What’s happening in Punj LLoyd

Punj Lloyd has commenced adjudication proceedings ( through its wholly-owned United Kingdom based subsidiary – Simon Carves) against SABIC Petrochemicals UK after SABIC terminated the contract and called the performance and advance bank guarantees amounting to approximately Rs2.14bn.

Punj Lloyd was expecting these claims to be settled from SABIC by end of Dec,2008. However, with commencement of legal proceedings against SABIC for terminating the contract, one can’t expect early recovery of these costs from the client till a settlement is reached.

The company would have to make provisioning to the tune of Rs 2.14 bn in the current fiscal to factor in the present status of the project.This move is one-time negative for the company in terms of adverse impact on the profitability in FY09.

At current price, the stock is currently factoring in most of the negatives related to order inflow slowdown, SABIC order provisioning as well as negative headwinds prevailing in the economy. Moreover,this provisioning is only one time in nature.

At current price of Rs 110, stock is trading at reasonable valuations of 10.8x and 5.4x its P/E multiples on FY09 and FY10 estimates respectively. These valuations currently factor in most of the negatives related to provisions for SABIC order as well as order inflow slowdown.

Investors with long term view can accumulate on declines, for good returns.

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