Punj Lloyd – Buoyed by oil spending-Auditors comment on potential losses not provided for

Punj Lloyd – Buoyed by oil spending

Auditors comment on potential losses not provided for (BL Research Bureau)

Increased spending in the oil and gas sector on the back of soaring oil prices appeared to be the catalyst for the strong numbers announced by Punj Lloyd for the year-ended March 2008. The company, on a consolidated basis, announced a 51 per cent growth in revenues and 82 per cent growth in net profits for financial year 2008.

Increasing order size

Operating profit margins for the consolidated entity improved to 8.2 per cent from 7.3 per cent. This nevertheless pales against the double-digit margins enjoyed by the company before its acquisitions.

The company has been taking initiatives to improve profitability of its subsidiaries, where though they held prequalification in high end areas, could not convert the same into commercial opportunities. The company has effectively tapped the qualification of the acquired companies to sharply ramp up its order book. Punj Lloyd’s current order backlog of Rs 19,600 crore is over five times its order book when it came out with its IPO in December 2005.

The average increase in the order size can also be expected to improve profitability through economies of scale. While the company recent Rs 2,015-crore order win in Malaysia is a case in point, the company has stated that it is working at bagging orders of $1billion in size.

While the above order backlog is tilted in favour of oil and gas segment, infrastructure projects (civil, power) account for a significant 35 per cent.

Although the management has stated that 90 per cent of its total orders have passed through clauses for input hikes, the infrastructure segment may nevertheless be vulnerable to commodity increase as the escalation clauses seldom cover the complete hike in inputs.

Loss on contract : The company’s auditors have commented that no provision has been made for expected losses of Rs 305 crore arising out of one of the contracts. The company has clarified that it hopes to recover the same and at least break even on the project.

The project, for a UK-based company, was a legacy order (of Simon-Carve before it was acquired by Punj Lloyd) and involved changes in design and scope of projects. While the company has already reversed some profits booked in the third quarter, it stated that a settlement has been reached for part of the revised order size. Given that this project accounts for less than 1 per cent of the present order backlog, the outcome of this issue is unlikely to have any significant impact on future profitability.