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Buy Punj Lloyd – Kotak

February 4, 2008

Punj Lloyd took a hit on its bottom line last quarter due to project delay and cost overrun. However, the markets have reacted more than necessary considering the strong order-book the company enjoys.

Punj Lloyd’s management expects to settle these losses once the projects get over by March-April 2008. In that case, losses may get reversed. Kotak expects blended operating margins to be around 9% in FY08 and expect it to improve to 10.3% in FY09 and 11% by FY10.

The company’s revenues to grow at a CAGR of 39% between FY07-FY10 and profits to grow at a CAGR of 61% between FY07-FY10. At the current price of Rs.401, the stock is trading at 21.1x and 14.9x its P/E multiples on FY09 and FY10 estimates, respectively.

Sum of the parts Valuation:
Value of core business 576 At 21.5 x FY10 estimated earnings
Value of JV with Ramaprastha grp 14 At 2.5x its book value of investment
Value of Pipapav shipyard stake 33 At Rs 80 per share

Kotak recommends a BUY with a price target of Rs 624. Citi also has a Target Price of Rs 620 post Q3FY08 earnings review.

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