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Punj Lloyd – Investment Recommendation

February 27, 2007

Delhi based construction company Punj Lloyd is doing extremely well after the takeover of SembCorp – SEC.

Punj Lloyd’s [PLL] order book has grown from Rs 1,200 crore to Rs 10,300 crore. On a consolidated basis the current order backlog is Rs 14,300 crore. PLL’s average order size has increased from $30 Million to $200 million and the company management is hopeful to achieve $ 300 million. PL is the second largest EPC contractor after L&T.

I went through the transcripts of their conference call [PDF] and find that they are trying to improve the margins of SEC by outsourcing engineering design work to India. For this they are hiring close to 700 engineers in FY08 and 1,300 in FY09. This will directly add to the bottomline of SEC.

Valuations and Investment Rationale:
PLL (including SEC) is expected to post a CAGR of 77% in revenues between FY06-09E and
99% in earnings for the same period. At the CMP of Rs 835, the stock trades at a P/E Ratio of 15.4x and 9.9x our FY08E and FY09E EPS estimates of Rs 54 and Rs 84. We have a 12-month price target of Rs 1,400, an upside of 65% using a 3-stage DCF model.

Budget time is a good opportunity to BUY if you are a long term investor as some stocks like PLL and TCS are available at attractive prices. However, just by 50% of your intended investment now as J P Morgan and other analysts are underweight on India.

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