Religare Securities puts REDUCE on Punj Lloyd

Oil and gas companies based in the Middle East are holding renegotiations with E&C contractors for a reduction in contract prices of ongoing projects, according to a recent article in MEED – a Middle East publication.

The decline in commodity prices coupled with a severe liquidity crunch has prompted companies to delay and renegotiate projects.

The article quotes Saudi Aramco, Abu Dhabi National Oil Company (Adnoc) and Dubai Electricity and Water Authority (DEWA) officials. This development could affect Indian construction majors such as L&T, Punj Lloyd (PLL) and Simplex Infrastructure. PLL’s order book stood at Rs216 billion (~65% international) as at the end of September’08. Projects in the Middle East comprise 26% of its total order book, wherein the company has a segment-wise exposure of 33% to pipelines and 28% to process plants.
We also anticipate delays in the award of new contracts at the clients’ end as they wait for a further cool-off in commodity prices and hence a reduction in project cost.

We have trimmed our FY10 sales estimate for PLL by 8% and EBITDA margin estimate by 50bps. Our earnings figures stand revised downwards by 3% and 22 % for FY09 and FY10 respectively.
The stock is currently trading at a P/E of 8.4x FY10E earnings. We are reducing our target price from Rs208 to Rs166 and revising our rating from Accumulate to REDUCE on account of concerns in the Middle East and PLL’s higher project exposure to the international market.

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