New trouble spots are emerging around the India Infra story. None seem in a condition to bear the fortitude of light in the near future. Selling might continue in L&T, Punj LLoyd, Nagarjuna Construction and all other tainted stocks. L&T had bought a 3.95 per cent stake in Satyam via market purchases before the fraud came to light. The stock price is around 80 per cent lower than L&T's acquisition price implying Rs 3 bn in unrealised losses. L&T does not plan to sell its stake at this stage, but will probably provide this disclosure in the Notes to Q3 results. Another company that got impacted by the Satyam fraud is Nagarjuna Constructions (NCC) which is doing four road projects, one seaport (Machilipatnam port project) and two airport projects (Gulbarga and Shimoga airports) with Maytas Infrastructure, which belongs to same promoter family as Satyam. The two companies have also jointly bid for irrigation cash contracts. NCC's stock price was down 30 per cent last week. Punj Lloyd's stock price was also down 25 per cent last week due to termination of a contract and encashment of GBP28.5m bank guarantee by its customer SABIC Petrochemicals. In the FY08 annual report auditors had qualified Punj Lloyd's accounts for non-provision of losses of Rs 3 bn on this project. This project was almost complete and Punj Lloyd has commenced adjudication proceedings against their client. If things go against Punj Lloyd it stands to loose GBP28.5m of bank guarantees and around GBP 25 mn of cost overruns on the project. Investors can expect provisions for losses on this project in FY09, which could be over 25 per cent atleast, maybe up to 50 per cent of Punj LLoyd's forecast pre-tax profit estimate for FY09. Worse, most engineering companies are susceptible to risk of order cancellations, deferments, rising working capital requirements and bad/doubtful debts in the current environment. It is difficult to believe that in an environment where the leading business groups are seeing the creation of unforeseen liabilities, would banks continue to fund new projects. Something tells me that the next sector to sink will be the Banking sector, as it grapples with lower loan sanctions measured by loan growth, and creation of NPAs. |
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