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Punj Lloyd sells Pipavav stake – Risk of execution delays

March 30, 2010

Punj Lloyd has sold its 19.43% stake in Pipavav Shipyard for Rs6.56bn (Rs50.75 a share, a 20% discount to the market price). This stake sale, in our view, is aimed at boosting its liquidity position, which was badly affected by execution delays. Punj, as co-promoter of Pipavav Shipyard, had invested in it to gain a valuable fabrication facility. This would have helped it construct offshore platforms, etc. According to the company, Punj would continue bidding for projects jointly with Pipavav where their interests converge.

With the company still facing problems in some of the projects, we feel that execution risks are still high and could lead to negative surprises in the future. We lower FY10e earnings owing to liquidated damages faced by the company in the Ensus project. We also exclude earnings attributed to Pipavav Shipyard as part of profits from associates over FY11-12.

In our view, the stake sale in Pipavav Shipyard is value-dilutive, where the reduced earnings are far more than the benefits from the immediate cash infusion. We thus reduce our one-year target price to Rs171 (from Rs191 earlier) based on 12x one-year-forward earnings (FY12).

The stake sale has triggered open offer and the Shady Gandhi’s have to BUY shares at Rs 61.5 in the offer that they will extend to the Public.

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