We retain our underperform rating on Punj Lloyd and stay with our 12-month price target of R21 based on EV/Ebitda methodology. Balance sheet and persisting losses are key concerns. With extremely low ROEs, high leverage and low interest coverage (<1x), we do not see any compelling reason to own the stock. We believe a significant reduction in debt levels is paramount for any re-rating. The stock is trading at 8.7x FY15e earnings and 5x FY15e EV/Ebitda despite building in a recovery in FY15 numbers.
Punjs 3QFY14 results were below our estimates on account of lower than expected margin due to higher provisions on account of cost overruns in international subsidiaries. Interest cost for the quarter was higher than Ebitda. We believe a declining order book, stretched balance sheet and cost overruns in the international subsidiaries remain key overhangs for the stock.
Punj reported ebitda margin of 5.2% (down 250 bps y-o-y) mainly on account of higher cost provisions in the international subsidiaries. Revenue declined 4% y-o-y and was below our estimate. Reported loss was R104 crore versus a loss expectation of R8 crore.
According to management, the lower consolidated margin was on account of R100 crore of provisions booked in the international subsidiaries. South-East Asian oil and gas subsidiaries made losses during the quarter. Punj has been facing losses in hydrocarbon projects in various geographies in the last three years putting a question mark on margin revival on the consolidated level.