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Punj Lloyd’s financial performance over the last two quarters amply demonstrates its ability to weather tough macro-economic conditions. The current trend of softening commodity prices and clear signals on interest rates softening from here on may further support the company’s earnings growth.

Investors with a 2-3-year investment perspective can consider adding the stock of Punj Lloyd. At the current market price, the stock trades at a modest valuation of about 9.5 times its estimated consolidated earnings for FY09. The current valuations provide a good entry point into the stock. The company’s earnings grew at 48 per cent compounded annually over the past three years.

The consolidated sales for the quarter ended September 2008 rose 53 per cent while net profit was higher by 61 per cent over a year ago. Net profit growth, excluding profit on sale of its ISP division (pending approval), was at 45 per cent. The company’s strong performance comes on the back of diversified business operations across several nations, a strategy that has enabled it to beat threats of a slowdown.

For instance, while revenue contribution from pipeline and process plant segment continues to remain significant in the latest quarter, its proportion to total sales has declined. Instead, the company’s infrastructure segment, further strengthened by its Singapore-based acquisition, has made a higher contribution. This segment’s increased contribution is visible in the order book as well.

Punj Lloyd has also made headway in geographic diversification, having significantly ramped up presence in South-East Asian and Asia-Pacific regions.

Over the past few quarters, infrastructure stocks have been beaten down on fears of higher raw material and borrowing costs hurting earnings. A mild slowdown in order book in the June quarter also sent the earnings estimates spiralling downwards for the company. Punj Lloyd has done well to cross these hurdles.

In the latest quarter, the proportion of raw material to sales witnessed a decline, improving operating profit margins by 50 basis points to 9.3 per cent. Interest cost too was comfortably covered by higher profits. Order inflows during the quarter, at Rs 5,600 crore, were more than double September 2007 levels.

The company’s current order book of Rs 21,700 crore (2.8 times FY08 sales) from cash-rich clients is likely to provide revenue visibility over the next 18 to 24 months. Beyond this period, new ventures such as defence equipment, onshore drilling and strategic stake in a shipyard are likely to expand the revenue stream. While a subsidiary has bagged its first onshore drilling contract, a further decline in crude oil prices may pose a threat to the rental income.

Vidya Bala

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