Dalal Street Investments

Punj Lloyd hammered on loss expectations in legacy project

June 3, 2008

Punj Lloyd (PLL) announced its FY08 result with consolidated revenue up 51% to INR 77.5bn (in line with estimates) and PAT of INR 3.2bn . EBIDTA margin improved by 100bps. The order book of INR 196bn, or 2.5xFY08 sales, provides revenue visibility. PLL maintains its focus in the oil and gas sector and has increased upstream capex in the India and Caspian region.

Now you are wondering inspite of the good results why is the stock hammered on the bourses ?

Simon-Carve is executing a USD300m LDPE plant project for SABIC in the UK. This is a legacy order (ie acquired by Simon-Carve, before PLL acquired Simon-Carve). The project is expected to be completed by October 2008 and c10% of the project is remaining. In 3Q08, PLL reversed INR670m of profit booked on this contract. The auditor, in their annual report, commented that PLL has not provided for expected losses of INR 3.05bn from this contract.

Punj Lloyd Management’s take on Expected Losses
They are confident of recovering these losses, once the negotiations are completed. The losses, as per PLL, are due to a) change of scope already executed by the company b) change of scope yet to be executed by Simon-Carve and c) losses due to design change and delays from the customer end. The management indicated they have reached a settlement of INR1.15bn relating to items a and b. Compensation for item c is based on estimates by an independent surveyor, the final amount to be paid to Simon-Carve. PLL has provided a performance guarantee of GBP14m for this project

This will keep pressure on the stock in the short-term.


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