Punj Lloyd: strong buy

An investment can be considered in the stock of infrastructure company Punj Lloyd. A healthy order-book, qualification to bid for larger and complex orders, and steady profit margins excluding one-off expenses suggest strong earnings prospect for the company. The stock is trading at 20 times its expected consolidated earnings for FY 2009. Investors can consider holding the stock with a 2-3 year perspective to benefit from the extended capabilities arising from the acquisition of Sembawang Engineering & Constructions (Semb E&C). Consider buying in lots to take advantage of any weakness linked to the broad markets.

Punj Lloyd's consolidated earnings for the quarter ended December 2007 disappointed and led to a sharp reversal in the stock. The company's subsidiary had executed some low-margin legacy orders that resulted in losses of Rs 68 crore being booked due to delays and design changes. The management has stated that the provisions have been made for the entire sum on a conservative basis, although some of this amount may be recovered. Barring this expense, the profitability of the company has been maintained. With nearly 75 per cent of the legacy orders completed this quarter, the remaining orders may at the most keep the profit margins sedate over the next couple of quarters.

However, on the positive side, Semb E&C's order backlog at Rs 6,200 crore is up 35 per cent over the year, indicating healthy momentum in order flows. Once the legacy orders are completed fresh orders are expected to carry improved margins, given the nature of recent orders bagged. The acquisition of Semb E&C has also enhanced Punj Lloyd's project capabilities in areas such as upstream oil and gas, airports and tunnelling. Punj Lloyd's consolidated order-book at Rs 16,000 crore is about three times its consolidated FY07 revenues. While the order inflows for the parent company have been subdued this quarter, capex spending in the oil and gas and process industries, especially in the West Asian region, can be expected to translate into strong order flow. Punj Lloyd's established presence in geographies outside India provides comfort in the above aspect.

The company has also made aggressive strides in getting a foothold in new segments of infrastructure that hold potential. Its strategic stake in Pipavav Shipyard, which is currently expanding capacities and plans to raise IPO funds, could not only provide investment upside but also allow utilisation of fabrication facilities at the shipyard for Punj Lloyd's offshore platforms and rigs. Its plans to foray into defence equipment manufacturing also have the potential to add substantially to revenues.

call : strong buy punjlloyds@300---325


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