Punj Lloyd
Cost overruns resurface, Maintain REDUCE
REDUCE
CMP: Rs 203 Target Price: Rs 192
Punj Lloyd (PLL) Q2FY10 performance posted negative surprise with yet another instance of cost overrun in an overseas project. Consequently, PLL reported a 63.3% yoy decline in adjusted net profit of Rs528 mn versus expectation of 4.2% decline to Rs1381 mn. Q2FY10 performance was disappointing with (1) revenue decline of 2.8% yoy to Rs28.7 bn, led by lower traction in key orders (2) cost overruns of Rs1040 mn booked on project undertaken by WOS Simon Carves (3) 37.2% yoy decline in operating profits to Rs2120 mn (4) 63.3% yoy decline in net profits to Rs528 mn. We were not surprised by low revenue booking in the quarter, owing to expectation of slow ramp-up in key orders and high revenue booking in precedent quarter. But, recurrence of cost overruns despite clarification by management in earlier interaction is negative surprise.
Q2FY10 result has resurfaced the cost overruns dilemma, yet again. PLL has already undertaken 26% correction in last 4-5 trading sessions. Since, being lower-end of consensus earnings estimates, we believe that above event is already factored in our earnings estimates and therefore maintain our FY10E and FY11E earnings estimates. We had negative bias on the company, but recent price correction has taken the sheen of the high expectations and valuations from overtly-optimistic levels to attractive levels. But, successful and profitable order book execution remains key risk to earnings, considering the track record of cost overruns. Since, PLL has not stabilized its operations, we retain our REDUCE rating and also increase the discount to L&T's valuations at 45% versus 30% earlier with revised price target of Rs192/Share against Rs242/Share earlier.
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