.00 5,492.00 4,777.82 4,485.00

EBITDA Margin (%) 11.4 20.1 10.0 15.1 10.5

PAT 367 4,377.00 70.17 233.66 126.40

PAT Margin 5.16 11.87 1.28 4.89 2.82

RoE 10.27 23.90 3.79 10.40 6.50

RoCE 11.43 29.50 15.78 6.19 14.52

D/E Ratio 0.61 0.37 0.87 0.68 0.67

Current Ratio 3.34 1.22 1.92 2.18 1.69

Working Capital Days 261 47 150 169 151

Asset Turnover Ratio 5.42 5.79 9.12 8.00 3.84RM as % of Sales 45.71 26.02 34.65 38.64 45.71

Employee Cost % of

Sales 9.90 6.45 3.69 3.85 1.35

Sector Comparison:

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

FY 06 FY 07 FY 08 FY 09 FY 10

Raw Material

Cost as % of

Sales

RM Cost as % of

Sales (Sector)

0

2

4

6

8

10

12

FY 06 FY 07 FY 08 FY 09 FY 10

Employee Cost

as % of Sales

(PLL)

Employee Cost

as % of Sales

(Sector)

Raw Material cost of Punj Lloyd

has risen exorbitantly in FY0910.

Raw Material cost as a percentage

of sales has become 45% for Punj

Lloyd whereas sector average

was 32%. PLL could not maintain

the cost due to price rise in steel

and cement. Probably PLL had not

gone for long term sourcing

with suppliers.

Employee cost as a percentage of

sales also almost 1.8 times more

for PLL than Sector average.

Whereas sector operates at

average 5%, PLL operates at 8

9%.

Both Raw Material and Employee cost has impacted significantly the EBITDA Margin


11/13


18.8

16.718.2

22.0

19.2

3.295.51

9.17

12.31

10.27

0.0

5.0

10.0

15.0

20.0

25.0

FY 06 FY 07 FY 08 FY 09 FY 10

RoE (%)

Sector

Punj Lloyd

1.5

1.4

1.3

1.4

1.4

2.67

2.13

2.32

2.26

3.34

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

FY 06 FY 07 FY 08 FY 09 FY 10

Sector

Punj Lloyd

24.6

23.5

24.5

25.6

24.3

12.59 12.19

17.94

20.15

14.05

0.0

5.0

10.0

15.0

20.0

25.0

30.0

FY 06 FY 07 FY 08 FY 09 FY 10

Sector

Punj Lloyd

Current Ratio

RoCE

Punj Lloyd RoE is far below the

sector RoE. Both Sector and PLL

has experienced higher RoE inFY0910 due to revenue

realisation of pending orders.

PLL current ratio high than thesector because ,of very high WIP

inventory. Threshold limit for

revenue recognition in PLL is 25%

completion whereas the same for

others is approx. 10% (except

L&T). This caused very high WIP

for PLL. This in turn increases CA

and CR

RoCE is Lower than sector due to

low EBIDTA margin


12/13


Valuation:Equity Valuation of Punj Lloyd

Financial Year 2011E 2012E

Net Operating Income 854.23 831.01

NOPAT 555.25 540.16

Add: Depreciation 140.03 164.3

Gross Cash Flow 695.27 704.46

Capex 200 447.4

Increase in Operating Working Capital 416.76 948.67

Gross Investment

Free Cash Flow 78.51 1,205.73

Terminal Value 13,299.40

Enterprise Value 66.04 10,263.36 10,329.40

Less: Loan Funds 3,750.33 4,496.00 8,246.33

Add: Cash 181

Equity Value 2,264.06

Equity Value per share 68.19

Multiples based Valuation

Financial Year 2011 2012

Earnings 311.48 247.92

PE 10.72 10.72

EPS 9.38 7.47

Price/ Share 100.57 80.05

8.50

6.87

6.436.68 6.27

2.021.97

4.56

6.456.03

0.00

2.00

4.00

6.00

8.00

10.00

FY 06 FY 07 FY 08 FY 09 FY 10

Punj lloyd

Sector

Asset Turnover Ratio

Asset Turnover ratio of PLL is

higher than sector. It means asset

utilization or capacity utilization

is higher than the sector. Thetrend is diminishing because

slower revenue growth rate of

PLL.


13/13


Calculation of Expected Rate of Return for Punj Lloyd

Source

Equity Beta Reuters 1.92

Risk FreeRate CCIL 7.17

Market

Premium

IESE Report: Avg of 22

analyst 6.1

Cost of Equity 18.882

Present Share Price: 72

Investors can Hold the PLL share for Long Term

considering higher growth Potential in Future.

a report on financial forecasting of punj lloyd

Documents