Punj Lloyd

The stock of Punj Lloyd Ltd has seen a massacre of sorts, having lost a third of its value in slightly more than a month. Part of the reason lies in its results for the last quarter. Although net revenues for the consolidated entity increased by a respectable 48% compared with the year-ago period, the increase in interest, depreciation, exceptional items and tax was lower at 33%, indicating a sharp fall in margins. In fact, after taking into account the higher “other income” during the last quarter, operating profit margin was down to 4.9%, compared with 5.8% in the year-ago period.
That was way below analyst expectations, the nasty surprise being losses booked on legacy orders of the company’s Singapore subsidiary, Sembawang Engineers and Constructors Pte Ltd. Without these losses, operating margins would have been much higher, at 8.1%. In fact, for the stand-alone company, operating margins have actually improved to 8.5%, from 7.4% a year ago. In addition, to be fair to the management, they had indicated that in a particular quarter, if the proportion of legacy orders was higher than the proportion of new orders, then margins would be affected. They had said that margins at Sembawang would move “from the traditional levels of 1-1.5% when we did the acquisition, to levels above 7-8% once all the legacy orders are completed and that migration may take a period of 18 months or 24 months.”
At the same time, the Sembawang acquisition has paid off handsomely in terms of moving up the value chain, higher ticket sizes and new orders. To illustrate, Sembawang’s order backlog was Rs4,243 crore at end-June, compared with Rs6,239 crore now. The order backlog for Punj Lloyd’s other operations (excluding Sembawang) fell from Rs10,982 crore to Rs9,774 crore over the same period. Analysts say that’s a concern given that margins are lower on the Sembawang orders. They’re also worried whether the other legacy projects that Sembawang still has could result in similar losses in the next few quarters. However, given the continuing momentum in new orders, the bulging order book, the improving outlook on margins as the legacy projects get over, there’s no reason why the stock should not outperform over the longer term.
Analysts have been touting Punj Lloyd as the next Larsen and Toubro Ltd, which is the reason it quotes at a premium to its less fancied cousins in the infrastructure space. But those higher valuations come at a price—it doesn’t leave any room for disappointment.