Kilburn Chemicals
www.pwc.com
Punj Lloyd Limited
Value Analysis of Manufacturing System Integration
Division (“MSID”) as at 31 March 2015
Draft Report
July 1, 2015
Price Waterhouse & Co LLP
Chartered Accountants
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Value Analysis of Manufacturing System Integration Division (MSID) for Punj Lloyd Limited, Diapositivas de Finanzas Corporativas
A value analysis of the manufacturing system integration division (msid) of punj lloyd limited, a leading engineering, procurement and construction (epc) company in india. The analysis covers the historical financial performance, value analysis approaches and principal assumptions, projected financial performance, free cash flow projections, and a comparison of the enterprise value derived using the income approach and the net asset value approach. Detailed insights into the financial and operational aspects of the msid division, including revenue growth, ebitda margins, capital expenditure, and working capital requirements. The analysis is intended to assist the management of punj lloyd limited in understanding the current and future value of the msid division.
Tipo: Diapositivas
2023/2024
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Kilburn Chemicals
www.pwc.com
Punj Lloyd Limited
Value Analysis of Manufacturing System Integration
Division (“MSID”) as at 31 March 2015
Draft Report
July 1, 2015
Price Waterhouse & Co LLP
Chartered Accountants
Strictly private and confidential Draft report Punj Lloyd Ltd. Group Headquarters, 78 Institutional Area, Sector 32, Gurgaon 122 001 Haryana, India Kind attention: Mr. Nidhi Narang, CFO July 1, 2015 Price Waterhouse & Company LLP Building 10C, 17th & 18th floor, DLF Cyber City Gurgaon – 122002, Haryana India Telephone (124) 3306 000 Facsimile (124) 3306 999 Dear Sir, Draft Report prepared by Price Waterhouse & Co LLP (“PW&Co LLP”) in connection with the Value Analysis of Manufacturing System Integration Division (“MSID” or the “Division”) This report has been prepared solely for Punj Lloyd Limited (“PLL”) in connection with value analysis of its Manufacturing and System Integration Division (“MSID”). Punj Lloyd Group along with its three entities Punj Lloyd Limited (“PLL”), PL Engineering Limited, Sembawang Engineers and Constructors Pte. Limited and their subsidiaries, joint ventures and associates, is engaged in the business of engineering, procurement and construction in the field of oil, gas and infrastructure sectors. We understand that PLL has set up MSID, which is a 65 acre facility at Malanpur, Gwalior, Madhya Pradesh. While the unit caters primarily to the Defense and Aerospace sector, it also manufactures components for other engineering sectors like power and transportation to balance capacities and get optimal machine utilization. Further, Punj Lloyd Infrastructure Limited (“PLIL”) is a subsidiary of PLL. We understand that Management of PLL (the “Management”) is exploring the possibility of a sale of MSID to PLIL. In this context, we (Price Waterhouse & Co LLP) have been requested to assist the Management in carrying out value analysis of MSID for internal strategic decision making purposes. We understand that the valuation is to be carried out as at March 31, 2015 (“Value Analysis date”). Our report has been prepared solely for the Management of PLL for internal benefit and use, in connection with the objective outlined above. The Management may share the report with the Board of Directors and the statutory audit committee. The information shall be provided to auditors only for information purposes in connection with their statutory audit and is not a substitute for their own independent audit procedures. Further it may be noted that PW&Co LLP accepts no responsibility or liability for damage arising from any other use or purpose. Our report is not to be used, referred to or distributed for any other purpose or to any other person without our written permission. We will not accept any liability to any other third party to whom our report is produced/ shown or in whose hands it may come. We shall not be called upon to prove or defend the Value Analysis in any forum within the scope of the present engagement. In the event that you wish to share our report, or findings thereof with any third party, it shall require our written consent. While this consent would not be unreasonably withheld, we would require a hold harmless letter in a form expressly agreed by us from each such party, to whom the report is proposed to be given. Our discussions/ interactions with the Management in respect of this Value Analysis is limited to the discussions on the assumptions used in the projections. We will not present our report nor shall be called upon to explain, prove or defend our report at, or before, any forum or authority. As requested, we will discuss our Value Analysis report with the team handling the project at PLL. To the fullest extent permitted by law, PW&Co LLP accepts no duty of care to any third party in connection with the provision of this report and/or any related information or explanation (together, the “Information”). Accordingly, regardless of the form of action, whether in contract, tort (including, without limitation, negligence) or otherwise, and to the extent
Strictly private and confidential Draft report Table of Content Topic Page Introduction 7 Historical Financial Performance 9 Value Analysis approaches and principal assumptions 13 Projected financial performance 17 Value Analysis-Income Approach 21 Free cash flows 22 Value Analysis-NAV Approach 23 Value Analysis conclusion 24 Appendix 1: Weighted average cost of capital 25 Appendix 2: Guideline comparable companies 27 Appendix 3: Contact Information 29
Strictly private and confidential Draft report Glossary of Terms and Abbreviations Term Definition bps Basis points CAGR Compounded Annual Growth Rate Capex Capital Expenditure CAPM Capital Asset Pricing Model EBITDA Earnings Before Interest, Tax, Depreciation and Amortization EV Enterprise Value FCF Free Cash Flow FY Financial Year (From 1 April to 31 March) INR Indian National Rupee Management Management of Punj Lloyd Limited MAT Minimum Alternate Tax Mn Million MSID Manufacturing and System Integration Division NWC Net Working Capital
Introduction
Strictly private and confidential Draft report Background Punj Lloyd Group:
- Punj Lloyd Group along with its three entities Punj Lloyd Limited (“PLL”), PL Engineering Limited, Sembawang Engineers and Constructors Pte. Limited and their subsidiaries, joint ventures and associates, is engaged in the business of engineering, procurement and construction in the field of oil, gas and infrastructure sectors. Manufacturing and System Integration Division (“MSID”) Overview:
- PLL’s Manufacturing and Systems Integration Division, located at Gwalior, established in the year 2012, is a line fabrication and assembly facility for Defense systems. It is spread over 65 acres of land, capable of high precision manufacturing for both ferrous and non-ferrous material.
- In addition, the facility handles fabrication and machining of land system components, assembly, integration and testing of weapons and maintenance and repair of existing weapons of the Indian Defense Forces.
- We understand that MSID is capable of creating complex aero- structures, air frames and accessories. Also, the Division has participated in tenders for manufacturing and upgradation of weapons for the Government of India. - Per Management, MSID has been accredited with ISO 9001, ISO 14001, OHSAS 18001, ISO 50001 (Energy Management System) and the AS 9100C Aerospace Standard. Manufacturing facility: As Per Management information, the MSID facility comprises: - Metallurgy and Metrology laboratories; - Fully equipped fabrication shop, including water jet cutting and stress relieving machines; - Large bed sizes CNC machines capable of handling ferrous and non ferrous material including composites. Key Clients: - As per Management, MSID’s clients are spread across sectors like Energy, Aviation and Aerospace, Defense, Transportation & Mining and Shipping. - Some of the key clients include HAL, Gun Carriage Factory, Nuclear Power Corporation of India, Raja Ramanna Centre for Advanced Technology and Bharat Heavy Electricals Ltd. - PLL has agreements with leading global companies for collaboration in Indian Defense Programs for a wide range of products including artillery systems, Air Defense gun systems, armored vehicle technology, assault rifles and carbines.
Strictly private and confidential Draft report 10 Historical Performance – Income Statement Snapshot Employee cost:
- Employee cost comprises salary, wages, bonus, contributions towards employee provident fund and other staff welfare schemes. Additionally, it also includes employee cost on contractual laborers.
- Employee cost as a percentage of revenue was at 36% in FY15. As per Management, the employee cost did not grow in line with revenues mainly due to hiring of low cost labor on contractual basis to execute job-work and limited increase in managerial team. Other expenses:
- Other expenses primarily constitutes travelling & accommodation cost, other manufacturing expenses such as machining charges, power, fuel and water, repairs and maintenance of building, plant and machinery, etc. It also includes land lease rent, selling, general and administrative expenses.
- Other expenses decreased from INR 61 million in FY14 to INR 55 million in FY15. As per Management, this is mainly on account of reduction in travelling & accommodation expenses for managerial team and rationalization of other expenses. EBITDA margins:
- EBITDA remained negative throughout the period FY13 to FY15. However, as the business started to grow post FY14, the EBITDA margins improved mainly on account of better absorption of fixed expenses. Source: Management information. INR million 2013 2014 2015 Net Revenues 14 49 191 Total revenues 14 49 191 Y-o-Y growth 248% 289% Raw material consumed 18 22 82 % of operating revenues 129% 46% 43% Employee cost 58 59 68 % of operating revenues 409% 119% 36% Other expenses 64 61 55 % of operating revenues 457% 125% 29% Total expenses 140 142 205 Y-o-Y growth 2% 44% % of operating revenues 995% 290% 107% Operating EBITDA (126) (93) (14) EBITDA margin -895% -190% -7% Financial year ending March 31,
Strictly private and confidential Draft report 11 Historical Performance – Balance Sheet Snapshot Fixed assets:
- As at March 31, 2015, plant and machinery constitutes ~60% of the total Gross Block while building constitutes ~30% and balance comprises land, office equipment, vehicles, tools, furniture & fixtures.
- We understand that the facility is located on 65 acres of land at Malanpur, Gwalior, Madhya Pradesh. Further, we understand that this land is leased for a period of 30 years (starting from November 9, 2009) by Industrial Infrastructure Development Corporation Gwalior Madhya Pradesh Limited. Long term loans and advances:
- We understand that the loans and advances relates to the amount deposited with the Central Excise Department. Operating net working capital:
- Current assets primarily constitutes inventories, unbilled revenues (work in progress), trade receivables and loans and advances whereas current liabilities comprises trade payables and other liabilities. Further, other liabilities comprises amount outstanding towards statutory authorities and advance received from customers.
- Management informed that inventory level depends on the nature of job/contract. Historically, since the operations were small, MSID was engaged in manufacturing of products which did not require large inventory.
- Based on our discussions, trade receivables days outstanding are generally in the range of 80 days to 100 days. As at March 31, 2015 the trade receivable days was at 81 days. Source: Management information. * According to Management, ~50% of the Trade Payables appearing in the Balance Sheet are payable to other businesses/SBU’s of PLL. For our analysis, the same have been considered as debt. * INR million 2013 2014 2015 Gross Block 1,199 1,204 1, Less: Acc. Depreciation (56) (108) (181) Net Block 1,144 1,095 1, Current Assets Inventories 1 0 0 Unbilled revenue (work-in-progress) - 20 84 Trade receivables 9 6 42 Loans and advances 82 93 109 Less: Current Liabilities & Provisions Trade payables 83 100 135 Other liabilities 24 36 68 Net Current Assets (excld. Cash) (16) (16) 33 CAPITAL EMPLOYED 1,127 1,080 1, Add: Accumulated losses 162 313 399 Adj. CAPITAL EMPLOYED 1,290 1,393 1, Funded by: Head Office 1,184 1,283 1, Short term borrowing 24 16 7 Trade Payable considered as debt 83 100 135 Less: Cash in hand 2 6 10 TOTAL FUNDING 1,290 1,393 1, Financial year ending March 31,
Value Analysis
Strictly private and confidential Draft report Basis of Value Analysis
- The basis of the Value Analysis that we have adopted in arriving at our Value Analysis is “Fair Value”. We define Fair Value as the price which a business might reasonably be expected to fetch, in money or money’s worth in an open market sale, between a willing buyer and a willing seller, both of whom are equally well informed about the business and the markets in which it operates and each of whom is deemed to be acting for its self-interest.
- Value Analysis has been carried out as at March 31, 2015 (“Value Analysis Date”). Value Analysis approaches adopted Generally the following approaches are used while carrying out Value Analysis:
- Income Approach: This approach indicates the value of a business based on the value of the cash flows that the business can be expected to generate in the future.
- Market Approach : This approach indicates the value of a business based on a comparison of the business to comparable publicly traded companies and as well as prior business transactions in the industry. The Market Approach indicates the value of a business on a going concern basis, based on a comparison of the business to comparable publicly traded companies and as well as prior business transactions in the industry. We understand that there are no listed guideline companies in India which are strictly comparable to MSID’s business Value Analysis approaches and principal assumptions in terms of business profile and customer concentration. Hence, Market Multiple Method was not considered in our Value Analysis. Further, Market Transactions Method, was not considered owing to the absence of strictly comparable transactions and paucity of publicly available data on transactions in the relevant industry.
- Net Asset Value Approach: This approach indicates the value of the business by adjusting the assets and liabilities appearing in the balance sheet of the company which is being valued as at the Value Analysis date. This approach is based on the summation of individual piecemeal values of the underlying assets less the book value of the liabilities. This value may not be a good indicator of the realizable value as it merely reflects historic costs and requires adjustments on account of estimated disposal costs and possible shortfall or appreciation in realization of both fixed assets and net current assets. For our analysis Net Asset Value Approach has been considered for benchmarking purposes. For our analysis under this approach, we have relied on the Balance Sheet presented as at March 31, 2015. The book values have been adjusted considering the Fair market value certificate of fixed assets dated January 7, 2015 prepared by a third party valuer, K. LAL & ASSOCIATES, as provided to us by the Management and no adjustment for the value of intangibles, if any comprised in the business has been carried out.
Strictly private and confidential Draft report 16 Sources of Information
- The key information we have received and used in our value analysis include: - Carved out financial statements* of MSID for FY13, FY14 and FY15; - Lease deed dated November 9, 2009 for land in Industrial Area Ghirongi, Malanpur, Gwalior, Madhya Pradesh; - Business plan along with the underlying assumptions for MSID as prepared by the Management over the period FY16 to FY20 (“Projected Period” or “Forecast Period”), which the Management believes to be their best estimate of the expected future operating results; - Fair market value certificate of fixed assets dated January 7, 2015 prepared by a third party valuer, K. LAL & ASSOCIATES, as provided to us by the Management. - other information provided by the Management.
- We have also used publicly available information sources (e.g. Bloomberg and Capitaline), to gather industry related information including comparable companies; *Note: We have not independently verified the carved out financial statements of MSID as prepared by the Management.
- In addition, we have obtained information through discussion and correspondence with the Management. We had discussions with Mr. Ashok Wadhawan (President-Manufacturing Division) and Mr. Rahul Maheshwari (Senior Manager-Finance) and;
- We have also undertaken analysis of other facts and data considered pertinent to this value analysis. This space has been left blank intentionally
Strictly private and confidential Draft report Projected financial performance Forecasts for the “Projection period”/ “Forecast period” (FY16 -FY20) as provided by the Management are shown below. The forecast revenues for MSID, comprises revenues from component manufacturing and Defense Program. Revenues from component manufacturing comprises revenues from sale of parts and aerostructures to Defense and Aerospace sector. Management informed that revenues from Defense Program relates to potential revenues from manufacturing and upgradation of weapons for the Government of India. From discussions with Management, we understand that MSID had bid for Defense tender ~4.5 years ago that is currently pending approval from Defense Ministry. There is a high likely hood of MSID winning the above mentioned bid mainly due to the fact that MSID’s product has already cleared the technical qualification and now remains as one of the only two bidders for the tender (originally there were a total of 6 bidders). Source: Management information. Financial year ending March 31, 2015 2016 2017 2018 2019 2020 INR million Actual Forecast Forecast Forecast Forecast Forecast Net Revenues (Component Manufacturing) 191 450 700 1,100 1,500 2, Y-o-Y growth 136% 56% 57% 36% 33% Net Revenues (Defense Program) - - 250 1,250 1,500 1, Y-o-Y growth n/a n/a 400% 20% -7% Total Revenues 191 450 950 2,350 3,000 3, Y-o-Y growth 136% 111% 147% 28% 13% Raw materials consumed (Manufacturing) 82 162 252 385 525 700 % of operating revenues 43% 36% 36% 35% 35% 35% Raw materials consumed (Defense Program) - - 183 913 1,095 1, % of operating revenues n/a n/a 73% 73% 73% 73% Total raw material consumed 82 162 435 1,298 1,620 1, % of operating revenues 43% 36% 46% 55% 54% 51% Other expenses (Manufacturing) 122 194 294 451 615 820 % of operating revenues 64% 43% 42% 41% 41% 41% Other expenses (Defense Program) - 150 220 220 160 251 % of operating revenues 88% 18% 11% 18% Total expenses 205 506 949 1,969 2,395 2, % of operating revenues 107% 112% 100% 84% 80% 82% Operating EBITDA (Manufacturing) (14) 95 154 264 360 480 EBITDA Margins -7% 21% 22% 24% 24% 24% Operating EBITDA (Defense Program) - (150) (153) 118 245 125 EBITDA Margins n/a n/a -61% 9% 16% 9% Total EBITDA (14) (56) 2 382 605 605 EBITDA Margins -7% -12% 0% 16% 20% 18%
Strictly private and confidential Draft report Projected financial performance Raw Material Consumption (“RMC”):
- Per Management historically the raw material prices for component manufacturing business remained high since the quantum of orders were small and it was directly purchasing all the raw materials. However, as per Management with orders size increasing and alteration in product mix Raw Material Consumption as a percentage of revenues for component manufacturing business is expected to decrease from 43% in FY15 to 36% in FY16. Subsequently, it is expected to be in the range of 35% to 36% during FY17 to FY20.
- Management represented that Raw Material Cost for the Defense Program business is specific to the Defense Project for which bid had been submitted. Management expects RMC as a percentage of revenues for Defense Program business to remain at 73% over the projection period FY17 to FY20. Other expenses:
- Other expenses during the projection period primarily comprises job work related cost, other manufacturing cost, employee salaries, repair and maintenance, land lease rentals and selling, general and administrative expenses.
- Other expenses of component manufacturing business as a percentage of revenues are expected to decrease from ~64% in FY15 to ~43% in FY16, mainly on account of increase in volumes leading to economies of scale. Further, Management expects this percentage to remain in the range of 41% to 42% during the period FY17 to FY20. Other expenses (Contd’): - Other expenses for Defense Program business comprises other manufacturing cost and trial and marketing costs incurred to focus on other Defense Program tenders. We understand that Management intends to bid for additional Defense Programs for which it expects to incur certain trial and marketing costs in FY20. Given this, Managements expects other expenses as a percentage of revenues to sharply increase from 11% in FY19 to 18% in FY20, mainly due to increase in these costs. EBITDA margins: - Management expects EBITDA margin for component manufacturing business to significantly improve from negative 7% in FY15 to 21% in FY16, mainly on account of: Change in the product mix during this period which will result in decreasing the raw material expenses (refer raw material consumption section for details) and; Achieving economies of scale during this period leading to better absorption of expenses (refer other expenses section for details); - Management expects EBITDA margins to remain in the range of 22%-24% during FY17 to FY20 on account of better price realization. As per Management, EBITDA margins for MSID is expected to be higher vis-à-vis other players in the industry mainly on account of it operating in a niche segment requiring specialized manufacturing capabilities. - EBITDA margins for the Defense Program business is expected to remain negative during the period FY16 to FY17 mainly on account of high expenses and low revenues. However, Management expects EBITDA margins to stabilize at 9% in FY20.
Strictly private and confidential Draft report Projected financial performance Capital Expenditure (“capex”)
- We understand that Management has envisaged a total capital outlay of INR 850 million, which is equally spread over the projection period i.e. INR 170 million of capex expected every year.
- Further, Management represented that out of total capex of INR 850 million, ~INR 400 million is towards setting up of infrastructure for manufacturing of Aerostructures, ~INR 220 million is towards ramping up of component manufacturing facility for small arms manufacturing and ~INR 110 million is incurred for enhancement of the existing capacity. Balance INR 120 million of capex is for execution of Defense Program project. Operating working capital requirement:
- Operating net working capital is estimated to increase from negative 3% of operating revenues in FY16 to 9% in FY17. This is mainly on account of increase in revenues which results in high proportion of revenues being accounted as trade receivable and work in progress (unbilled revenues).
- Going forward, net working capital as a percentage of revenues is projected to remain in the range of 7% to 8% during the period FY18 to FY20. Net working capital Source: Management information, PW&Co LLP analysis 38% 18% 7% (^) 6% 5% 0% 5% 10% 15% 20% 25% 30% 35% 40% FY16 FY17 FY18 FY19 FY Capex as a % of revenues Capital expenditure Source: Management information, PW&Co LLP analysis -3% 9% 8% 7% 7% -4% -2% 0% 2% 4% 6% 8% 10% FY16 FY17 FY18 FY19 FY NWC as a % of revenues