Punj Lloyd

2008-09 has been a tumultuous year in the truest
 sense of the word. It began with fears of continuing global inflation.
 The world was seeing the most concerted and synchronised growth in all
 major commodity prices since the beginning of the 20th century — which
 encompassed crude oil, gas, coal, steel, other minerals and metals,
 rice, wheat, vegetables, sugar and edible oils.  Recall that on 2 July
 2008, the spot price of West Texas Intermediate crude was being quoted
 at over US$ 145 per barrel, and experts were anticipating it to cross
 the US$ 200 mark in quick time.
 
 It was not only the astronomical rise in prices. A number of
 commodities like steel were perennially in short supply; and project
 costs for a construction company such as yours had to be re-calibrated
 on a monthly basis. Then came the change from August 2008, and
 exacerbated with the bankruptcy of Lehman Brothers on 14 September
 2008. The global financial crisis that followed sucked out liquidity
 from the system. Fear ruled; with financial institutions unwilling to
 lend to anybody, including funding and underwriting of basic
 counter-party transactions.  This financial meltdown continued unabated
 through October, November and December of 2008. By January-February
 2009, the slow recovery from the financial crisis started, thanks to
 the unprecedented monetary and interest rate interventions by
 governments and central banks throughout the world. But what came in
 its wake was the global economic slowdown — of the crisis moving from
 Wall Street to High Street. Every economy has been affected.
 
 As I write this letter to you, the US economy has suffered from three
 successive quarters of negative GDP growth, and is looking at yet
 another quarter of falling GDP. Here are some estimates:
 
 - While some believe that the US economy will bottom out by the third
 quarter of 2009, the estimated GDP growth for the year will be -2.9%.
 Unemployment as of April 2009 is at 8.9%, and rising. The first four
 months of 2009 have seen 2.7 million net job losses, in addition to 1.7
 million in the last quarter of 2008.
 
 - The Euro area is also in a deep recession which, in many ways, is
 worse than that of the US. GDP growth of 2009 is estimated at -3.5%.
 
 - The UK is reeling under depression and its GDP growth for 2009 is
 forecast at -3.7%.
 
 - Japan is again in crisis, with a decline in industrial output in
 excess of 30%; and GDP growth for 2009 is being estimated at -6.5%
 to -7%.
 
 - With an estimated 11% decline in the real value of world trade in
 2009, China’s growth may reduce to 6%.
 
 - India’s growth is down from the heady 9% plus range of the last three
 years to 6.8% in 2008- 09 and probably will be the same in 2009-10.
 
 The recession or de-growth is all pervasive.  Thought of as an ‘energy,
 minerals and metals’ driven growth engine, Russia’s forecasted growth
 for 2009 is -3%. Venezuela’s is -5%. South Africa’s is -2%. Brazil’s is
 also -2%.
 
 In this incredibly difficult milieu, your Company has performed
 creditably. Punj Lloyd’s consolidated total revenue and income from
 operations grew by 54% to Rs. 11,912 crore in 2008-09. On a stand-alone
 basis, it increased by 53% to Rs. 6,888 crore. The Company’s order
 backlog as on 31 March 2009 was Rs. 20,685 crore — or nearly 21 months
 of 2008-09 revenues. That is a very healthy and reassuring position for
 any construction and EPC major.
 
 Your Company has won several key orders in 2008-09. While the chapter
 of Management Discussion and Analysis list each in detail, let me share
 some of them with you In our oil and gas business, which contributed to
 61% of Punj Lloyd’s total revenues in 2008-09 or Rs. 7,234 crore, we
 won a prestigious pipeline project at Qatar. It is the Strategic Gas
 Transmission Project for Qatar Petroleum, valued at Rs. 3,636 crore and
 involves laying two new 36” diameter pipelines. This is the largest
 project that your Company has taken up in the oil and gas business. We
 have also won a major contract in the field of non-conventional sources
 of energy. We are also laying pipeline for the AGIP Kazakhstan North
 Caspian Operating Company NV.
 
 In our infrastructure and power business, which accounted for 30% of
 your Company’s consolidated revenues or Rs. 3,464 crore, we have an
 enviable order backlog of Rs. 7,645 crore. We have successfully
 completed four of our eleven highway projects during the year. The
 multi- speciality ‘Medicity’ project at Gurgaon (Haryana) is also
 nearing completion. Some of the other major projects won and being
 executed during the year were: (i) civil work for the aerodrome at
 Pakyong, Sikkim, (ii) elevated metro rail viaduct at Delhi, (iii)
 building the north podium of Marina Bay Sands Integrated Resort,
 Singapore, (iv) constructing the Bayfront Station at Marina Bay’s new
 Downtown MRT line, and (v) two prestigious joint-venture projects in
 Libya involving EPC and commissioning of water, sewerage, roads and
 other facilities for the city of Tripoli.  On 16 April 2009, your
 Company won the award of three large contracts for the construction of
 eight stations for the Bangalore Metro Rail Project. The time for
 completion is 22 months.  In power, we are executing an EPC package for
 the 2 x 250 MW Chhabra Thermal Power Project in Rajasthan; and have
 been awarded the EPC for the 2 x 270 MW Govindwal Sahib Power project
 in the Tarn Taran district of Punjab.
 
 In petrochemicals, which accounted for 9% of our revenues in 2008-09 or
 Rs. 1,018 crore, our subsidiary, Simon Carves Limited of the UK, has
 been working on several key projects, such as a bio-ethanol plant at
 Humberside (UK), a low density polyethylene plant in Thailand, and
 another in the Middle East.
 
 Despite seemingly difficult times, we take comfort from four basic
 elements of our business.  First, we are well diversified across three
 key areas
 
 - oil and gas, infrastructure and petrochemicals
 
 - and are rapidly increasing our presence in the fourth, thermal and
 nuclear power. Second, even within each of these businesses, we have a
 good diversity of project and service offerings. As an example, in our
 oil and gas business, we are involved in oil and gas pipelines, LNG
 tankage, coker units, sulphur blocks and the like — which further
 de-risk each SBU. Third, we are equally well diversified in terms of
 our geographical footprint. Today, your Company is in North Africa, the
 erstwhile CIS countries especially the energy rich Caspian region, the
 Middle East, Europe, South East Asia and India. And fourth, many of
 these projects are critical to the economy of the client nation.  Thus,
 these are unlikely to be cut-back or scaled down because of temporary
 economic exigencies.
 
 At this stage, I need to explain to you the dispute between our
 subsidiary, Simon Carves Limited (UK) and SABIC involving the EPC of
 the 400,000 tons per annum LDPE plant at Teesside in the United
 Kingdom. In February 2006, Simon Carves entered into a contract for the
 design, procurement and construction of this plant at a contract price
 of -135 million, which was subsequently increased by agreement to
 -155.8 million
 
 In November 2008, SABIC terminated Simon Carves’ engagement under the
 contract prior to the scheduled completion date and subsequently
 encashed two bonds totalling £ 28.5 million Simon Carves, and hence
 your Company, remains in dispute with the client over this action and
 intends to recover its full commercial entitlement, including the sum
 associated with the en-cashed bonds.
 
 The early adjudication process resulted in an adverse decision for
 Simon Carves. We
 
 are contesting this. However, since a negative adjudication outcome has
 occurred, we have conservatively taken a one-time charge of Rs. 473.06
 crore on the books of accounts of Simon Carves Limited, UK. This has
 resulted in your Company’s consolidated EBITDA falling from Rs. 810
 crore in 2007-08 to Rs. 530 crore in 2008-09 — and in PAT falling from
 Rs. 360 crore last year to a loss of Rs. 225 crore this year.
 
 We are contesting this decision, because we believe that it could be
 overturned. This is based on external legal advice. Simon Carves is now
 preparing its claim in the Court of Justice.
 
 We remain bullish about your Company’s growth prospects for 2009-10 and
 over the longer run. We have an enviable order backlog; we are
 continuing to bag important orders across different businesses and
 geographies; and we have both the managerial bandwidth and access to
 state-of-the-art equipment to execute more business in various parts of
 the world.
 
 Moreover, I see the global downturn playing out by 2009, and the
 emergence of stronger growth in 2010.
 
 Therefore, I remain confident of your Company achieving healthy
 double-digit growth in 2009-10 and generating greater shareholder
 value. The demand for infrastructure is growing rapidly throughout the
 world. Punj Lloyd is well placed to leverage it to the hilt.
 
 I thank all our employees, sub-contractors and their employees for
 working so hard during the year and showing their unwavering commitment
 to your Company. And I am grateful to you for your support as a
 shareholder.
 
 Atul Punj 
 Chairman