The lure of foreign shores can be irresistible. They tempt even the best. But for the underprepared, the prosperity they promise, can turn out be a mirage. One Indian company which has lived this bitter truth is Engineering, Procurement and Construction (EPC) major Punj Lloyd, whose overseas escapades – both in the West and some politically volatile regions in the East – have been nothing but painful

Sisir Pradhan | The Dollar Business

The year was 2005. After two decades of restrictions, Libya decided to auction oil and gas exploration licenses, thereby marking the return of American energy companies to the country. Later, in 2006, the George Bush administration’s decision to restore full diplomatic ties with Libya, brought further cheers to many energy and EPC (Energy, Procurement, and Construction) companies, not only in US, but all around the world. In India, Punj Lloyd, which was then a Rs.1,685 crore net revenue conglomerate with more than two decades of experience, saw this as an opportunity to expand its footprint in the MENA (Middle East and North Africa) region. For, during that period, India’s infrastructure sector was not doing very well and companies like Punj Lloyd were looking at overseas markets for growth.

Go Go Years

A lot was happening with Punj Lloyd in that period. In 2006 it went public and the following year it unveiled its new corporate identity and announced a strategy to establish itself as a leading transnational, engineering and construction company. Soon, it secured its first major contract in Africa – a pipeline project from Libya’s Sirte Oil Company. This project worth Rs.13.5 billion was then its single biggest contract. As a result, in FY2007, Punj Lloyd saw its revenue more than treble, with a contribution of 68.6% from overseas markets. The Libyan project also opened up the floodgates for Punj Lloyd as it got several contracts in UAE, Qatar, Saudi Arabia, Oman, Bahrain & Yemen. All this meant it suddenly acquired rock star status on Dalal Street and many analysts started touting it as the next L&T.

 

Rude Awakening

While expanding overseas brought in growth, it also exposed the company to the volatility in the international market, particularly in the politically volatile MENA region. Aware of its over dependence on the region, Punj Lloyd started looking for projects in developed markets like Europe and, as a part of this strategy, acquired a majority stake in Semb Corp Engineers & Constructors and its UK-based engineering services company Simon Carves through Punj Lloyd Pte. Ltd. (its wholly owned subsidiary in Singapore). The company envisioned that the acquisitions of Sembawang E&C and Simon Carves, besides giving it pre-qualification status for large, complex and higher value bids, will also enable it to pursue opportunities in Europe, China and South East Asia.

While all this was great in theory, the company had failed to entirely appreciate the fact that Simon Carves was already facing cost overruns. It had also failed to assess the consequences of performance bonds it had paid for a £135 million (later increased to £155.8 million) contract from Riyadh-based SABIC – the termination of this contract, followed by SABIC encashing the performance bonds led to Punj Lloyd later taking a Rs.473.06 crore one-time hit. As a result of this, and the fact that its total debt had soared over 6x in just the three years between FY2006 and FY2009, Punj Lloyd’s profit collapsed from an all-time high of Rs.358.4 crore in FY2008 to a loss of Rs.224.7 crore in FY2009. 

Summing up the Simon Carves disaster, Atul Punj, Chairman, Punj Lloyd, speaking at a conference call had said, “It was a case of us not understanding the complexities of construction management in the UK.” Unfortunately, for Punj Lloyd, FY2009 was not aberration but the start of a trend.

No No Years

Since FY2008, which was by far Punj Lloyd’s best year, the company has lost almost 90% of its market capitalisation. And a comparison of the company’s financial numbers for FY2014 with that of FY2008 tell us just why investors have given up on it. For, while in FY2008 it had a total debt of just Rs.1,607.2 crore, by the end of FY2014 its total debt had increased by Rs.4,640.3 crore to Rs.6,247.5 crore. As a result of this, while in FY2008 it had paid just Rs.180.6 crore as interest, in FY2014 it ended up paying Rs.882 crore – over 2.7x of its EBITDA – as interest! 

Even at the EBITDA level the company wasn’t doing great. For, as compared to an EBITDA margin of 8.9% in FY2008, in FY2014 its EBITDA margin was just 2.9%. And the reason for this was rise in expenditure (as a percentage of revenue) under several heads like contractor charges, employee expense, consultancy and professional expense, and several others. Add to this collapse in EBITDA margins the fact that in FY2014 its interest expense – at Rs.882 crore – was almost 4x of that in FY2018, and the reason for it making a massive loss becomes absolutely clear.

 

A small yet significant reason for this massive rise in interest expense is also the fact that in FY2014 Punj Lloyd’s cost of debt was 14.1% as compared to 11.2% in FY2008. The reason? Lenders will charge much higher interest to a company that has made losses in five out of the last six years, isn’t it?

Although the company is trying hard to strengthen its Balance Sheet and reduce debt by selling non-core assets, its total debt has risen by an average of Rs.773.4 crore since FY2008, and is yet to show a year-on-year downtick.

Homecoming

The main takeaway from Punj Lloyd’s financial performance in the last 10 years is simple – chasing growth overseas is not always good! The company set out for unknown shores and most of these shores, unfortunately, were minefields. For, while the rise in the share of its revenue from overseas markets, from 58.2% in FY2005 to 70.4% in FY2014, has brought in a 5x growth in revenue, it has also made the company lose an average of Rs.145.4 crore in the last five years (as compared to a profit of Rs.100.1 crore in FY2005, a year before the company started its overseas run).

This, probably, also tells us that it’s about time Punj Lloyd started concentrating on India, particularly since in FY2014 it earned 87.7% of its revenue from the energy sector, and we all know what is happening with oil prices. Punj Lloyd focusing back on India also makes sense because of the fact that the investment climate in India is improving by the day, and the Modi government’s infrastructure push is bound to provide a lot of opportunities to the company. It should also take heart from the fact that despite such tough times, it has managed to keep its primary expenses – projects materials consumed and cost of goods sold – under check. In fact, its expenditure under this head at 35.9% (as a percentage of net revenue) was actually lower in FY2014 (its worst year) than at 35.5% in FY2008 (its best year). May be this is what was in the company’s Chairman Atul Punj’s mind when he told The Dollar Business, “With the monetisation of assets to reduce debt and internal focus on process improvement and better execution, the turnaround story has already begun.” Given the tough times the company has gone through and the immense potential it holds, one can only hope the company regains its status of, as Atul Punj puts it, the “Bellwether of Indian yet Global” EPC companies. 

“Punj Lloyd’s turnaround has already begun” - Atul Punj, Chairman, Punj Lloyd

Heading a company that has not seen any revenue growth in the last five years and has ended five of the last six years with losses can be a very daunting task, particularly if it operates in some of the most politically volatile regions of the world. But doing exactly this is Atul Punj, Chairman, Punj Lloyd, who tells The Dollar Business his strategy to turnaround the company’s fortune

Interview by Sisir Pradhan | The Dollar Business

TDB: In the last 10 years, the share of revenue from abroad in your total revenue has consistently risen, while EBITDA margin has shrunk. How would you explain this phenomenon?

Atul Punj (AP): The increased share of international revenue is reflective of the slowdown in capex investments and consequent delays in infrastructure and construction projects in India during the last decade. Our EBIDTA margins have largely been stable in the low double digits – any blips have been more because of foreign exchange volatility.

TDB: Given that both domestic as well as global oil and gas majors are your clients, help us understand the differences in the way they operate.

AP: For any client, whether domestic or international, quality is imperative and Punj Lloyd has developed its standards of execution to those accepted internationally, making it a preferred global EPC contractor. The difference in operations is more linked with the market structure/ economy than the client per se. For instance, in the absence of a central nodal agency, land acquisition or clearances take time, hence project execution in India is more challenging than overseas. Within domestic and international markets, clients differ based on internal organisational processes and structures. In our experience, clients like PETRONAS, Shell and GSPC have proactively resolved disputes with contractors during project execution, leading to faster project completion and trust.

TDB: In the last 10 years, raw material cost (as a percentage of revenue) has increased by 900 bps and contractor cost has increased by over 800 bps. Is it because your pricing power has failed to keep pace with costs? If yes, why?

AP: As an EPC Contractor, Punj Lloyd handles multifarious projects. Depending upon the type of project, cost of material in the overall cost of project varies from 35 to 65%. Further, there are clients’ free issue material as well. Thus, pricing of a project depends on type of project and is not a constant.

TDB: Being heavily dependent on the oil and gas sector, how do you think the recent crash in crude oil prices will affect you?

AP: Punj Lloyd provides EPC services across the entire gamut of infrastructure, including buildings, airports, rail transit systems, highways and expressways, besides the oil and gas sector. This diversified presence, both geographical and in business verticals, enables Punj Lloyd to quickly readjust its strategy to maintain growth. With the increased infrastructure spend globally and the development agenda of Government of India, the opportunities in buildings and infrastructure, metro and railways are promising.

TDB: You operate in some of the most politically unstable parts of the world like Libya. Tell us what has been your experience there. Have things deteriorated significantly in the last few years?

AP: Punj Lloyd has grown from a pipeline contractor in India to a global EPC diversified conglomerate, a fact made possible owing to its spirit of entrepreneurship. Crossing Indian borders, Punj Lloyd has diversified in businesses and geographies, and today operates across 23 countries. While this predisposes it to market or political risks in newer regions, it is indisputable that the same heterogeneity hedges it against fluctuations of any one economy. Punj Lloyd made its foray into Libya when it had high potential for infrastructure development. The civil war and the resultant unrest could not have been foreseen. Punj Lloyd remains cautiously optimistic about its future. It has however strengthened its risk identification and mitigation processes to evaluate its expansion into new territories.

TDB: Over the last decade, your total debt has grown at almost the same rate as your topline. When can we see an end to this? What plans do you have in place to reduce debt?

AP: Punj Lloyd is not unique in suffering from debt. This is an industry trend which can be attributed to a series of factors. Comparatively, Punj Lloyd’s debt is far lower as compared to the industry.

Some of our projects were impacted by delayed or non receipt of payments, which impacted our working capital cycle, necessitating raising of debt. We have, over the last two years, been working intensively towards recovering these receivables. Early breakthrough has been achieved and more is expected.

Concurrently, we have been focusing on monetising of non-core assets. Punj Lloyd has recently sold its entire shareholding in Global Health Private Limited (Medanta) to pare debt. All these initiatives will result in reduction of debt and a stronger balance sheet.

TDB: The main reason for Punj Lloyd’s high cost of debt is a lot of rupee-denominated working capital loans. Do you have any plan in place to change this? Are there plans to raise cheaper dollar denominated long-term debt in the near future?

AP: We are continually exploring options to bring down both the volume of debt and cost of borrowing. The cost of conversion of some of these loans from rupee to dollar denomination is, in some instances, quite high, making it unviable to do so. The present regulatory regime also does not permit raising of dollar loans as ECB (external commercial borrowing) by EPC companies. 

TDB: What are your expectations from the defence segment? By when can we expect to see it making a significant contribution to your topline?

AP: The Government has taken the right steps to promote indigenous manufacturing in the defence sector. All these steps create a positive and stable framework for investment in this sector and enable collaboration with international defence companies for transfer of technology.

Punj Lloyd is excellently positioned to undertake both aerospace and land systems work. A modern, high tech manufacturing facility, all necessary certifications and the experience of working with marquee clients like HAL, Gun Carriage Factory among others, are the building blocks necessary for the defence initiative to take off.

TDB: How have things changed on the ground since the Modi government took over? Can you tell us about your specific demands from the government?

AP: The government spend, coupled with a positive investment climate, will provide the impetus for GDP growth. For this to happen, quick action on the stalled projects getting back on-stream, and tangible investment on ground will have the desired effect.

TDB: Realistically speaking, when do you think Punj Lloyd will be back to its glory days?

AP: Punj Lloyd is a diversified EPC conglomerate. It works globally with renowned oil & gas and infrastructure players. A strong foundation has been built over seamless delivery of challenging projects, high standards of safety and quality, and most importantly, skilled people and equipment assets.

The total order booking of Punj Lloyd till date in FY2015 has surpassed the value of orders booked during the two year period 2012-2014, auguring the prospects for improved financial performance in the coming time. This is also symbolic of the trust that our clients continue to have on us.

With the monetisation of assets to reduce debt and internal focus on process improvement and better execution, the turnaround story has already begun. Various government initiatives to improve industry sentiment will also help ensure that Punj Lloyd regains its status as the bellwether of ‘Indian yet Global’ EPC companies.