XLRI JAMSHEDPUR

Punj Lloyd Ltd.

Valuation for Equity Investors
 Punj Lloyd Ltd. 2010

BACKGROUND
PLL, commenced operations as a pipeline‐laying company in 1989, is currently the
second‐largest 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, cross‐country oil and gas pipelines, offshore pipelines and
platforms.
The acquisition of a 100 per cent stake in Singapore‐based Sembawang Engineers and
Constructors (SEC) and UK‐based Simon Carves Ltd in 2006‐07 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 2005‐06 to Rs 277 billion
as of March 2009‐10. As on June 2010, PLL’s order backlog stood at Rs 256 billion which
is 2.5 times the net sales of the company in 2009‐10. PLL had witnessed an order inflow
close to Rs 172 billion in 2009‐10.
As of March‐10, 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 of
total order book amounting to Rs 77.7 billion are from Libya in infrastructure sector in
2009‐10.

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 Singapore‐based company. Punj Lloyd Delta Renewables (JV) will develop,
engineer and execute renewable energy‐based projects throughout the world.

Strength

One of the largest engineering construction companies in India with a strong

international presence.

Significant experience and strong track record.

Operations in diverse industries and economies.

Long term relationship with world‐class 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 Government’s plan to
raise investments in infrastructure development to ~9% of GDP by 2014. This
 Punj Lloyd Ltd. 2010

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 Petronas
Limited 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 and
Petrochemicals 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 Prince
Khalid 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 contract‐wins valued at Rs. 18.73 bn. The
contract will include designing, procurement, installation and commissioning of
utilities for three towns of Libya.

Sembawang Engineers and Constructors, a wholly owned subsidiary of global

conglomerate 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 to
Bangalore worth Rs 5390mn

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

Sembawang Engineers and Constructors Pte Ltd, was awarded a contract worth
approximately 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 Petroleum
Technology 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
Habshan‐5 Utilities & Offsites Project in UAE.
 Punj Lloyd Ltd. 2010

EPC project in consortium with Technicas Reunidas worth Rs 20560 mn from

Abu 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 of

Bihar for turnkey implementation of 850 solar‐powered 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, increase
in borrowings as well as higher depreciation and interest charges.

Risk

Construction projects are vulnerable to execution delays on account of non‐

availability 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 the
Company to currency risk.

As international projects are a predominant part of the order book the Company
is subject to geo‐political risks associated with the respective countries where it
operates.

The outlook going forward remains optimistic although the growth rate may
rationalise 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.
It’s mainly due to the nature of business. The economics of this sector are interesting. It
 Punj Lloyd Ltd. 2010

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 15‐20 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 lump‐sum
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 projects
Current 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 Dahej‐Vijaipur pipeline project).

Delay at ONGC Heera project: Cost overruns in ONGC’s 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, one‐third of total order book). New EPS is lower than what it
was in FY 09‐10.
 Punj Lloyd Ltd. 2010

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 2010‐11. Order backlog reported by the company is Rs. 28,500
Crore 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
years
3. Manufacturing expenses and operating expenses of Punj Lloyd have historically
amounted to 44% each of their revenue figures
4. Capital work‐in‐progress 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
 Punj Lloyd Ltd. 2010

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

 Punj Lloyd Ltd. 2010

EPS 10.59 11.43 9.67 8.51

Balance Sheet
2009 2010 2011E 2012E
Capital 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

 Punj Lloyd Ltd. 2010
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 0.0
loss/(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 in

Inventories -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 activities

long 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 11.5
Net cash inflow/(Outflow) 204.8 -121.8 896.4 -632.8
Opening cash and cash equivalents 211.0 364.8 181.0 1077.4
Closing cash and cash equivalents 364.8 181.0 1077.4 444.6
 Punj Lloyd Ltd. 2010

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 3.84
RM 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:

50.0 Raw Material cost of Punj Lloyd

45.0 has risen exorbitantly in FY09‐10.
Raw Material cost as a percentage
40.0 Raw Material
Cost as % of
of sales has become 45% for Punj
35.0
Sales Lloyd whereas sector average
30.0 was 32%. PLL could not maintain
RM Cost as % of
25.0 Sales (Sector) the cost due to price rise in steel
20.0 and cement. Probably PLL had not
15.0
gone for long term sourcing
FY 06 FY 07 FY 08 FY 09 FY 10 with suppliers.

12
Employee cost as a percentage of
10
sales also almost 1.8 times more
8 Employee Cost for PLL than Sector average.
as % of Sales
6 (PLL) Whereas sector operates at
Employee Cost
average 5%, PLL operates at 8‐
4
as % of Sales 9%.
2 (Sector)

0
FY 06 FY 07 FY 08 FY 09 FY 10

Both Raw Material and Employee cost has impacted significantly the EBITDA Margin
 Punj Lloyd Ltd. 2010

Punj Lloyd RoE is far below the

RoE (%)
sector RoE. Both Sector and PLL
25.0 22.0
18.8
has experienced higher RoE in
20.0 19.2 FY09‐10 due to revenue
15.0 18.2 12.31 realisation of pending orders.
16.7 Sector
10.0 9.17 10.27
Punj Lloyd
5.0 5.51
3.29
0.0
FY 06 FY 07 FY 08 FY 09 FY 10

Current Ratio PLL current ratio high than the

4.0
3.5 sector because ,of very high WIP
3.34
3.0 2.67
inventory. Threshold limit for
2.32
2.5 Sector revenue recognition in PLL is 25%
2.26
2.0
1.5 1.42.13 1.4 Punj Lloyd completion whereas the same for
1.5 1.3 1.4 others is approx. 10% (except
1.0
0.5 L&T). This caused very high WIP
0.0 for PLL. This in turn increases CA
FY 06 FY 07 FY 08 FY 09 FY 10
and CR

30.0
RoCE RoCE is Lower than sector due to
25.6 low EBIDTA margin
25.0 23.5
24.5 24.3
24.6
20.0 20.15
17.94 Sector
15.0
14.05 Punj Lloyd
12.19
10.0 12.59

5.0

0.0
FY 06 FY 07 FY 08 FY 09 FY 10
 Punj Lloyd Ltd. 2010

Asset Turn‐over ratio of PLL is

10.00
8.50 Asset Turnover Ratio higher than sector. It means asset
8.00 6.43 utilization or capacity utilization
6.68 6.27
6.00 is higher than the sector. The
6.87 6.45 6.03 Punj lloyd
trend is diminishing because
4.00 4.56
Sector slower revenue growth rate of
2.00 1.97 PLL.
2.02
0.00
FY 06 FY 07 FY 08 FY 09 FY 10

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
 Punj Lloyd Ltd. 2010

Calculation of Expected Rate of Return for Punj Lloyd

Source
Equity Beta Reuters 1.92
Risk Free
Rate CCIL 7.17
Market IESE Report: Avg of 22
Premium 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.