Investor's Eye: Update - Punj Lloyd (Management meet highlights), Automobiles (Craving for growth)

 

Investor's Eye [September 03, 2012]  Sharekhan www.sharekhan.com

Summary of Contents   Punj Lloyd Cluster: Apple Green Recommendation: Hold Price target: Rs60 Current market price: Rs45 Management meet highlights  We recently met the management of Punj Lloyd Ltd (PLL) to understand the future course of the company's business. We present the highlights of our meeting in this note. Libya's orders to start execution in two to three months: The current order book of PLL stands steady at Rs26,206 crore, with nearly 16% of it exposed to Libya. With the new government now in place, Libya is inching towards stability and so are the various projects that had got stalled. PLL has five infrastructure projects, two oil & gas contracts and one upstream drilling contract in Libya. It has already started the execution of the upstream contract with one rig deployed for about a month. Of the five infrastructure contracts the company has already renegotiated three and would commence construction activity in the next one month or so. The remaining two contracts are up for renegotiation and a favourable outcome is expected soon. The two oil & gas projects are also in the process of renegotiation and execution should commence soon. Overall, the company expects the situation in Libya to improve going ahead and hopes to begin executing the existing projects at full speed in about a quarter or so. Further, the company remains optimistic about the potential opportunities in Libya and would remain focused on the country.  Various claims and settlement negotiations on track; favourable outcome expected this fiscal: A considerable chunk of PLL's money is caught up in various claims and contract settlement cases pending with the authorities in India and Libya. In India, these cases are largely confined to Oil and Natural Gas Corporation (ONGC)'s Heera project, which was earlier under arbitration but was put under the purview of the Outside Expert Committee (OEC) about two months back. The OEC usually settles cases within six to seven months. The total claims are estimated at nearly $200 million and the company is optimistic about a favourable outcome in this fiscal. In Libya, due to political unrest there had arisen some force majeure claims, amounting to roughly $80 million currently, on three infrastructure projects. These projects have been renegotiated and accepted by the authorities, and the claims would be released in about a month. Further, some other Libyan projects are also being renegotiated which would result in further force majeure claims. All this will help the company to release its working capital and thus reduce its debt burden.  Evaluating two to three strategies to reduce debt: The company seems to have regained its operational efficiency, as was reflected in its revenue and operating profit margin performance over the past few quarters. However, its profitability remains questionable due to the huge debt (largely working capital loans) on its books. PLL intends to reduce its debt by various means. One, it intends to raise debt through its international subsidiaries at their respective markets. This would help it repay the high-cost rupee debts in India. Two, it plans to sell a few assets that are located mostly in and around Delhi. Three, it plans to repay its loans using the claim proceeds whenever these are received. With the Libyan operations showing signs of improvement and order execution in the country picking up in the coming months, we expect the company to see a sustained inflow of cash from the region. Further, the force majeure claims and the mobilisation advance from the Libyan government will help PLL to execute the Libyan projects without needing more working capital. Also, the Heera case seems to be progressing well. All these factors and some large projects that are nearing completion could result in a healthy cash flow which could free up the working capital as well as help repay part of the debt.  Hold with price target of Rs60: PLL witnessed a strong order inflow in FY2012 which has improved the revenue visibility for the next two years. It has also shown an improvement at the execution level and margin expansion over the last five quarters. Even the situation in Libya is slowly improving, though it has not stabilised yet. Thus, PLL now needs to bring its debts under control and reduce its working capital requirement. These if achieved will help it to lower its interest burden and cause the operating profit to percolate to the net level. Hence, any success in lowering the cost of the debt or improving the working capital days will add to the growth at the net profit level. We, therefore, maintain our Hold recommendation on the stock with a price target of Rs60, as the company's business visibility is improving. SECTOR UPDATE Automobiles Craving for growth OEMs get the first taste of panic as slowdown turns manic  Barring Mahindra and Mahindra (M&M; the automotive segment), the growth of most domestic automobile companies slipped to low single digits in the year till date (YTD) FY2013. Virtually, half the automobile companies are in negative zone. In our report dated December 27, 2011, we had anticipated this manic slowdown in H1FY2013.  The August 2012 performance reflected the vulnerability of some automobile companies. For instance, Hero MotoCorp's sales hit an 18-month low; M&M's tractor sales touched the lowest level in two years and Maruti Suzuki saw its sales falling to a ten-month low. Barring Tata Motors (the car segment), M&M (the automotive segment) and Eicher Motors, all other companies and all other segments of these companies reported a decline year on year (YoY).  Outperformance to depend on sustenance of market share  The companies that can hold market share in a slowdown will bounce back the fastest as pent-up demand returns during the festive season. Some segments like Maruti Swift and M&M XUV5OO may even benefit as customers turn conservative and become choosy. The two-wheelers and commercial vehicle (CV) segments will be the hottest battlegrounds as the entry of new players threatens the incumbents. Outlook: M&M and Maruti can outperform We had witnessed a wave of negative sentiments for the rural demand triggered by the delayed monsoon. Most affected by this were the ones that had the maximum rural exposure, such as M&M (tractors), Maruti Suzuki (25% of sales) and Hero MotoCorp (46% of sales). We expect the late revival of the monsoon rains coupled with the high food prices and government grants to support the rural demand. We believe that most negatives related to the impact of the rainfall deficiency have been priced in. The competitive lens filters out M&M as the company that is best placed to capitalise on this opportunity (sub-4 meter Xylo and Verito launch) followed by Maruti Suzuki (an order backlog of 1.4 lakh diesel cars, petrol-CNG options for Alto and Swift, 800cc launch around Diwali).   Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Regards, The Sharekhan Research Team myaccount@sharekhan.com Manage your newsletter subscriptions

 

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