M NEY RE

R E S E A R C H

PUNJ LLOYD LIMITED

CMP : Rs. 62.00 | TARGET : Rs. 98.00 Recommendation : BUY

20TH FEBRUARY, 2012

Initiating Coverage BUY

Punj Lloyd Ltd. is an Indian multi-national having operation over 20 countries and executing EPC contracts in areas of Energy, Infrastructure, Process, Power and Renewable energy. The company is among the leaders in Oil & Gas EPC contracts, with a distinction in all terrain pipe laying. We expect the company to bounce back from the depressed environments and financial troubles it has been facing over past few years. We expect the sales to grow from Rs. 7863 crs in FY11 to Rs. 14600 crs in FY14. This would be accompanied by an improvement in operating margin from 6% to ~11% during the same period. We expect a reduction in interest cost and leveraging of its fixed overheads leading to a growth in PAT from a loss of Rs. 50 crs to Rs. 326 crs in FY13E and Rs. 558 crs in FY14E. This would translate into an EPS of Rs.9.81 and Rs. 16.81 for FY13E and FY14E respectively. The stock at current price of Rs. 62 trades at 6.3x and 3.7x its FY13E and FY14E earning respectively. We expect the stock to trade at 10x its FY13E EPS and arrive at a target price of Rs. 98 for the stock, implying a return of 58% from current prices. INVESTMENT RATIONALE Leader in Energy EPC business Punj Lloyd is among the most prominent names in energy related EPC business across the globe. In India, it is the leader in pipe laying competing with handful of players like L&T and Afcons. Globally there are a number of players from Europe, US, Japan and several other countries which fail to compete significantly with them as they are not cost competitive. China has tried but has not been very successful in making significant presence in the oil & gas sector especially in oil & gas pipe laying. Execution history and qualifications In EPC business the period for which one is there in the business and the execution history of a company becomes the laurel and serves as entry barrier for new competitors. Punj has been present in the energy EPC business for decades and has executed landmark projects which have established its reputation in the space globally. The track record, types of orders and size gives it qualifications that support its sustainability in the
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ANALYST MOHAMMAD RIAZUDDIN - CFA, FRM e. riazuddin@moneyore.com t. 022 6694 9075

business and restrict competition. Large Equipment base In EPC business, especially relating to energy, equipment base is one of the largest strength of a contractor. This can however be a burden during the lean periods, but can be a major boon and entry barrier when the macros of the industry are conducive, a situation similar to the present one. The company has an equipment fleet of 13000 items in 200 categories valued at $ 400 mn. These include barges which were procured for laying underwater pipelines and service off-shore projects. These assets are very valuable as any new order for the same have a significant wait time. Hence, they earn significant rentals when the demand for such barges is high. Currently the 3 barges it owns will remain booked for most of the next 3 years. In such an environment where orders are galore, such barges actually fetch premium over and above their acquisition cost. Besides this, the company has always believed in investing in equipment rather than hiring them in order to avoid project disruptions due to unavailability of equipments and associated costs. Once the macro situation strengthens, leveraging such an asset base boosts the performance significantly. Sectoral diversification Punj Lloyd is present in diverse sectors leveraging its technical capabilities and project execution skills to the fullest. It has presence in energy (upstream, mid-stream and down-stream), power, infrastructure, water, defense and renewable. This sectoral diversification helps it wither through a slowdown in any particular sector and adds to the ability to channelize resources to the most profitable one. It has over the years acquired and developed technical capabilities to execute projects in the mentioned diverse sectors. Geographical spread Punj Lloyd was among the first Indian company to realize that the business environment in India will not always remain very conducive and to sustain growth it needs to be present in other geographies as well. Punj has strategically moved into Middle East, North African, South-East Asian and CIS countries. The company currently has operations in 20 countries. The company has incurred significant time, effort and money to build such resources and channels in such diverse geographies. The investment is likely to pay off now because the situation back home is not encouraging. The government policies and inefficiencies has hampered project execution across the board, increased uncertainty, competition and finally significant delay in payments as most of the clients are PSU, who themselves are struggling for liquidity. Most of the domestic players, including L&T, are now looking to enter these countries, however the establishment cost and time is something that cannot be ignored. Therefore the geographical spread of Punj will enable it to pick and chose the regions where it needs to focus on depending on margins maximizing the returns for the shareholders. Chapter closed for Simon Carves Simon Carves has been bleeding and was the major reason for Punj to post losses in recent past. However, the company has gone into administration and no more claims/liability on the same will hurt Punj Lloyd. We do not expect any kind of recovery from there and the auditors have also removed the qualification pertaining to that. Hence we do not expect any further shocks on that front. Stability in Libya The political upheaval in Libya has subsided significantly. The elections there are due in June and the current transition committee is very keen on building the basic infrastructure like houses, hospitals, roads etc. that were destroyed in the upheaval. Libya has enormous amount of forex reserves with a per capita income of $14,800, among highest in the world. The government formed will be flushed with funds and has made it clear that infrastructure and development will be its foremost

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target. The current presiding organization has accepted the upheaval as force majeure and has asked the contractors to file their claims so that work on ground can start as soon as possible. Since the number of players there are very less and Europeans are not likely to come back in a hurry, Punj is best placed to leverage on the situation as it already has completed a lot of work there and has mobilized assets on the ground. The management is of the view that the work will start latest by April this year and the claims it would make from the government there will more than compensate the de-mobilisation, depreciation and other ancillary cost that they have incurred. Though further net cash inflow should not be expected before September, but this will help in mobilisation and productivity of assets lying there. Moreover, the margins on existing contracts and fresh ones will be remarkably high for understandable reasons. The Libya event proved to be a major drag both on margins as well on balance sheet. Once work starts there, a positive impact will be felt in margins, working capital and asset turnover. Significant uptick in Oil and Gas activity We foresee significant uptick in Oil & Gas activity over next decade. Crude has refused to budge below the $100 mark for over a year. This has raised a lot of concern over cost of fuel and energy security for countries like India, which imports more than 80% of its fuel requirement. This has given the impetus to govt. and other private bodies to increase exploration activities in domestic boundaries and also to look for alternative sources of fuel like Liquefied Natural Gas (LNG) and Coal Bed Methane (CBM). Reliance has got permission to develop satellite fields in KG-D6 and ONGC also finding prospective gas fields in the basin will give an opportunity for gas services company like to Punj in India. There has also been a rush to import LNG by GAIL, GSPL and Petronet LNG. The two operational LNG capacities of Petronet and Shell are almost doubling their capacities and construction is on at several other locations for LNG terminals (like Kochi, Chennai etc). This will give birth to transporting need of re-gasified LNG opening business opportunity in India. The activity in S-E Asia's gas resources will also open up opportunities for the company. The detailed opportunity and pipeline activity in oil & gas sector is detailed later in the report. Global Pipeline Opportunity The Pipeline and Gas Journal's worldwide survey indicate that 118,623 miles of pipelines are planned and under construction. Of these, 88,976 miles represent projects in the planning and design phase; 29,647 miles reflect pipelines in various stages of construction. Natural gas pipeline should dominate in terms of percentage share. Approximately 75% of the total global planned pipeline additions during 2011-15 will be gas. Asia Pacific region should be responsible for 41.8% of total planned pipeline additions with China and India being the frontrunners.
Region North America South/Central America and Caribbean Western Europe and European Union Africa Asia Pacific Former Soviet Union and Eastern Europe Middle East Total Total of regions where Punj is present Planned and Under Construction Pipeline (miles) 31,951 11,571 2,172 7,617 34,295 19,537 11,480 118623 72,929

Going by the planned pipeline projects, this throws up an opportunity of $141 bn in next 5-7 years only in the regions where Punj is present. This goes on to prove what kind of opportunity the company can be walking into only in pipe laying. Significant pipeline capex in India Over the next 4 years, GAIL, IOCL and GSPC plan to invest Rs. 11000cr, Rs. 7700 cr and Rs. 3000 cr respectively in putting up Oil

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and Gas pipelines in India. Besides this, there will also be addition from RGTIL, the pipeline company owned by Mukesh Ambani personally. It plans to invest Rs. 20,000 crs in a staggered manner. Strong order book and healthy order flow The total order book for the company has crossed Rs. 28000 crs. This equates to more than three years of existing sales. Moreover, orders from all segments like energy, pipeline, roads have been flowing in. Hence there has not been a slowdown in order intake giving a better top line visibility. Coal Mining in Indonesia Sembawang has acquired 50% stake in a thermal coal mine in Central Kalimantan, Indonesia having estimated resources of 134 Mn mt and reserves of 57 Mn mt. The coal extracts would be sold to local power producers as well as exported. This is a new business opportunity for the company which would generate cashflows from FY13 onwards. Since the financial estimates are yet not available, we have not factored it in our valuations, but this would definitely be an additive to the arrived intrinsic value of the company. Social infra spending in Middle East After the uprising in the north African region there has been deep realization among the ruling family in Middle East that if they want to continue to be in power, they need to address the basic needs of the people and invest heavily in social infrastructure like hospitals, schools, roads etc. besides social benefits that are transmitted directly to citizens of the country. Investing in infrastructure will not only lead to equitable distribution of wealth but will also create a structure for a sustainable economy that does not completely rely on oil. Tourism, trade and services will receive a boost as a result of this. A total of $1600 Bn worth of investment is either under construction or planned in UAE and Saudi Arabia alone. The penetration Punj Lloyd has in this region is commendable and looks forward to good business opportunity coming from the region. With the acquisition of Sembawang in 2006, the group has been able to establish a foothold in infrastructure and construction space in Middle East, region where Sembawang already had good presence. Business Opportunity in Middle East

As we can see above, significant investment is planned in the region with a mix of civil, industrial and other infrastructure. All of these are likely to be executed in next 5 years. There is a huge market for construction players across the globe. The sovereigns here are cash-rich, hence issues relating to payment is not a problem. Clearances and land acquisition is also not a problem in these regions. The following table gives us a glimpse of the margins prevalent in the region for EPC players under different verticals.

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Nature of Work Margins Value of projects planned/ underway

Civil/Commercial Cons. Residential and commercial offices 7-10% $1237 bn

Industrial Oil &Gas, chemical, cement plant etc 10-15 %$446 bn

Infrastructure Building roads, railways, bridges, airports, sea-ports, utilities 10-15% $910 bn

INDUSTRY OVERVIEW The Golden Era of Gas Opportunities in gas exploration, transportation and trading The Gas opportunity in Asia The use of Natural Gas as a source of energy has increased by 50% across the globe while it has tripled in Asia over the last two decades. Asia also remains the center of global liquefied natural gas (LNG) trade: the region accounts for nearly two-thirds of global LNG demand. Japan and South Korea alone account for one-half of the global LNG market, and growing LNG imports to China and India ensure that the Asia-Pacific will remain the key demand center for LNG. The pipeline gas trade is also growing, and production of domestic gas in the rest of developing Asia is likewise rising rapidly. However, it still remains underutilized from both reserves and share of energy consumption point of view. For example, Japan, South Korea, Taiwan, and Thailand still rely on oil for about 45% of their energy needs even after two decades of efforts to reduce oil dependence. Oil demand in China is growing at well over 5% a year, and China has rapidly emerged as the secondlargest oil consumer and importer in the world after the United States. Natural gas presents an important opportunity to diversify Asia's industrial and power-generation energy use away from oil, while reducing the region's heavy import dependence on Middle Eastern oil and vulnerability to potential oil price shocks. Coal accounts for over 50% of Asia's energy consumption compared to the global average of just 16% (excluding Asia). Hence, rapidly growing oil and coal use in Asia, the two most carbon-intensive fuels, explains why Asia's carbon emissions are rising much faster than the region's overall energy demand. Alternatively, natural gas produces virtually no sulfur emissions, far lower levels of nitrous oxides, 25%30% less CO2 than oil, and 40%45% less CO2 than coal. Hence, there are potentially huge environmental benefits in expanding the use of natural gas. Gas provides an inexpensive, practical, near-term opportunity for de-carbonization and improved pollution outcomes. Other metrics also suggest the underutilization of gas in the region. The Asia-Pacific accounts for 37% of total global energy demand while only representing 17% of the global gas market. By comparison, the region accounts for 66% of global coal demand, 31% of oil demand, and 25% of global nuclear and hydroelectric consumption. In the region's two largest energy markets, China and India, gas accounts for a paltry 4% and 10% of energy use, respectively. Even after 30 years of LNG development, in the next two largest energy markets, Japan and South Korea, gas represents only 17% and 13% of energy use, respectively. Thus, even with rapid growth over the past two decades, there remains huge scope for increases in Asia's gas use that would yield major energy security and environmental benefits. From an energy security perspective, the Asia-Pacific is relatively more self-sufficient in gas than in oil, with large gas reserves and production capacity in Southeast Asia, Australia, and growing domestic gas reserves in the large economies of China and India. Moreover, gas and LNG production capacity globally are more diversified and located mainly in non-OPEC countries. In addition, development and transportation of LNG and gas via longdistance pipeline requires strong government-to-government cooperation and locks in long-term market and geopolitical relationships that reduce the potential for political confrontation. Finally, gas is a much more efficient energy source; it has a

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much higher energy conversion rate than coal, especially in combined-cycle gas turbine power generation technology, which is up to 50% more efficient than conventional coal or oil-fired generation. Why should gas utlisation increase in Asia:+ Underutilised Asia accounts for 37% of energy demand but only 17% of global gas demand + Much cleaner Virtually no sulphur, far lower nitrous oxide and CO2 emission + Independence from OPEC Oil Major part of gas reserves are present in non-OPEC countries, reducing the dependence

on them for energy needs

+ Much efficient The conversion rate for gas based power plant is far greater than coal fired increasing efficiency. Gas

based power plants have lower capital and running costs Past Constraints and Future Prospects for Gas in Asia Though the concern of energy security and environmental degradation plays in the minds of policy makers of the region and gives an intuitive appeal for gas, there are several lingering issues that need to be addressed before we look into full blown activity in gas exploration, trade and consumption. Perhaps foremost, gas use in Asia has been constrained by the region's wide geographic and maritime dispersion that make the tyranny of distance a key factor in Asian gas use. Natural gas transport infrastructure absorbs a significant share of the raw resource value compared with oil, and the long distances of Asia magnify this cost constraint. But the constant rise in price of oil and other fossil fuel like coal has made people thing about investing in gas infrastructure. Huge capacities are underway in liquefaction and re-gasification area. Pricing of gas has also been of great importance and hindrance to penetration of gas as a fuel. In Asia, gas pricing has always been very politically sensitive leading to allocation of gas at cheaper rates to priority sectors. This has always restricted investors as the risk return parameters never favored them. The low pricing lead hindered investment exploration and upstream, but giving way to heavy investment in downstream which again suffered due restricted and inconsistent availability. On the other hand the abundance of coal in India and China made gas very uncompetitive overlooking the environmental hazards attached to using it as a fuel for electricity generation. Still over 80% of electricity in India and China is generated using coal. Hence a higher price of gas would not have a market at all. However with China's commitment to reduce CO2 emission and the increasing focus on reducing environmental hazards would lead to greater use of gas in power generation. Similarly for India, the environmental and logistic cost of using coal is increasing by the day. The quality and availability of domestic coal is a problem and the rise in prices of imported coal has forced the government to reevaluate the pricing of gas and stress further on gas extraction and creation of ancillary infrastructure to support the same. Till late, major gas trades in Asia was priced and based on crude linked to Japanese crude basket. Japan and Korea happen to be the largest importer of gas and the pricing basis has been prevalent for decades. However the nature and economic variables along with heterogeneous demand supply dynamics did lead to higher prices for gas which was unaffordable to developing nations, especially when crude prices are high. However, we are seeing gradual shift to a more realistic pricing base i.e Henry Hub prices which tracks the prices of gas traded in Lousiana, US and more or less reflects the demand supply dynamics of the commodity itself.

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Therefore a mix of policy change, cost of competing fuels, environmental concerns, logistics issues and availability would shape the gas future of Asia which is at a cusp of change. We expect significant investment in upstream, transportation (both LNG and pipeline) and downstream sector in the region. South-East Asia and Middle East would lead in upstream activities while countries like India which has an envious coast line and underdeveloped infrastructure would see building up of capacities and better utilization of existing ones. Gas Trading Emphasis on LNG Over the past two decades, use of natural gas in Asia has increased threefold, ensuring that the Asia-Pacific will continue to be a hub of the global gas trade for the foreseeable future. Despite increased growth, however, natural gas is still an underutilized resource and is far outpaced in Asia by the consumption of coal and oil. Increased consumption of natural gas in place of oil and coal would have the dual effect of providing Asian energy security and mitigating climate change. Yet emerging economies are faced with some key challenges. Plentiful and inexpensive domestic reserves in countries such as China and India drive continued coal consumption. Furthermore, political, geographic, and economic constraints have made further investment in gas and development of liquefied natural gas (LNG) pipelines difficult. To emphasize the opportunity and relevance of gas trade we first have a look at the global gas reserves and global LNG trade share:

North America (ex Arctic) Europe Asia Pacific S & C America Former Soviet Union Africa Middle East Total

WORLD NATURAL GAS SUPPLY AND DEMAND Reserves (Tcf) Consumption (Tcf/Yr) 263 27.3 201 18.5 524 14.4 248 4.4 2059 21.1 508 2.5 2546 8.9 6348 97.1

Reserves/Consumption. (Yrs) 10 11 36 56 98 203 286 65

Source: BP Statistical Review of World Energy 2011, MONEYORE Research

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From the above chart and the table we can infer that regions in Africa and Middle East have significant amount of reserve compared to their production/consumption. This is evident from the high Reserve to consumption ratio. Hence, countries from these regions will be the major suppliers to energy deficient countries like India and China. The global trade in gas can happen in two ways first, through transoceanic and cross country pipelines. Secondly through the Liquefied Natural Gas (LNG) route. Cross border pipelines have not been very successful due to political factors. However, LNG has picked up very fast due to the flexibility in operations. Qatar and Iran happen to be the countries with largest reserves and Qatar is the largest exporter of LNG in the world. Significant liquefaction capacities have been developed in these countries and subsequent re-gasification plants and LNG terminals are being developed along with ancillary infrastructure in energy deficient countries like India. We would discuss the opportunities in regions and India separately as we proceed. If we compare pipeline and LNG route, pipeline happens to be more economical on shorter routes and where it does not have to move through water bodies (as it increases the costs). LNG is more economical over longer distances as gas can be compressed significantly and transported anywhere. To recoup the liquefaction and re-gasification cost, the distance needs to be higher and the cost curve is not linear. The following graph shows the trade-off between different modes of transport. TRANSPORTATION COST OF NATURAL GAS AS $/MMBTU

Source: From presentation in Pacific Energy Summit 2011

As we can see, the transportation cost does not respond linearly to increase in distance. Hence, LNG seems to be the ideal route to transport gas within widely spread Asia. Hence huge demand for creation of re-gasification terminals and the connecting pipeline would be needed. As far as supply and price of LNG is concerned, we expect the prices to cool off from here. The reason being the following:1. LNG is gaining popularity as mode of gas trading. We have seen significant addition in liquefaction plant over previous years and continuous addition to the list is happening. Once these capacities commission and work at full capacity supply would increase. 2. With better technology, the liquefaction cost and transportation cost are coming down making it more competitive. 3. Major shift in pricing from Japanese Crude Cocktail (JCC) to Henry Hub based pricing, delinking it to crude prices

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4. Last but not the least, the emergence of shale gas in US leading to significant drop in LNG imports and infact we have seen recently for a brief period US had become net gas exporter. As evident from the graph below, gas import is likely to fall significantly in US which will keep global gas prices in check.

Source: US Energy Information Administration

Brunei Indonesia Malaysia Philippines Singapore Thailand Vietnam ASEAN

GAS RESERVES IN SOUTH EAST ASIAN COUNTRIES Reserves [in trillion cubic feet(tcf)] Proven Possible Probable 8 4 0 90 42 34 0 58 28 1 3 1 0 0 0 9 12 11 11 5 9 176 95 55

Total 12 166 86 5 0 32 25 326

Source: Presentation Gas Pipelines in Developing Countries, Asia by GHD

As we can see above, Indonesia, Malaysia, Thailand and Vietnam are very rich in gas reserves with Indonesia leading the pack. There has been a massive change in the attitude of the government in Indonesia over the years where it has appreciated the fact that in order to develop the country and explore the natural resources, the contractors, who bring in the technology, capital and bear the risk need to be adequately compensated and rewarded. The current production sharing contracts have encouraged global players to look at the archipelago as good business destination. Investment in the oil and gas sector in 2012 in Indonesia alone is projected to rise by 23.7% to US$ 18.3 billion ($15.8 bn in upstream and balance in downstream). Indonesia also has a Coal Bed Methane reserve of 453 tcf which it is planning to encash soon. Hence the growing activity in the region especially in Indonesia would be very favourable for contractors and EPC players involved in the sector and have already done projects here. Fortunately, there are very few players in the pipe laying and offshore jobs which can pose significant competition to the capabilities of Punj Lloyd which has been in the region for over a decade and the acquisition of Sembawang gives it a further leverage there. Indian scenario The energy demand in India has been growing very rapidly with primary energy consumption in the country increasing at a compounded annual growth rate (CAGR) of 7% to reach 469 million tonnes of oil equivalent (MTOE) in 2009 over previous five

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years. If we look at oil, which is still the fuel used for transport, our proven reserves are 9 bn boe (Barrels of Oil Equivalent). Our production for 2010 was 300 mn boe compared to the consumption of 1200 mn boe. This means that we more or less import 75% of our crude requirements. The share of natural gas in the country's primary energy mix increased from 8% in 2008 to 10% in 2009. However, this share is quite low compared to the global average (24%), primarily due to supply side constraints. India's 44 cubic meter (cm) per capita of natural gas consumption also lags the global average of 429 cubic meter per person. Going forward, given its increasing availability, natural gas is expected to account for a significant share of the country's primary energy mix.

Source: Exploring Opportunities, Ernst & Young

The following two charts give us an idea about the sensitivity of the demand for natural gas in India and the supply expectations through 2015:-

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Source: Gail Investor presentation

End Use Sector Power Cement City Gas Tea CNG End Use Sector Fertiliser Petrochemicals Sponge Iron LPG Methanol

USE OF NATURAL GAS AS FUEL Purpose Substitute Used as a fuel in thermal power generation Coal Used as a fuel in gas fired boilers Coal, LPG, Naphtha, Furnace Oil and HSD Fuel for heating, cooking etc. (domestic and commercial use) LNG & electricity Industrial fuel for firing dryers Oil Transportation fuel Petrol and diesel USE OF NATURAL GAS AS FEEDSTOCK Purpose Substitute Feedstock (for manufacture of ammonia) Naphtha, fuel oil and coal Specific fractions in feedstock are used for manufacture of ethylene and propylene Naphtha and propane gas Used as a primary reduction agent for the reduction of iron oxides into metallic iron Coal Specific fractions are extracted from LPG Crude Oil Feedstock Naphtha, bio-mass

The demand for gas in India is very price sensitive. We see that the maximum potential of gas can be explored if the customer gate prices are in the range of $6-7 per mmbtu. At such prices the demand can shoot from 171 mmscmd currently to 387 mmscmd. At such levels and considering the rising prices of coal, logistics issue and clean energy certificate mechanism, gas can compete with coal in power generation as well. However there has been a major dip in gas production of KG-D6 block of Reliance where the output has reduced to around 40 mmscmd compared to expected 60 mmscmd. This drop in output by reliance has stranded approximately 3000 MW of power capacity based on the gas as well as several fertilizer plants. Moreover the outlook on future production from the block has also been smeared where the company has demanded permission to develop satellite fields. Production for the current year, i.e. FY 12 for natural gas will be in around 132 mmscmd. Hence, to meet the deficit, we will see an increasing focus on LNG. If we analyse the gas consumption data (April to Nov 2011), we had consumed 38259 mmscm of gas, out of which re-gasified imported LNG was 10297 mmscm i.e. 27%. This is definitely slated to go up given the fall in KG basin output and several LNG terminals coming on stream. GAIL has been very active in scouting for LNG from middle-east, Africa and US. It is also trying to price the LNG in a manner that it is not directly linked to

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crude (move from Japan crude basket to Henry Hub based pricing). As a result we are seeing fresh storage and re-gasification plants as well as increase in capacity of existing facilities at Hazira and Dahej.
Location Ennore, Chennai Dhabol Dahej Dhamra Hazira Kochi Mangalore Mundra Pipavav Okhamadhi
Source: MONEYORE Research

EXISTING AND UPCOMING LNG TERMINAL CAPACITIES IN INDIA Company Capacity (MTPA) Status IOCL 2.5 Planned Ratnagiri Gas and Power 5 Under construction by 2013 PLNG 10 Doubled from in 2009 IOCL 5 Planned Shell 10 To expand from current 3.6mtpa PLNG 5 Under construction by 2013 N/A Planned GSPC 6.5 Planned Swan Energy 4.5 Planned GVK N/A N/A

To summarise our views, we are very bullish about the use of gas in Asian countries over the coming years and we are likely to see accelerated investment in both upstream and downstream sectors. Modes of transportation will be a mix of pipeline and LNG, but the option of LNG has created greater opportunities to use gas where imports through pipelines were not possible. This will infact raise the requirement of inland pipeline that would link LNG stations to the ultimate consumers Pipeline Infrastructure As we have discussed earlier that relevance of gas in total energy basket will only increase over time, we here explore the current state of pipeline infrastructure in South East Asia, India and Middle East.
Region North America South/Central America and Caribbean Western Europe and European Union Africa Asia Pacific Former Soviet Union and Eastern Europe Middle East Total Total of regions where Punj is present Planned and Under Construction Pipeline (miles) 31,951 11,571 2,172 7,617 34,295 19,537 11,480 118623 72,929

Going by the planned pipeline projects, this throws up an opportunity of $141 bn in next 5-7 years only in the regions where Punj is present. This goes on to prove what kind of opportunity the company can be walking into only in pipe laying.

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The figure above depicts the existing and planned Oil & Gas pipeline projects in the S-E Asian countries. We expect significant investment to take place in the region in building pipeline infrastructure to support the augmentation in exploration output. The boost would come from undersea pipeline to connect countries and different islands within the same country along with pipelines from exploration sites to liquefaction plants for LNG transport. Middle-East has more or less well developed pipeline infrastructure. However owing to the sanction on Iran oil by USA, we have seen increased activity in planning oil and gas pipeline in the region. Abu Dhabi is likely to start its 370 km pipeline project from Habshan fields to the port of Fujairah in order to offset reliance on Arabian Gulf oil terminals while reducing shipping congestion through the Strait of Hormuz.

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Moreover, India and Pakistan are moving closer to agreement on Turkeministan-Pakistan-India pipeline to utilize the world's fourth largest gas reserve in Turkeministan. The 1,700-kilometre (1,050-mile) TAPI pipeline, aims to transport over 30 billion cubic metres of gas annually from the Dauletabad gas fields in southeast Turkmenistan. Hence we expect lumpy orders from central Asia and Middle East going forward. Advantages of Pipeline transportation

> Lower cost of transportation > Lower transit losses > Lower energy intensiveness > Economies of scale > Safety and Reliability -minimum disruptions > Environment friendliness > Multi-product handling > Stationary carrier > Augmentation at low cost > Minimal land costs > Decongestion of surface transport systems

CRUDE & PRODUCT TRANSPORTATION THROUGH PIPELINES

Source: MONEYORE Research

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Indian Scenario In total, India has approximately 19,000 kms of pipeline out of which 13,236 km are gas pipelines. Still a significant part of the crude and product transport happens through road and rail. This is an inefficient mode of transportation as pipeline transportation costs one-third of that by railway and one-fifth of that by roads. Yet, given the problems relating to forest clearances and land acquisition involved, it was the only available option for hinterland transport. However, after a change in environment ministry, and a pledge by the government to enhance the movement of such projects, we expect the future to be better than the recent past. Pipeline has been gradually gaining market share from roads and railways (from 44% in FY10 to 48% in FY11). However, it is still far lesser than 66% prevalent in USA and other developed nations.

Source: PPAC, MONEYORE Research. For 2010-2011

The current capacity is approximately 389 mmscmd with average flow in 2011 being 200 mmscmd, which will further reduce due to fall in KG-D6 output. However this does not mean that there will not be addition in pipeline capacity. Under current scenario several pipelines are being significantly underutilized due to less than expected KG D6 output whereas other areas the capacity is very much needed. As we resort to LNG, we would need additional pipeline infrastructure from ports and terminals to hinterland in order to transport the imported gas to users. There is also need for crude and product pipelines by refineries in India. IOCL plans to invest Rs. 7700 crs in increasing its pipeline network by 20 from 10,900 km to 15,000 km by 2015. Laying of such pipelines will reduce costs for the refinery. In the next three years i.e upto FY2014, GAIL also plans to invest ~Rs. 11,000 crs in pipelines. In addition to this GSPC would invest further Rs.3000 crs during the same period. RGTIL, a company privately owned by Mukesh Ambani, will also invest around Rs. 20,000 but over a larger span of time. Hence major activities in onshore and offshore pipelines are also expected India. Though the movement on ground has been slow over the past few years, we expect that the severity of the situation (idling power plants and fertilizer plants) would spur the authorities and government to put such projects on priority list.

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The following figure shows the existing and planned crude, product and gas pipelines in India:

Source: Gail Investor Presentation

INDIAN INFRASTRUCTURE OPPORTUNITY Roads For a country of India's size, an efficient road network is necessary both for national integration as well as for socio-economic development. Currently, India has the world's second largest road system, with 41,00,000 km of roads. About 60 per cent of freight and 87 per cent of passenger traffic passes on roads. Although National Highways (NH) constitutes only about 1.7 per cent of the road network, they carry 40 per cent of the total road traffic. The length of various categories of roads is: National Highways - 70,934 km, State Highways - 1,54,522 km, Major District Roads & Other District Roads - 25,77,396 km, Rural Roads - 14,33,577 km.
Under NHAI (kms) 50024 16553 11818 20236

Total Length Already 4 Laned Under implementation Balance length for award
Source: NHAI Website

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Construction Opportunities India's construction sector is expected to grow at about 35 per cent between 200809 and 201213. The private sector is expected to contribute 44 per cent of the total projected spend of US$ 100 billion on roads and highways over the Twelfth Five Year Plan (2012-17) period. According to estimates, the road sector in India will require investments in the range of US$ 75-90 billion over the next five years. NHAI has received record premiums in 2011. In fact 20 projects out of 28 been awarded till November 2011 in the current fiscal fetched premium of about Rs 2,146 crores (US$ 408.61 million). The NHAI has fixed the targets for construction of NH in the country. For 2011-12, a target of 2,500 km has been set of which 823 km (upto October 2011) has been achieved. Foreign direct investment (FDI) received in the sector construction activities (including roads and highways) during April 2011 to October 2011 stood at US$ 1,074 million, according to statistics released by Department of Industrial Policy and Promotion (DIPP). Growth Potential The Government has already announced plans of investing Rs 550 billion (US$ 10.47 billion) in highway construction projects this year alone its biggest investment so far. The projects will see the construction of 7,300 km of roads including the building of new expressways in addition to expanding existing roads. Policy Initiatives to attract Private Investments

> NHAI/ Government of India (GOI) to provide capital grant up to 40 per cent of project cost to enhance viability on a case to
case basis

> 100 per cent tax exemption for five years and 30 per cent relief for next five years, which may be availed of in 20 years > Concession period allowed up to 30 years
Government Initiatives In addition to the above policy benefits, the Government has announced several incentives to attract private sector participation. These include:

> Government to bear the cost of the project feasibility study, land for the right of way and way side amenities, shifting of
utilities, environment clearance, cutting of trees, etc

> Duty free import of high capacity and modern road construction equipments > Declaration of the road sector as an industry > Easier external commercial borrowing norms > Right to retain toll
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Railways The Indian Railways is one of the largest developed networks in the world and is the major catalyst to infuse socio-economic growth in Indian economy. India has the world's fourth largest rail network, which is also the second largest organisation under a single management. The total route network of Indian Railways (IR) ranges to about 64,000 kilometers (km), spreading across 7,000 stations with more than 18,000 trains operating every day. Over 22 million passengers travel by trains on a daily basis in India. In addition, around 2.5 million tonnes (MT) of freight is transported via trains on a daily basis. These include a huge variety of goods like mineral ores, iron and steel, fertilisers, petrochemicals, and agricultural produce. Industry Initiatives

> The World Bank has signed a US$ 975 loan agreement with the Indian Government to build the Eastern Dedicated Freight
Corridor (DFC) that will help in faster and more efficient movement of raw materials and finished goods between the Northern and Eastern parts of India. Recently the PMO unhappy with the progress of the project has taken charge of it directly and intends to finish the project by the deadline of March 2017

> The Railway Sector investment programme was approved by Asian Development Bank (ADB) Board on August 31, 2011 as a
Multi-tranche Financing Facility (MFF) for US$ 500 million, with 1st tranche of US$ 150 million approved on October 18, 2011 Government Initiatives In order to promote higher investments, the Indian railways have introduced several policies to assist its business associates. Some of the policies by the Ministry of Railways are:
> Railways Infrastructure for Industry Initiative > Private Freight Terminal (PFT) > Special Freight Train Operators (SFTO) > Automobile Freight Train Operators (AFTO) > Automobile and Ancillary Hubs > Kisan Vision (Cold Chains) > New Catering Policy > Rail Connectivity to Coal and Iron ore mines

The total FDI inflows into the railways and its related components industries have grown due to 100 per cent FDI sanction by the Government of India. The Government has increased the scope of public private participation (PPP) beyond providing maintenance and other such supporting roles. Government is providing new lines, increasing the rolling stock to build up capacity. The Government is

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investing heavily in building rail infrastructure in the country. With increasing participation expected from private playersboth domestic and foreigndue to favourable policy measures, freight traffic is expected to grow rapidly over the medium - to longterm. Ports Maritime Transport is critical for the social and economic development of a country. India enjoys a vibrant port sector comprising 12 major ports and 176 notified non-major ports. India ranks 16th among the maritime countries and has one of the largest merchant shipping fleet. Containerised traffic grew at the rate 13 per cent per annum between 2005-06 and 2010-11. The traffic is expected to go up to around 2,495 MT from 870 MT, by 2020. The capacity at the ports is expected to get enhanced to 3,130 MT by 2020 in order to manage the voluminous traffic well. The proposed investment during the next 10 years to create the expected capacity will be Rs 277, 000 crores (US$ 55.29 billion). Investment Policies The Government of India has put in place a favourable and investor friendly policy framework for the shipping industry. The highlights of some of the policy initiatives taken by the Ministry of Shipping are:

> 100 per cent FDI under the automatic route for Port development projects > 100 per cent income tax exemption for a period of 10 years > Standardisation of bidding documents to ensure uniformity and transparency in the award of projects > The Model Concession Agreements have been standardised and simplified > The tariff setting mechanism has been modified with tariffs being set upfront by Tariff Authority for Major Ports (TAMP) > Bidding documents have also been standardised to ensure uniformity and transparency in the award of projects > Acquisition of all types of ships has been brought under the Open General License
Government Initiatives The Ministry of Shipping has finalised a National Maritime Development Programme (NMDP) to implement specific programme/schemes for the development of the Port sector. Under the NMDP, 276 projects at an estimated cost of Rs 55,803.73 crores (US$ 11.14 billion) have been identified in the major Ports to be taken up over a period of 2011-12. India has announced a combined US$ 110 billion package to develop its ports and shipbuilding industry by 2020. The ten-year plan - Maritime Agenda 2010-2020, intends to develop the Indian Ports capacity to 3,200 million metric tonnes (MMT) to handle the expected traffic of about 2,500 MMT by 2020. This will replace the existing US$ 30 billion with NMDP, which is due to expire in March 2012. The port sector under the new plan would invest US$ 66 billion, majority of which will be from private investors.

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COMPANY DESCRIPTION

BUSINESS OVERVIEW Punj Lloyd is an EPC player present in various business verticals ranging from offshore to petrochemicals to renewable energy. To understand the dynamics of the business in right perspective, we divide it's business into three broad verticals i.e. 1) Oil & Gas 2) Infrastructure 3) Others Oil & Gas Punj Lloyd is present in upstream, mid stream as well as down-stream value chain of the Oil & Gas sector as an EPC player. We can further break it down into
> Offshore - The company provides engineering, procurement, fabrication and installation of offshore wellhead and process

platforms, including topsides and jackets, risers, submarine pipelines, underwater cables and single buoy mooring systems. In this business equipments are a major entry barrier. The reason being the cycle suddenly turns deceiving everyone and there is a significant wait time between the ordering and delivery of such equipments. Hence, someone who has the equipments in good times, he would be able to get maximum business with handsome margins.

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Punj Lloyd has one of the most sophisticated flotilla of barges needed for offshore business which includes four work barges Mahesh 1, Ganpati, Madhwa and Kuber. Kuber the latest addition, a non self-propelled S-type barge, can lay 4 to 60 dia pipes in sea, besides maintaining and repairing existing pipelines. Augmenting this equipment fleet is the 45,000 m fabrication and maintenance facility at Sungaipurun, Indonesia. This yard stores important spares and handles heavy swamp and construction equipment overhauling, ensuring minimum downtime of equipment and swift mobilisation. Heera Redevelopment Project by ONGC has been a landmark and remarkable project executed by the company. This project involved a gamut of offshore facilities including engineering, fabrication, transportation, installation and commissioning of four well head platforms, 50 km of rigid submarine pipeline, 10 km of flexible pipeline, 20 km of composite cables and replacement of a 30 year old single buoy mooring system. This has put the company in a different league in terms of execution capabilities and offshore project qualifications. Though there are claims relating to the project, yet the credibility the project has earned for the company is helping and will further be instrumental for the company to bag offshore projects in India and abroad.
> Onshore field development and rigs In field development the services include gathering stations, flow lines and transfer

lines, gas and crude processing plants. The gas processing work, from wellhead to finished product, includes transportation, gas liquid separation and treatment, liquid recovery and fractionation, compression and liquefaction, LNG storage and re-gasification. Punj Lloyd Upstream has a fleet of new AC VFD 1500HP and 2000HP onshore rigs with a drilling capacity of 6,000 m. Punj Lloyd Upstream is developing onshore drilling contracts in the MENA region and will expand to other countries where Punj Lloyd has an operating presence. Punj Lloyd Upstream is prequalified for drilling contracts in Libya, India, Iraq, Oman & Kuwait.
> Pipelines Oil and Gas pipeline has been the core to Punj and they are the leaders in all terrain pipe laying. They have

executed projects in Libya, Kazakhstan, Turkey, Indonesia, Middle-east and India. As stated earlier, they have a large fleet of equipment which gives them an inherent advantage in terms of cost and execution abilities.
> Cryogenic Tanks and Terminals LNG receiving terminal need cryogenic tanks to store the liquid fuel before transporting it

further. Punj Lloyd had acquired a company called Technodyne through which it acquired the technology for constructing cryogenic tanks and is now capable of participating in the engineering and construction works of a number of LNG terminals coming up in the country. Punj Lloyd Group has constructed three LNG and LPG Tank farms in India and over 300 tanks globally. The company has been involved in all the three LNG terminals at Dabhol, Hazira and Dahej. After the acquisition of Sembawang, it has managed to get a good hold in S-E Asia as well which would fuel this business as well.
> Process Punj has also done EPC for process, i.e. Refinery and petrochemical plants. After the acquisition of Simon Carves,

it has acquired additional skills in HDPE, LDPE, PE and other polymerization processes. Infrastructure Infrastructure is also an area where Punj has made a remarkable presence. It executes roads, highways, tunnels and other civil construction projects. It has made significant inroads in the infrastructure space in S-E Asia and Middle East with the acquisition of Sembawang. Sembawang has worked on the MRTS, LRTS as well as Changi International Airport in Singapore. The company has lapped up quite a number of infrastructure projects in last two years when the orders in energy segment were coming slowly. It has off late bagged road orders from GMR as well as construction of complete township for Delhi police
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recently. The infrastructure projects are normally high volume low margin business. The company is also involved into construction of power plants. It takes complete EPC projects as well as Balance of Plant (BOP) orders. Others Besides these, the company also has interest in water treatment and purification, renewable energy and defense. They currently form a very small part of the order book and revenue but can be good business opportunity going forward. The company is currently acquiring necessary approvals, licenses and building capabilities to capitalize on such opportunities.

The Perfect Storm

The past 3-4 years for the company have been very testing and financially draining. It can be rightly termed as a Perfect Storm which hit one after the other hurting the financials and also the credibility of the company to an undesirable extent. Besides the general deterioration in the macro-economic environment leading to margin compression, fumbling cash flows and slowdown in revenue booking, there were three major shocks that hit the company. We discuss each elaborately in an attempt to understand the nature, cause and the after effect of each. Heera Re-development Project Punj Lloyd, along with its offshore engineering arm - PT Sempec Indonesia, a wholly owned subsidiary, secured its then single largest Offshore Platform Project--the prestigious Heera Redevelopment Project--on an EPC basis from Oil & Natural Gas Corporation Limited (ONGC). The order, valued at around US$ 290 million (~ Rs. 1400 crs) was awarded in January 2007. The project included EPC work related to pre-commissioning and commissioning of 4 unmanned platforms, 70 kms of submarine pipeline, laying of 25 km composite cables, modifications of 7 existing platforms and installation of a new SBM in Mumbai High South. The project was supposed to be completed in 16 months, however, as per the company's claims , there was a fault in the design and an increase in the scope of work. This lead to addition in steel requirement, and lead to delay in the execution which resulted in significant cost and time over-run. Though Punj went ahead and executed the project, but it had to bear significant cost overruns. Punj has gone for arbitration with ONGC. This has left a huge burden on the balance sheet of the company. Relating to the disputed portion of this project, Rs. 243 crs is recognized as revenues and appears in WIP along with Rs. 65 crs in debtors owing to Liquidated Damages (LD). So this Rs. 308 crs is the disputed amount recognized in the books by the company. However, non disputed Rs. 158 crs of WIP and Rs. 21 crs worth of debtors relating to the same project from ONGC also got stuck as the company moved to arbitration route. Hence, to sum up Rs. 487 crs of working capital is stuck due to Heera project which moved out of the system and needed to be paid interest on as the company has significant amount of debts on the balance sheet. The arbitration process normally takes 24-36 months to resolve. The company has made claims in excess of around Rs. 1000 crs, however has booked Rs. 495 crs in the books only and out of which Rs. 187 crs is not even disputed. Hence, theoretically speaking, maximum loss from this can be to the extent of Rs. 300 crs. Recent development on this front has been good. The arbitration has been adjourned on mutual agreement. The dispute is being referred to Outside Expert Committee (OEC). This is likely to resolve the dispute expeditiously Though the project has lead to huge financial strain, it has also catapulted the company into a different league where they can

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now boast of executing such off-shore projects. Such an experience and qualification will help them get off-shore contracts, which are inherently less competitive and fetch better margins, not only in India but internationally as well, specifically S-E Asia. Simon Carves Just after its IPO in 2006, Punj Lloyd made an acquisition of a Singapore based company called Semb Corp Engineers & Constructors, now known as Sembawang, along with its subsidiary in Middle East and most notable Simon Carves in UK. It paid a total of Singapore $ 30 mn (Rs. 114 crs) to acquire the EPC major. Simon Carves, the step down UK subsidiary specialized in engineering, procurement and construction of LDPE, PVC, Styrene and refinery processes domain. Though the main business of Sembawang was in extremely good shape and helped the company get a foot hold in S-E Asian markets and also acquire capabilities to execute projects in offshore and infrastructure in Middle East, Simon Carves proved to be a blunder. The company had several legacy orders which it had completely messed up. There were labour, union and subcontractors issues. The projects the company was executing in UK suffered from huge cost and time overruns leading to clients encashing performance bonds of the company and filing claims from them. This was a complete misinterpretation of Punj Lloyd as far as contracting business is concerned in UK. Though the company tried to turn it around, but failed consequently. In last three years the company has made a cumulative loss of over Rs. 1500 crs in Simon Carves. Finally the management had put its tools down and decided to put the company into administration after settling the claims there. Once the company goes into administration, no further claims can be made. The losses made in these years have been absorbed by the company on consolidation level, and the company has adequately suffered for the mistake. To the losses that the company posted at the net level in past 3 years, Simon carves had a big role in that, more so in FY09 and FY10. However, it has been a learning experience. Doing any kind of contracting job using labours and sub-contractors in Western Europe will be a forbidden area for the company. Now, the Simon Carves fiasco is behind us and no more liability/claims would come from the company. Punj Lloyd has been able to retain the engineering division of the company along with the qualifications and few key personnel which now form a part of Simon Carves Engineering Ltd., a fresh company. Libya In northern Africa, Punj had significantly meaningful presence in Libya. In 2010, before the troubles in Libya started, company had total order outstanding of Rs. 9835 crs from the region. Of these, orders worth Rs. 6244 crs were from International Investment and Services Company (IISCO) and were won by Sembawang. These orders were not moving and had been effectively removed from the order book as no mobilisation expenditure was incurred nor any advance was received on the same. Out of the balance active order book, one order originally worth Rs. 1811 crs was almost complete and outstanding work was only to the extent of Rs. 11 crs and respective WIP for the project is Rs. 434 crs. This project was deep into the Sahara and there has not been any meaningful damage to the project or the equipments there. Most of the work is completed and billed to the client, and a small portion is yet to be completed. Besides this, there was an oil storage complex order worth Rs. 287 crs. And the balance Rs. 3289 crs was from housing and infra. The company had received an advance to the tune of Rs. 480 crs for these housing and infra projects, but the simultaneous mobilisation of resources have been very less, at Rs. 215 cr. The work completed on these projects is very less (WIP of Rs. 85 crs only), hence chances of destruction of the work is even lesser. The company on evaluation of ground situation has taken a write off of merely Rs. 36 crs in Q3FY12 in respect of damages there.
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Current situation The company management has visited Libya recently after receiving an invitation from the transition government there. The political turmoil has been accepted as force majeure, and the contractors have been asked to prepare and file for claims. The company had incurred huge sums in de-mobilising work force from Libya, which the company plans to claim from the government there. Besides this they would also recover the depreciation of the equipments and damages to the equipments there. The transition government is very keen in honouring all the commitments and wants them to start operations fast as the country has been completely shattered due to the uprising destroying the social infrastructure to a great extent. The country is very cash rich due to it oil revenue and will have a single minded mandate to develop the infrastructure of the country with the cash reserves to boost the growth of the country. The elected government would also like to make the country a tourist destination which would need and call for massive investment in infrastructure in line with UAE. Currently the government is desperate to start work and will obviously give preference to companies who can do it at the shortest notice and who have completed projects there. This is an advantage to Punj which already has branches, offices and equipments there in the country. This would reduce the mobilization time and cost and make them much more competitive vis-vis other players both in terms of cost and time. The orders in Libya were always high margin and will continue to be so as after the turmoil, the number of contractors willing to venture out there would be far lesser. If we try to gauge the cash flows, revenue visibility and working capital requirement in Libya in next 6 months, we find that Rs. 250 crs lying in the bank along with Rs. 400 crs from the pipeline order where minimal amount of work is left can be bagged by the company very soon. This can help them start off operations there. With the amount that company actually spent on demobilization and depreciation which the company intends to make a claim for, further revenues can be supported in the balance part of FY13. Hence we can see that a handsome cash flow would be available for the company which would be good enough to support the operations there. Hence additional cash would not be required to complete projects in Libya. In fact towards the end of FY13, we can see Libyan operations starting to contribute cash to the head office. As per latest Q3FY12 results, the auditors have removed the qualification on Libya and have kept Rs. 599 crs as Matter of Emphasis. These are the assets relating to Oil & Gas activities of the company. As and work starts and greater clarity emerges, we expect this auditor emphasis to get removed as well. We expect the claims to come by and revenues start flowing in from 2nd quarter of FY13. Work in Libya should start by April 2012. Libya, which proved to be one of the largest burdens, can prove to be a great business opportunity going forward.

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BUSINESS AS IT STANDS NOW Revenue Break-up

Geographical Breakup Asia Pacific South Asia Middle- East and CIS Africa Rest of the World Total

Rs. Crs 3531 3286 875 0 37 7729

% 46% 43% 11% 0% 0% 100%

Business Wise Infra Pipeline Process Power & Others Tankages Offshore Total

Rs. Crs 2642 1891 1105 913 706 472 7729

% 34% 24% 14% 12% 9% 6% 100%

Order Book Status

Geographical Breakup South Asia Middle East & CIS Asia Pacific Africa Rest of the World Total

Rs. Crs 12638 6181 5075 4308 68 28270

% 45% 22% 18% 15% 0% 100%

Business Wise Infra Pipeline Process Power & Others Tankages Offshore Total

Rs. Crs 9591 5895 5656 4074 1997 1057 28270

% 34% 21% 20% 14% 7% 4% 100%

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The challenges at hand and how we foresee it

Volatile Margins

Margins for the company have been very volatile over the past three years. In EPC companies we focus on operating margins to gauge the core strength and execution capability of the company. Its operating profit margins on a standalone basis stood at 11.9% in March 08 and have fallen to 10.79% in FY11 and 9% in first half of FY12. However, what we really need to look in Punj is the consolidated figures as it has a large number of subsidiaries. On a consolidated level, the operating profit was 12.08% in FY08 and from then onwards has kept on sliding till FY11 to fall to 5.23%. Year FY09 to FY11 was the period when the company was hit by this perfect storm along with the global meltdown. The losses from Simon Carves and the rising raw material prices hurt the margins on a consolidated basis. Moreover, we have seen the company posting a sales revenue of Rs. 12,000 cr at its peak in FY09. The corporate overheads and capacities had been built to support much higher levels of sales. However, due to the problems and general slowdown, the revenues crept down to RS. 7900 cr. level. Hence the corporate overheads and other fixed cost diluted the margins generated at project levels even further. What we expect from here onwards is as follows:1. Operating margin on a quarterly basis will remain volatile due to the nature of the business. We see that infrastructure, especially Indian infra, occupy a healthy portion of the order book as of date (~30%) and will be a greater part of the revenue that company would generate in FY13. Infra being a typical low margin was lapped up by the company in order to combat the slowdown in Oil and Gas earlier. Hence major part of revenue booking in FY13 might come from this segment putting pressure on margins. 2. Even on energy segment, Koreans have bid very aggressively increasing the competition levels and hence reducing the margins. This will also play out in FY13, putting pressure on margins. However, we will see significant shakeout in the space and some sorts of pricing power coming to the company next year which will help margins in following years. 3. The anomaly of past few years is not expected in the future. There will not be any losses from Simon Carves or Libya going ahead, and a better sales growth leading to better spreading of fixed costs will help project margins translating into consolidated margins for the company.

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4. Claims from Libya are expected in FY13. This would also propel the margins. Moreover, the existing order book and fresh orders that we expect from Libya would be at healthier margins giving support to the consolidated figure Revenue Growth Given the capabilities and overheads that the company has, it is very imperative for the company to keep its sales growing. Besides the operating overhead in terms of administrative cost, the company has a high level of depreciation and interest expense as well which deters the operating profit to have a meaningful impact at net profit level. Reducing depreciation (by extinguishing assets) is not possible, and neither is debt repayment a viable option. Hence the company will have to leverage on these fixed costs to make any meaningful bottom line. Execution and hence revenue growth has been an issue in the previous couple of years owing to the tight liquidity condition globally which made the clients skeptical about projects and in turn impeded the project flow. Adding that issues relating to forest clearance, environment clearances, land acquisition and poor financial health of India PSU (one of the major clients or company) deterred the project execution cycle in India. Moreover, with such mounting concerns and strain on financials due to Heera Project and Simon Carves, the company decided to consolidate its business and get a grip over the current situation before jumping on the growth bandwagon. In FY12, the company is expected to clock sales of ~Rs. 10,000 cr, which will be a significant jump (27%) over last year's consolidated sales turnover of Rs 7849 cr. The company has an order book of ~Rs. 30,000 cr. This is three times of the current year expected sales. In addition to that order flow has been very healthy. Sighting the activity in exploration and pipeline infrastructure, as discussed earlier, order flow will not be an issue. Given the internal capabilities and capacities built by the company, scaling up will not be an issue. However, there are two factors that can play a role in the top line expansion. First, the external environment, as in, the financial health of the customers and other externalities which is not very uncommon in this kind of businesses. The externalities in Indian operations is expected to improve as, the demand- supply gap for gas has become very prominent. Especially due to coal shortage and fall in KG basin output. Hence, it is on priority list for the government to ensure project enablers to satiate the demand for fuel to fire power plants and fertilizer capacities. The markets outside India do not have many problems relating such externalities. The second hurdle is the working capital requirement which we discuss next. Working Capital EPC business is not a very capital intensive business, however, it needs commitment in terms of working capital. Most of the payments relating to project happen on milestone basis. Hence, the company needs to make the relevant investment in terms of raw material, labour, other consumables etc. which gets billed once a certain milestone is reached in the project, which again takes time to convert into cash as realization from clients. This keeps the net non-cash working capital requirement high ranging between 15-25% of the sales revenue booked in any period depending on what life cycle the projects are in. If we look at the net working capital for the company over past three years, it has clearly been on a much higher side and has remained a cause of concern for the investors. For example, Net Non-Cash working capital (NWC) for FY11 was Rs. 3532 cr, viz. 45% of FY11 sales. It was 42% of sales booked in FY10. More significantly, Work in Progress has always hovered around 4050% of the. Though the company admits that the working capital requirement for every project should range between 15-25% of the revenues booked depending on aggregate effect of stage of the execution cycle in which the projects are. Following points tend to explain the high level of working capital and WIP for the company in past few years:-

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1. Growth NWC requirement for a project. As stated above depends on which part of the execution cycle the project it. In the initial stages where most of the raw material is procured and basic engineering work is done, there is some bit of frontloading of expense which can only be billed and presented for payment after a certain milestone is reached and approved by the client. Hence, the greater the number of projects in early stages, the larger will be the NWC requirement. The company had been growing at breakneck speed till FY09. This would obviously mean greater inflow of orders and larger number of projects being in initial stages demanding greater working capital. Therefore higher level of WIP and NWC is to some extent explains the high level of NWC. With the growth consolidating over the past three years, we expect the current working capital levels to support a much larger level of sales. 2. Heera Project As we have discussed, significant amount of money got spent on Heera which the company could not claim as of date and has moved into arbitration process. Out of the total spent, the company has recognized Rs. 487 crs as outstanding from that project which represents itself in consolidated WIP and Debtors. This part of the NWC is actually nonoperative and we will get some clarity on the same over next 12 months or so, the time period normally taken by the arbitration process. 3. Libya A good chunk of money also got stuck in Libya due to unrest. Out of the total assets, WIP is around Rs. 500 crs in Libya which again did not get rolled over and resulted in zero revenues over the past one year or even more. However, as we have discussed earlier, we expect traction in Libya to start very soon. Soon, we can get this money into the system as well. 4. Economic slowdown and liquidity issues with PSU Oil marketing companies The general economic slowdown globally over the past 3 years had deteriorated the liquidity situation of companies across the globe making them skeptical about projects impacting project execution as well as a delay in payment. This forced the contractors to sit with high unbilled work and debtors. The high crude prices lead to significant deterioration in financial and liquidity situation of most India Oil Marketing Companies (OMCs) like HPCL, IOCL, BPCL as well as other PSUs like ONGC and GAIL, who had to take the burden of subsidy. They form major clients for Punj and the liquidity crunch at their end clearly reflected in slowing of payments from them. Around Rs. 400 crs is stuck with Indian refineries which the company expects to get in next 3-6 months as govt. increases their support and the liquidity situation improves from here on. The following figure gives a break-up of the active and non-active part of the working capital. As we can see above, NWC worth of Rs. 2500 crs is the active working capital which we feel is a good amount to sustain a revenue of Rs. 10,000 cr. Moreover the Rs. 600 cr in Libya will also start getting rolled over. Out of Rs. 500 cr due from ONGC, Rs. 180 cr is not disputed, yet stuck up due to arbitration process. Still we can't factor that in for the next 12 months atleast. Indian refineries are expected to pay in next 3-6 months their dues. The other smaller amounts due from other projects will also start paying once the economic activity increases and liquidity situation eases.

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The point we are trying to drive home with is that, the biggest concern for the investor community has been the composition and reliability of its NWC. We have broken it up so that ambiguity is removed. What has been troubling the investors is that the company's business model inherently needs 40-50% working capital, as reflected in past 3-4 years balance sheet. But on careful evaluation we find out that the troubled part is Rs. 500 cr with ONGC and another Rs. 550 crs with other clients. Once this cash flow comes in and more projects entering 2nd-3rd stage, greater amount will get generated from operations. Adding to that will be improving Libyan situation. All these collectively enable the company to generate enough cash internally to support much larger sales figure without resorting to debt or equity issue. Say suppose the company is able to bring its working capital requirement to 35% and 30% in next two years, at the latest half yearly balance sheet's (H1FY12) NWC of Rs. 4483 crs, it would go on to support a sales turnover of Rs. 12800 and Rs. 15,000 crs respectively. If we look at it from another angle, to support a turnover of Rs. 12,000 crs, on an incremental basis, we need a NWC of Rs. 3000 (@25%). The company currently has an active and rolling NWC of Rs. 2500. If we are able to realize Rs. 500 crs from this inactive book of Rs. 2000 crs in next 1.5 yrs, which seems to be very likely as discussed earlier, we are well braced to attain a turnover of Rs. 12,000 crs. Hence, on a realistic basis, we can see that the consolidated debt will not go up from the current levels and still we can support a sales growth of close to 25% for next two years. We would have enough working capital to support the level of sales and no further fixed asset investment would be needed to achieve that level. However, as the cashflow from projects are normally lumpy, intermediate increase in debt levels cannot be ruled out. EXPANDING HORIZONS Nuclear Power Punj Lloyd is also present in this sector, having provided services in support of the design and construction of associated nuclear process facilities in areas such as enrichment, fuel fabrication, new build and decommissioning including waste treatment. Company has executed civil construction, mechanical work, electrical systems and C&I of various packages for nuclear power projects. India now envisages increasing the contribution of nuclear power to overall electricity generation capacity from 3.2% to 9% within 25 years. By 2020, India's installed nuclear power generation capacity will increase to 20,000 MW from 4780 MW currently. India now ranks sixth in terms of production of nuclear energy, behind the U.S., France, Japan, Russia, and South Korea. Indian expects $100 Bn on investments over the next two decades in Nuclear Power. After the signing if Nuclear Supplier's Group (NSG) treaty, India has opened doors for international players to sell nuclear fuel as well as transfer of technology to set up Nuclear plants in India. This will open further avenues of growth for the company. PL Engineering (PLE) Punj Lloyd formed PL Engineerng with a motivation to provide engineering and design services for captive projects as well as outside clients. The company has its main office in Gurgaon having a strength of 500 engineers along with offices in Manchester and Abu Dhabi. The company has a total staff strength of 650 engineers capable to provide design and engineering services to Pipelines, Refineries, Tankage & Terminals, Field Development, Thermal & Nuclear Power, Petrochemical, Chemical, Automotive and Aerospace industries. From Techno-economic feasibility studies prior to the start of a project to decommissioning and abandonment studies at the end of an asset life, the services cater to entire life cycle of projects.

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After putting Simon Carves Lt. into administration, PLE has inducted 75 engineers along with the qualifications and projects of the company. With them, PLE has set up Simon Carves Engineering which does only engineering and design work for Polymers, Green Fuels (like Bio-ethanol), Nuclear Power and Chemicals. The new company does not do EPC work. The gross margins in the business is very high as major part of the cost is employee cost only. The operating margins are in the region of 20%. Like most of the other businesses of the group, 70% of the revenue comes from clients abroad. They would leverage the groups presence and brand name to get projects in Middle-East and S-E Asia and Europe where the margins are much better than in India. Oil & Gas forms the largest part of the revenues for the company followed by nuclear. Future Outlook The opportunity for the company is huge, but we won't see skyrocketing levels of revenue in next year or so. In oil and gas, major investment is being made in pipeline and midstream (where scope of engineering is very limited). Not much capacity is coming up in polymers and petro chemicals. Even nuclear orders will be very few and discreet in next couple of years. But we expect the same to pick up gradually. New avenues in infra (in India and abroad) would soon come up and we will get some traction from aerospace and off-shore jobs. The management expects to deliver a 20-25% growth in revenues for next few years. This should not be a very aggressive target as we are coming from a very low base. Given the employee strength of 650, last year's sales of Rs. 120 crs seems to be very low. However, we must also understand that the general economic environment, especially in infrastructure and oil & gas was very low. The company has enough employee strength to support much higher levels of sales giving tremendous operating leverage. The company will be a major beneficiary of the engineering outsourcing business which is at a very nascent stage, but likely to grow manifolds given the quality and price if engineering talent available in India and technology which makes such outsourcing model possible. The company was initially set up to cater to the engineering work of the parent, but as external opportunities arose, they embarked on the same and now external orders constitute 55% of the revenues. However, transactions with the parent happen on arms length to increase competitiveness and profitability of both.
JV With GECI International, France Dassault Systmes Purpose To provide engineering services to Indian Aerospace sector and then expanding beyond India serving other regions as well To provide 3D, Product Lifecycle Management (PLM) and Dassault Systmes' Version 6 software solutions to customers in Oil & Gas, Power- Nuclear & Thermal, Chemicals, Petrochemicals, Biofuels, Industrial Plant Design, Aerospace, E-learning solutions and Equipment Manufacturing sectors in India and other markets.

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Defence India has evolved as the most lucrative defence market globally with a mega acquisitions program coupled with the government's proactive stance, a healthy foreign supplier base mix and an increasing number of deal closures seen over the past few years. This understanding is further manifested by the large number of tie-ups forged by large Indian manufacturing/technology companies with global Aerospace and Defence companies in the recent past, to enable them a foot in the door in the Aerospace and Defence manufacturing sector. As per KPMG estimates deals worth USD 24.66 billion (approximately) have been signed by the Indian Ministry of Defence (MoD) with global integrators in the past 48 months and another USD 41.99 billion (approximately) deals are in the process of getting signed. India will be spending more than USD 80 billion on capital acquisitions in the 2010-2015 timeframe. The offset policy recently introduces, would help industry get orders from international companies and to upgrade its technologies for manufacturing defence equipment. India has revised the offset policy in buying the French Rafale jets through a massive $11 billion MMRCA deal. The French company needs to procure 50 per cent of the value of the imported defence products from Indian companies. This would benefit Indian defence industry to get manufacturing orders of $5.5 billion from the French company. This would create a lot of demand and market for defence production companies. It also improves the skillset of the companies and generates employment in the sector. More so the government on 9th Feb, 2012 paved the way for defence public sector undertakings (PSUs) to go for joint ventures (JVs) or form consortia with private sector companies. Punj Lloyd has also built capabilities to enter the defence markets with capabilities in Land systems, defence aviation and design& engineering. It will look to partner global players, working with their technology and providing the engineering and production facilities to them in order to make their presence felt in the sector. As reforms happen in the defence opening opportunities for global and local private players, we expect the company to claim its cut in the pie too. Renewable and Water The company also ventured into renewable energy. We have seen the interest in National Solar Mission together with commitments from government of Gujarat, Rajasthan and other states to utilize solar and solar thermal for power and heating purposes. The company in April 2010 secured solar based EPC contract with combined value of Rs. 232 cr from Public Health Engineering Department of the Govt. of Bihar. It has also embarked on international orders with getting EPC contract for a polysilicon plant in Qatar in having technological tie-up with a German company. This can open several new avenues for the company going forward. Development Projects In order to capitalize on its construction and execution capabilities, Punj Lloyd has ventured out in development projects. The company however remains very return cautious and goes for projects where there is a compelling IRR generation opportunity. Couple of recent orders bagged by the company are as below. Residential Complex for Delhi Police The project awarded by Delhi Police through competitive bidding for construction and maintenance of police residential complex near Azadpur Mandi in North Delhi.

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The project, with an estimated cost of approximately Rs 1300 crores, primarily entails development, operation and maintenance of the residential zone of over 5000 units (approx. 40 lakh sq ft.), along with utility facilities such as sewerage and water treatment. It also includes development and commercial operations of the nonresidential infrastructure such as schools, healthcare, convenience shopping, as per the norms laid down in the Delhi Master Plan 2021. PLIL will be signing a concession agreement with Delhi Police, which is under the aegis of Ministry of Home Affairs (MHA), for 25 years and will be entitled to semiannual annuities of Rs. 62.75 crores along with construction milestone linked lump sum payments of Rs. 316 crores. The company will also be entitled to receive rental and other ancillary income from the non-residential portion of the complex. Khagaria Purnea Highway Punj Lloyd Group subsidiary, Punj Lloyd Infrastructure Limited (PLIL), bagged a BOT project from National Highways Authority of India (NHAI) for upgradation of NH-31 from Khagaria to Purnea in Bihar to a two-laned, undivided carriageway with paved shoulders, under the NHDP III (National Highways Development Programme III) on Annuity basis in February 2011. The estimated cost of the project is Rs 735 crore. The scope of work involves Design, Build, Finance, Operate and Transfer of the 140 km section of the National Highway. The concession period would be 17 years and will be entitled to semi-annual annuities of Rs 56 crores. VALUATION AND RECOMMENDATION We are very optimistic about the macro environment relating to businesses the company operates in and especially the energy business. We expect the competitive environment to improve and Punj would emerge as a formidable player in the segments and geographies it is present. The pain of the past couple of years has been endured and adequate financial losses have been booked. Incrementally, we see things only improving in terms of business flow, margins and cash flows. We foresee the working capital requirements to ease of significantly from here as we see Libyan operation starting and funds getting realized from other projects. Coupled with traction in core business, it would restrict the growth of debt and hence the interest cost from here. Along with this a synchronized improvement in operating margins will help leverage the fixed costs significantly resulting in handsome gains at the net levels. We expect the company to post an EPS of Rs. 9.81 and Rs. 16.81 in FY13 and FY14 respectively. This will be due to combined forces of factors discussed above. At current market price of Rs. 62, the stock trades attractive valuations of 6.3x and 3.8x its FY13E and FY14E EPS. We expect the stock to trade at 10x its FY13E EPS and arrive at an intermediate target of Rs. 98. If there is better than expected flow of orders and cash flows, the target is more likely to get revised upwards.
Valuation Ratios P/E P/B FY12E 22.5 0.7 FY13E 6.3 0.7 FY14E 3.8 0.6 FY15E 2.5 0.5

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FINANCIALS

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CONSOLIDATED PROFIT AND LOSS ACOOUNTS Particulars (Rs. Crs.) Net Sales Other Operating Income Total Income Operating Profit Operating Margin Other Income/ Exp Depreciation PBIT Interest PBT Tax Effective Tax Rate PAT PATM No. of Shares EPS (Rs.) CONSOLIDATED BALANCE SHEET Particulars (Rs. Crs) Networth Total Debt Minority Interest D. Tax Liability Liabilities Total Gross Block Acc. Dep Net Block Cap. WIP Investments Net Current Asset(Non-Cash) NWC as a %age of Sales Cash & bank Deferred Tax Asset Asset Total

FY11 7863 153 8016 499 6% 143 269 373 357 16 66 -50 -1% -

FY12E 10409 35 10444 775 7.11% 213 290 698 500 198 110 88 1% 33.21 2.66

FY13E 12790 30 12820 1203 9.17% 140 325 1018 475 543 217 40% 326 3% 33.21 9.81

FY14E 14604 32 14636 1658 11.14% 45 334 1369 439 931 372 40% 558 4% 33.21 16.81

FY15E 16920 35 16955 1996 11.59% 50 330 1716 379 1337 535 40% 802 5% 33.21 24.15

FY11 2979 4543 74 7596 3365 1113 2252 213 384 3532 44% 1215 7596

FY12E 3061 5282 80 161 8584 4000 1403 2597 0 350 5195 50% 439 3 8584

FY13E 3381 5482 82 150 9095 4400 1728 2672 0 320 5077 40% 1026 9095

FY14E 3932 4742 85 140 8899 4700 2062 2638 0 300 5033 34% 927 8899

FY15E 4724 4333 88 120 9265 5000 2391 2609 0 300 5336 32% 1020 9265

301 A N HOUSE 34 TPS III 31ST ROAD OFF LINKING ROAD BANDRA - WEST MUMBAI 400050. t. +91 22 6694 9071 / 72 / 75 Mr. RAJESH AGARWAL Managing Partner & Fund Manager e. rajeshagarwal@moneyore.com m. 0 98210 74265 Mr. MOHAMMAD RIAZUDDIN - CFA, FRM SENIOR ANALYST e. riazuddin@moneyore.com m. 0 72086 87880 Mr. VICKY NICHANI e. vicky@moneyore.com m. 0 98200 62842

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