What hit Punj

With the infrastructure sector hamstrung by high interest costs and commodity prices, and poor activity across segments, it could be a while before Punj Lloyd can once again become the giant it was.

Punj Lloyd’s problem has been further compounded as many of its projects have run into cost and time overruns resulting in auditors qualification in its annual reports, a situation where auditors are unable to say whether the accounts are true or false as they couldn’t review all the areas that they wanted to. The company’s stock price is already down to Rs 76 (from a high of Rs 577 in January 2008) , while operating margins are between 3% and 3.5% compared to the industry average of 9% to 10%.

“As of now there is no clarity about the company’s earnings in the next couple of quarters. We are adopting a wait-and-watch approach,” says Poddar, who has advised clients to reduce their exposure to the stock.

Punj Lloyd also took a blow when the turmoil in West Asia stalled all projects in Libya, an important market. Nearly 16% of its total order book of Rs 22,800 crore, comes from Libya. Ishan Sethi, analyst at Goldman Sachs, says revenues from Libya will be minimal in the coming years. The fact that 40% of the company’s orders are infrastructure projects under a long execution cycle means that the company may not reap the benefits next year. With no work taking place in that region for the past 12 months, Punj Lloyd has had to reduce its backlog of Libyan projects from nearly Rs 10,000 crore to Rs 3,589 crore.

TODAY, SIMON CARVES IS LIKE AN ALBATROSS around Punj Lloyd’s neck. Punj Lloyd reported losses of Rs 18.49 crore and Rs 2.27 crore in the April to June and September to December quarters of 2010, although it has shown some improvement in the fourth quarter with a net profit of Rs 31.87 crore. In July this year, Punj Lloyd informed the BSE that it was no longer able to provide additional financial support to its 100% subsidiary, given the prevailing market conditions and its own financial conditions. Simon Carves will now be placed in administration in accordance with the laws of England and Wales.

Did Punj Lloyd bite off more than it could chew? Sneha Poddar, analyst at brokerage firm Sharekhan, says the company did not have the wherewithal or the expertise to manage complex projects such as Sabic or Ensus. “There was no way that it could have pulled off the project alone.”

“Honestly, not understanding the complexities of construction management in Britain affected the Sabic and Ensus projects. That’s when we decided not to take any such bets again in western Europe, no matter how lucrative they might appear,” said Punj.

So what went wrong with the Simon Carves purchase? While Punj Lloyd’s management refused to speak to Fortune India, an analyst call on May 29, 2010, by the company sheds some light. Punj pointed to the lack of productivity in Britain and the management’s inability to influence Simon Carves’ trade union. “We were paying for 40 hours a week per person and the average productivity we were getting was around six to eight hours,’’ he said. The concept of ‘sympathy strikes’—showing solidarity with other British unions on strike—further reduced productivity.

It wasn’t the only time Simon Carves was embroiled in a controversy. In 2006, it had run into trouble while building Britain’s first world-class bioethanol plant, in Teeside, for the Ensus Group, another British company. As the main contractor, it had problems with its sub-contractors and the project was delayed. Although Ensus took control of the plant in February 2010, it sought to encash the performance bond worth £2.3 million because of a problem of foul-smelling emissions from the plant. But this time, the British high court ruled in favour of Simon Carves.

Simon Carves, in turn, started adjudication proceedings against Sabic and sought damages because of cost overruns resulting from the changes in the scope and design ordered by the Sabic management. Simon Carves lost the adjudication proceedings in April 2009. As the parent company, Punj Lloyd had to cough up the £28.5 million.

In 2006, during the awarding of a project by Britain-based Sabic Petrochemicals, Simon Carves had agreed to a performance bond backed by bank guarantees worth £28.5 million (Rs 205.5 crore). When Simon Carves failed to deliver, Sabic sought damages and sought to encash the bond, claiming that the contract had been cancelled.

The acquisition also brought into Punj Lloyd’s fold the 180-year-old Simon Carves, a Sembawang subsidiary with expertise in polymers and petrochemicals. This meant access to the lucrative European markets.

In 2006, six months after it listed on the Bombay Stock Exchange (BSE) and National Stock Exchange, Punj acquired Singapore-based SembCorp Engineers and Constructors (later renamed Sembawang E&C), a subsidiary of SembCorp Industries, for Rs 102.6 crore. This added to the company’s stature both at home and abroad, and, importantly, beefed up its existing construction portfolio to include airports, jetties, mass rapid transport, light transport, and tunnelling. Moreover, it allowed Punj Lloyd to transfer Sembawang’s existing orders of Rs 4,900 crore into its own books. The parent company’s order book jumped from Rs 3,240 crore in 2004-05 to Rs 15,944 crore by 2006-07.

BETWEEN 2004 AND 2009, it seemed Punj could do no wrong. Its order book grew from Rs 3,240 crore in fiscal 2005 to Rs 7,500 crore in fiscal 2009. He was hungry for growth and big deals was the strategy to strengthen his presence across segments in the construction business—power plants, highways, oil refineries, and ship building—with footprints across Southeast Asia, Africa, Europe, and China. The deals included a stake purchase in Pipavav Shipyard for Rs 349.28 crore in September 2007, which helped Punj Lloyd debut in the shipbuilding and repairing business. Not content with domestic bets, Punj made strategic global acquisitions.

Such was the impact that in the third quarter of 2008-09, Punj Lloyd reported a net loss of Rs 227 crore, compared with a net profit of Rs 92 crore the previous year. The reason: The company had to make a provision of Rs 215 crore in its balance sheet after Simon Carves failed to meet the deadline for a project. Even after that, it struggled with the British entity for two years, trying to salvage the situation, but the sheen had worn off. The untold story of what went wrong.

But the one-time giant is now remembered for the single move that felled it. For Indian companies going on a global acquisition spree, the story of Punj Lloyd’s fall from grace is cautionary. Its acquisition of the British firm Simon Carves is a grim reminder about the flip side of globalisation. Inadequate due diligence, coupled with perilous ambition, took a toll on Punj Lloyd’s balance sheet.

THERE WAS A TIME WHEN Punj Lloyd was the darling of the stock market, feted by analysts and experts as the next Larsen & Toubro (India’s biggest private sector infrastructure firm). Most brokers had a ‘buy’ tag on the stock. The rise of the New Delhi-based engineering, procurement, and construction company from the bankrupt entity that chairman and managing director Atul Punj inherited in 1988, was inspirational. Industry analysts attribute this transformation to a Rs 3,599 crore powerhouse almost entirely to Punj’s efforts.