19 June 2007

BUY
Rs237
Urmik Chhaya 91-22-6639 9176 urmik.chhaya@alchemyonline.com

Punj Lloyd Ltd

High Growth PlayOil & Gas, Infrastructure Services
Nirav Parikh 91-22-6639 9147 nirav.parikh@alchemyonline.com

Reuters code Bloomberg code Shares o/s Mkt Cap 52 week high/low Avg daily trading volume BSE Sensex Nifty Shareholding pattern (%) Promoter FIIs Banks/FIs/MFs Public/Others Performance (%) Absolute 1m 30.8 3m 54.5 36.4 12m 57.1 10.3

PUJL..BO PUNJ IN 261.27mn Rs62bn/ US$1.5bn Rs253/109 2.27mn shares 14080 4147

53.9 17.6 15.0 13.5 YTD 14.8 12.4

Relative to Sensex 32.9 Share Price Movement

(Rs) 260 240 220 200 180 160 140 120 100 May-06

Investment Positives Global capex boom: The Gulf Cooperation Council (GCC) earned USD1.5tn cumulatively from 2002-06. These Gulf economies are flush with financial resources and investments are being directed into energy and infrastructure sectors. Strong revenue growth: Revenues are expected to register a CAGR of 45.66% in FY07-09E growing from Rs51bn in FY07 to Rs108bn in FY09E, primarily driven by strong order inflows after the acquisition of SEC and Simon Carves. Significant Increase in order backlog, and size and quality of orders (after the acquisition of SEC): With the acquisition of SEC and its wholly owned subsidiary Simon Carves, PLL has improved its pre qualification strength and this is reflected in the quality and size of order inflows. (Refer Table 2 & 3). The complexity of Projects have increased and company has entered newer verticals (Refer Table 5) Moving from Sub-Contractor to main Contractor: PLL has now become main contractor for new complex jobs. PLL will act as a main contractor in large projects like pipeline project in Libya (Refer Table 4). Improvement in margin: The EBIDTA margin (excluding other income) is expected to improve from 7.3% in FY07 to 9.1% in FY09E. The margin would improve after the inherited order backlog of Sembawang Engineers & Constructers (SEC) gets exhausted in FY08E. SECs legacy order backlog stands at Rs25bn with a low margin of 1.3-1.5 Catalysts Significant opportunity in the King Abdullah Economic city (KAEC): PLL, through SEC and Simon Carves, can capture a large part of the US$26.6bn King Abdullah Economic city in Saudi Arabia. Improvement in margin through sub-contracting of SEC & Simon Carves work: The margin for PLL can further improve if SEC and Simon Carves work is sub-contracted to PLL. Offshore engineering services: The engineering costs in UK (Simon Carves) are in the range of USD80-90/hr while the same work in India costs around USD20-30/hr. Valuations At Rs236.6, PLL trades at P/E of 20.15x and 13.59x on FY08E and FY09E earnings, respectively. With its strong order backlog and potential catalysts, we arrive at P/E multiple of 17x on FY09E, hence target price of Rs296. BUY.

May-07

Aug-06

Nov-06

Feb-07

Mar-07

Apr-06

Jun-06

Jul-06

Jan-07

Sep-06

Financial Highlights March End Net sales (Rs mn) EBIDTA (Rs mn) EBIDTA (%) Net profit (Rs mn) EPS (Rs) (Fully diluted) P/E (x) * Sizeable jump in net sales is due to consolidated numbers of SEC. FY06 FY07* FY08E

Dec-06

Jun-07

(Rs mn) FY09E

13682 1399 10 351 6

51265 3743 7 1960 6 34

80020 7001 8 3304 11 20

108763 9893 9 4899 17 13

Bloomberg code ASSB <GO>

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Contents
INVESTMENT POSITIVES Global Boom in Construction Strong Revenue Growth Significant Increase in the Order backlog, and Size and Quality of Orders Moving from Sub-Contractor to main Contractor Improvement in Margin Real Estate Play Medicity Increased Proportion of Oil & Gas Sector in order backlog to reduce lead time Concerns on project execution overplayed CATALYSTS Significant Opportunity in King Abdullah Economic City (KAEC) Improvement in margin through sub-contracting of SEC & Simon Carves work Offshore engineering services VALUATION RISK Failure to recover claims KEY ASSUMPTIONS Order inflows ANNEXURE I ANNEXURE II 3 3 3 3 4 4 5 5 5 5 5 6 6 6 6 6 6 6 7 7

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INVESTMENT POSITIVES
GLOBAL BOOM IN CONSTRUCTION
The Gulf countries are witnessing a capex boom. The countries in the Gulf Cooperation Council (GCC) Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE accrued substantial windfall since 2002 when global oil prices began escalating. From 2001-06, oil prices rose from US$20/barrel to US$60/barrel. The price surge, together with higher demand boosted combined export earnings of the six GCC states to an average of US$327bn a year in 2002-06, or to more than double the average (of US$146bn) recorded in the preceding five years (Source: Institute of International Finance, IIF). Similar surpluses were recorded by other commodity driven economies like Russia, North/West African Countries etc. These economies too are flush with financial resources due to boom in oil prices and these savings are being directed into energy and infrastructure investments. The Arab Oil & Gas directory forecasts massive investments to the tune of around USD500bn in Saudi Arabia in the next few years.
Table 1: Projected Investment in Saudi Arabia over next few years Verticals USD Bn

Petrochemicals Power Generation Water Distillation Plants Natural Gas Related Projects Special Economic City & Transport links
Source: Arab Oil & Gas Directory

90 90 88 50 140

STRONG REVENUE GROWTH

Revenues are expected to register a CAGR of 45.66% in FY07-09E, growing from Rs 51bn in FY07 to Rs 108bn in FY09E, primarily driven by strong order inflow after the acquisition of SEC and Simon Carves.
Table 2: Order backlog (As on May 2007)
Sector/Region Order backlog position of Punj Lloyd South/South East Asia Middle East & Africa (Rs mn) Oil & Gas Civil, Infra & Power Total 46140 31202 77342 38425 3365 Rest of World 4502 13165 (Rs mn) 38425 Rest of World (Rs mn) 3365 Total (Rs mn) 87929 31202 119132 Total 22144 21503 17939 18117 61586

Sembawan Engineers & Constructors South/South East Asia Middle East & Africa Petrochemicals Oil & Gas Civil, Infra & Power Total 10263 5048 10558 25869 7379 2840 7381 17600

Source: Company

SIGNIFICANT INCREASE IN THE ORDER BACKLOG, AND SIZE AND QUALITY OF ORDERS
With the acquisition of SEC and its wholly owned subsidiary Simon Carves, PLL has improved its pre qualification strength and this is reflected in the quality and size of order inflows. (Refer Table 2 & 3).The complexity of jobs have increased and company has entered newer verticals (Refer Table 5).

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MOVING FROM SUB-CONTRACTOR TO MAIN CONTRACTOR

The company has now become main the contractor for newer complex jobs. PLL will act as main contractor in large projects like pipeline project in Libya (Refer Table 4), LDPE Plant in Saudi Arabia, etc. Thus, with acquisition of SEC & Simon Carves, PLL has moved up the value chain.
Table 3: Pre-acquisition of SEC (major orders) Contract Company Country Value Brief RIDCOR Global Health Care Dabhol LNG GAIL India India (Rs mn) 3020 860 Improvement & maintenance road Bldg Structure Hospital

Duration

Contract Date June 2005 Feb 2006

Completion

14 months

FY08

India India

4139 1382 Dahej - Uran Pipeline May 2006 FY07

Source: Alchemy, Company Table 4: After acquisition of SEC (major orders)

Company Sirte Oil Co Country Libya Contract value (Rs mn) 13480 Brief Pipeline Project 22 18 Yemgas IOC IOC IOC Qatar Petro Horizon Terminals PTT PE ONGC Ensus Group (Carlyle) Saudi Kayan Petrochemical Co ONGC New Doha Intl Airport Yemen India India India UAE Singapore Thailand India UK Saudi Arabia India UAE 3079 3497 8640 2990 8037 1472 8900 12887 13350 Naphtha Cracker Unit Hydrocracker Unit Hydrogen Generation Unit Laying Pipeline Terminals Process Plant Largest Offshore Platform Project Bio-ethanol Plant 300 ktpa LDPE Plant 2420 2580 Uran-Trombay Gas Pipeline Expanded Capacity Fuel System 15 16 24 33 24 14 Duration in months Contract date Aug, 2006 Aug, 2006 Aug, 2006 Aug, 2006 Sep 2006 Nov 7, 2006 Nov 7, 2006 Nov 10, 2006 Dec 2006 Dec 2006 Jan 2007 March 2007 March 2007 March 2007 March 2007 Q1 FY10 Q1 FY09 Early 2009 Q1 FY10 June 2008 Dec-08 Q3 FY09 Q2 FY09 Q1 FY09 Complete

Source: Alchemy, Company Table 5: New Verticals Added Sector Oil & Gas Petro Chemicals

Green Fuels SEZ Mass Rail Transport Systems (MRTS) Source: Alchemy, Company

Profile Platform Projects Downstrem of the Polymerisation Process which includes various forms of polymer treatment, handling, conveying, storage, packing and shipping. Bio-ethanol Plants

IMPROVEMENT IN MARGIN
The EBIDTA margin (excluding other income) is expected to improve from 7.3% in FY07 to 9.1% in FY09E. The margin would improve after the inherited order backlog of SEC is exhausted in FY08E. SECs legacy order backlog stands at Rs25bn with a low margin of 1.31.5%. Recent orders (post acquisition) through Simon Carves are at 7-7.5% margin. Thus, exhaustion of legacy order backlog will improve margin of PLL.

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REAL ESTATE PLAY MEDICITY

PLL holds 16% in this project (investment of Rs1.35bn), which involves development of 47 acres of land in Gurgaon. Of this, 22 acres will be utilized for constructing a hospital while the rest will be utilized for commercial/residential development. The company acquired the plot at the rate of Rs3500 per square feet. With rise in real-estate prices, the current worth of this investment is much higher. The construction work of Medicity is expected to be complete by the second half of FY08.

INCREASED PROPORTION OF OIL & GAS SECTOR IN ORDER BACKLOG

TO REDUCE LEAD TIME
As of March 2006, Punj Lloyds order backlog stood at Rs5231.7mn. However, the proportion of civil works accounted for 43.04%. The road projects in Assam and Rajasthan together accounted for approximately 24% of the order backlog. These projects were of longer duration (30 months). Thus, the order backlog had longer lead time and a lower margin due to high proportion of civil works. The current order backlog (Refer Table 1) has higher proportion of Oil & Gas projects (accounting for 73% of standalone order backlog). These projects have relatively lower lead time and higher margins. (Project duration 14-24 mths)
Table 6: Order backlog as on March 2006 Amount (Rs mn) (% of order backlog)

Pipelines Storage Tanks Process Plant Civil Power

Source: Alchemy, Company

14161 8060 3606 22516 3972

27 15 6 43 7

CONCERNS ON PROJECT EXECUTION OVERPLAYED

The road projects in Rajasthan and Assam accounted for 24% of order backlog as of March 2006(pre acquisition of SEC). Due to non-availability of Right of Way (RoW), these projects got delayed. Thus, these delays were beyond the companys control. After the acquisition of SEC, proportion of these projects is very small.

CATALYSTS
SIGNIFICANT OPPORTUNITY IN KING ABDULLAH ECONOMIC CITY (KAEC)
This is the single largest private sector investment in Saudi Arabia with an investment of US$26.6bn, to be developed over 168mn sq mts. This project is being developed by EMAAR and Saudi Arabia General Investment Authority (SAGIA). PLL expects to get substantial orders in the development of the city through its JV with Prince Khalid Bin Bandar Bin Sultan (KBS), Saudi Arabia. (Punj Llyod Ltd. holds 49% in JV.)The city will have six distinct components seaport, industrial district, financial island, education zone, resorts and residential area. The industrial district will cover 63mn sq mts (almost a third of the citys size). One of the key areas in this industrial district will be plastic valley and downstream petrochemicals. This could be a big opportunity for Simon Carves which has vast experience in petrochemicals. (Altogether, Simon Carves has designed and supplied more than 60 plants to manufacture a variety of polymers. Of these, 35 plants manufacture LDPE or its related product ethylene vinyl acetate (EVA). The other major area in the city will be the residential area covering 51mn sq mts. This could be a big opportunity for SEC, which has substantial experience in design and construction of buildings. Thus, Punj Lloyd is ideally placed to capture substantial work in the development of KAEC.

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Table 7 : Break up of the residential area Units Brief 10000 Two-storeyed town houses 14400 water front villas 14722 Larger water front villas 2668 Exclusive villas (with private docking for direct access from the sea) Source: www.kingabdullahcity.com/en/

Area (mn sq mts) 15 7 11

IMPROVEMENT IN MARGIN THROUGH SUB-CONTRACTING OF SEC & SIMON CARVES WORK

The margin can further improve if SEC & Simon Carvess work is sub-contracted to PLL. However, all the recent orders of Simon Carves, including a bio ethanol plant in UK and a LDPE plant in Saudi Arabia, would not be sub-contracted to Punj Lloyd as its own large order backlog needs to be executed.

OFFSHORE ENGINEERING SERVICES

Simon Carves is a niche engineering company engaged in petrochemicals. This UK based company has high manpower costs in the engineering field. The engineering costs in UK range between US$80-90/hour while the same work in India costs around US$20-30/hour. Thus, there is big potential to capture a higher margin by off shoring a significant portion of detailed engineering work to India. Currently, Simon Carves India has 200 employees and company expects to add another 500 in FY08E and 600-700 employees in FY09E. Going ahead, the company expects Simon Carves India to undertake independent projects in aeronautics, aviation and telecom (independent of PLL).

VALUATION
At Rs236.6, PLL trades at P/E of 20.15x FY08E and 13.59x FY09E earnings. L&T trades at 16.15x on FY09E earnings. With its strong order backlog and potential catalysts, we arrive at P/E multiple of 17x on FY09E earnings indicating a target price of Rs296. BUY

RISK
FAILURE TO RECOVER CLAIMS
The company is carrying certain disputed claims as sundry debtors. Rs1.15bn in sundry debtors is under dispute with various companies. An adverse outcome from these disputes could affect financials.

KEY ASSUMPTIONS
ORDER INFLOWS
The order inflow in FY07 was Rs100bn. However, order inflow has been assumed at Rs110bn in FY08E and 120bn in FY09E. (Previously, we had estimated a slowdown in order inflows to Rs90bn in FY08E and FY09E each.) We believe the company will raise capital and maintain the momentum in terms of growth in order inflows.

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ANNEXURE I COMPANY INFORMATION

Punj Lloyd is one of the largest construction companies in India providing integrated design, engineering, procurement, and construction and project management services for energy and infrastructure sectors. The companys acquisition of Sembawang Engineers & Constructors Ltd, Singapore and Simon Carves, U K, has strengthened its global presence and portfolio of offerings. The company is now pre-qualified for larger and more complex project bids. The companys area of operations now include onshore and offshore pipelines, cryogenic tanks & terminals, process plants, highways, bridges, railways and infrastructure services, plant and facility management and power plants, etc

ANNEXURE II
Profit & Loss
Year ending March Net Sales & Services Other Income Materials Consumed and COGS (% of sales) Contractor Charges (% of sales) Employee Cost (% of sales) Other Expenses PBIDT (excl. O. Income) OPM (%) Interest Depreciation/Amortisation Profit before Tax & Exceptional Items Provision for Tax Profit after Tax EPS (Fully Diluted) (Rs) Equity FY05 14294 499 3775 26 2652 18 1723 12 4878 1264 8 1061 751 114 33 81 3.23 522 FY06 13682 348 4517 33 2976 21 1386 10 3402 1399 10 593 621 562 211 351 6.73 522 FY07 51265 793 16372 31 14193 27 6369 12 10587 3743 7 825 1061 2649 689 1960 6.97 522 FY08E 80020 500 28161 35 17697 22 11162 13 15996 7001 8 1426 1091 4999 1694 3304 11.74 522 FY09E 108763 500 38132 35 23963 22 15113 13 21660 9893 9 1701 1291 7412 2512 4899 17.41 522

Source: Company, Alchemy Research. Note: In FY07 other income includes gains on forex fluctuation of Rs240mn Balance sheet, free cash flow & ratios have not been included since the Annual Report for FY07 which includes SEC & Simon Carves is not available.

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Sales
Arun Singh Chetan Chitroda arun@alchemyonline.com 91-22-6639 9125 91-22-6639 9134

Dealing
chetan@alchemyonline.com

Disclosure of interest statement*

Analyst holding of the stock Firm holding of the stock Owners holding of the stock NO NO YES

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