We reiterate our Sell rating on Punj Lloyd on continuing near-term headwinds to growth given 1) minimal contribution to FY12E revenues from Libya orders (16% of order backlog); 2) longer execution-cycle infrastructure orders are roughly 40% of order book, suggesting that an execution uptick is still some time away; and 3) we see risk of further write-offs on the back of incremental R1,200 crore auditor qualification on Libya projects in Q4FY11.
Though we increase our FY12-13E Ebitda margin estimates by 60-80 bps, high debt (1.3X net debt/equity for FY12E) and low interest coverage (1X for FY11) mean that the positive impact on net profits is limited.
We see the following negative catalysts for Punj: 1) weak order inflow trend continuing in FY12; 2) further deterioration in execution and receivables cycle; and 3) lower-than-expected FY12 margins. We lower our FY12/13 revenue estimates by 14%/18% as we build in slower-than-expected order inflows as well as execution over this period. This, coupled with high interest expenses, leads to a 71%/35% cut to our FY12/13 EPS estimates. Our FY14 EPS estimate is R8.62.
We revise our valuation methodology to P/B from P/E given limited visibility on earnings growth over the next 12 months. Our new 12-month target price is R57 (from R62), based on 0.63X FY12E BVPS, close to its 5-year trough P/B. Punj?s Indian construction peers trade at FY12E P/B of 1.5X with an average FY12E ROE of 8% vs the 2% ROE that we expect for Punj in FY12E. We reiterate our Sell rating as we see higher relative upside elsewhere in our coverage universe.
Risks to our target price include faster-than-expected improvement in execution and receivables collection; a pickup in order inflow activity from the Middle East; and stronger-than-expected margin improvement in FY12.
?Goldman Sachs