| Summary of Contents STOCK IDEA Punj Lloyd
Cluster: Apple Green
Recommendation: Buy
Price target: Rs620
Current market price: Rs519 Stepping in the upper league Key points - Moving up the value chain: One of the significant achievements for Punj Llyod Ltd (PLL) over the years has been its increasing average order size. PLL started with an average order size of $30 million that has grown to $130-140 million, and the company intends to increase it to $250 million. We believe higher order size would improve the margins of the company and also make it a pre-qualified player for larger and more complex orders.
- SEC turnaround—a key positive: PLL acquired Sembawang Engineers & Constructors (SEC) in June 2006. SEC's acquisition has added to the expertise of PLL in the field of oil & gas, airports, jetties, MRT/LRT, and tunneling. SEC has traditionally operated at lower margins, however the new orders are booked at healthy margins. Further, the company expects to execute all the legacy orders of SEC over the next 18-24 months. We expect, this will improve SEC's operating profit margin (OPM) from 3.5% in FY2008E to 7% in FY2010E.
- Order book—more the merrier: PLL has had a spectacular flow of orders, with orders growing from Rs3,240 crore at FY2005 end to Rs15,944 crore (including Rs4,900 crore for SEC) by FY2007 end. In H1FY2008 the company bagged orders worth Rs2,070 crore. The company has a healthy order backlog of Rs14,852 crore, which is 2.9x its FY2007 revenues and this we believe imparts strong visibility to the earnings of the company.
- Acquisitions—help plugging and bridging gaps: PLL is the second largest engineering, procurement and construction (EPC) company in the country. Acquisition of SEC and Simon Carves has helped PLL plug gaps in its offerings and increase its addressable markets. Post acquisition, PLL has considerably bridged the gap making it more competitive against Larsen and Toubro (L&T), the largest EPC player in the country.
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