EQUITY RESEARCH: PNC Infratech

PNC Infratech Ltd is an infrastructure production, improvement, and control business enterprise. The Company is broadly speaking engaged within the regions of infrastructure projects, together with highways, bridges, flyovers, power transmission lines, airport runways, and other infrastructure activities. Its segments include BOT (Toll and Annuity) and EPC Contracts. It offers cease-to-cease infrastructure implementation solutions that consist of engineering, procurement, and construction (EPC) services. It implements initiatives on various Public-Private-Partnership (PPP) formats, which include Design-BuildFinance-Operate-Transfer (DBFOT), OperateMaintain-Transfer (OMT), and Hybrid models. It is concerned with the construction and development of Highways, Bridges and flyovers, and Industrial region improvement. It specializes in road constructing projects in Punjab, Haryana, Tamil Nadu, Madhya Pradesh, Maharashtra, Karnataka, Rajasthan, Uttar Pradesh, Uttarakhand, West Bengal and North Eastern India.

ABOUT

PNC Infratech has established itself as a capable executor in the segments of airport runways, water infrastructure, and roadways. Additionally, PNC is able to complete projects on schedule thanks to its exceptional execution skills, ownership of contemporary equipment, and internal teams. 85 significant infrastructure projects, including 61 road EPC projects, have been completed by the organization throughout 13 states. It is working on 26 projects at the moment.

It has a total of 22 HAM projects, including 6 operational projects, 12 projects under development, and 4 projects for which the company has signed concession agreements. It is currently operating 5 BOT projects that include both toll and annuity assets.

BUSINESS OVERVIEW

PROJECT PORTFOLIO

• OPERATIONAL PROJECTS:

• HAM PROJECT

SHAREHOLDING PATTERN

ORDER BOOK DETAILS:

A contract under execution is over Rs. 18,900 crore (including contract worth Rs. 4,083 crore not yet included in the order book) which is over 2.6 times of FY23 revenue.

Remaining value of contracts under execution of over Rs. 14,900 crore as on
30th June 2023
◼ The below orders are not included in the order book as on 30th June 2023:
✓ Concession agreement signed for 6-lane Greenfield Varanasi - Ranchi – Kolkata Highway under Bharatmala Pariyojana in the state of Bihar on Hybrid Annuity Mode - Package 2 with a total bid project cost of Rs. 891 crores
✓ Concession agreement signed for 6-lane Greenfield Varanasi - Ranchi – Kolkata Highway under Bharatmala Pariyojana in the state of Bihar on Hybrid Annuity Mode - Package 3 with a total bid project cost of Rs. 1,113 crores
✓ Concession agreement signed for 6-lane Greenfield Varanasi - Ranchi – Kolkata Highway under Bharatmala Pariyojana in the state of Bihar on Hybrid Annuity Mode - Package 6 with a total bid project cost of Rs. 1,260 crores
✓ Concession agreement signed for Construction of 4-lane highway from Singraur Uphar to Baranpur Kadipur Ichauli in the state of Uttar Pradesh on Hybrid Annuity Mode (Package-III) for total bid project cost of Rs. 819 crores

KEY INVESTMENT RATIONALE

• Order book strong provides healthy revenue visibility

At the conclusion of Q1FY24, PNC's order book (OB) was 14,916 crore. Order book stood at 18900 crore, 2.6x book to TTM sales, including the recently won projects (four HAM and one EPC road project worth 4083 crore contracts won in March 2023). Roads made up 72% of the total order book, while water and canal projects made up the remaining 28%.

The company has projected inflows of around 10,000 crore for FY24E (compared to 4855 crore of contracts secured in FY23). The majority of the focus would be on road developments (more than 70%), with water and railroad elements potentially making up the remainder.

We draw attention to the fact that in FY24, NHAI and MoRTH proposed to grant a total of 12,000 km worth of road projects. The business stated that bids will probably be accepted by October 2023. It had submitted bids as of Q1FY24 for road projects totaling 11,700 crore rupees, including one elevated corridor. In addition to its ongoing projects in UP, it continues to assess Jal Jeevan Mission water delivery potential in Rajasthan and MP.

• Asset Monetisation

To monetize its assets, PNC is now in talks with possible investors. Seven of the eleven HAM and one BOT project (Bareilly Almora) are now operating; the remaining ones are most expected to be so within the next three to four months. Together, they have a debt of 6900 crore and equity of 1700 crore.

It has received offers from potential buyers that are not obligated. The management anticipates that the money-receiving process will be finished by the end of the fiscal year 24. We draw attention to a media report that claimed KKR's Highways Infrastructure Trust was in talks to buy the assets for an estimated enterprise value of Rs. 9,000 crore. The hypothetical deal assumes a P/B of 1.24x.

• Margins to improve ahead

In the past, excellent performance has produced bonus payments that raised operational profits, with core margins around 13.5–14%. We point out that the EPC companies, including PNC, experienced margin pressure in FY22 as a result of the sharp increase in the cost of raw materials including cement and steel. As a result, the margins decreased from 13.7% in FY21 to 12.5% in FY22. This was changed in FY23.

Margin levels are projected to stay at the normalized levels of 13.5% with steady raw inputs.

KEY RISKS

• Slower execution could impact revenues

The potential for overall revenue growth may be impacted by slower execution.

• Delay in Asset Monetisation

Even though PNC works in a cutthroat business, any error caused by competitive bidding could reduce profitability for particular projects

• Raw material volatility

We observe that during the past two to three quarters, raw material prices have moderated. However, any significant fluctuation in raw material costs could have an influence on margins.

• Increase in a competitive environment

Even though PNC works in a cutthroat business, any error caused by competitive bidding could reduce profitability for particular projects.

AUG CONCALL SUMMARY

Summary:

Capex:

• The company's road construction target for FY '24 has been revised to 14,000 km.
• The net working cycle is 83 days as of June 2023.
• The company's net worth is INR 4,098 crore with a net debt of INR 303 crore.
• Excess cash may be used for equity investment requirements and capex.

New Projects:

• A total of 611 km of new projects were awarded and 2,250 km of roads were constructed during Q1 FY '24.
• PNC Infratech secured 3 packages out of 14 packages for the Varanasi-Kolkata highway project.
• NHAI has floated bids for over 68 projects costing around INR 65,000 crore.
• The company is evaluating rail station redevelopment projects and is participating in the JJM projects in Uttar Pradesh, Madhya Pradesh, and Rajasthan.
• The company has bid for INR 11,400 crore worth of projects.

Guidance:

• The company expects to finalize the monetization of operational assets in the next couple of quarters.
• The company is expecting to receive cash from the monetization plan in FY '24.
• The company is targeting INR 2,000 crore-plus revenue from the JJM projects in FY '24.
• The appointed date for the recently won HAM projects is expected in Q4 FY '24.
• Margins in the water segment may be impacted in Q2 due to intense monsoon activity.

Financials:

• The company's revenue for Q1 FY '24 was INR 1,861 crore, with an EBITDA of INR 245 crore and a profit of INR 157 crore.

Competitive Landscape:

• The competitive intensity is higher in the EPC sector compared to HAM projects.
• The competitive intensity in the EPC sector is higher than in HAM projects.

FINANCIALS

• Revenue of Rs. 1,861 crore in Q1FY24 as compared to 1,721 crore* in Q1FY23.
• EBITDA of Rs. 245 crore in Q1FY24 compared to Rs. 221* crore in Q1FY23. EBITDA Margin of 13.2% in Q1FY24.
• PAT of Rs. 157 crore in Q1FY24 compared to 130* crore in Q1FY23. PAT Margin of 8.4% in Q1FY24.
• The remaining value of contracts under execution of over Rs. 18,900 crores as of 30th June 2023 (including Contracts worth Rs. 4,083 crores not yet included in the order book)
• Net Working Capital days as of 30th June 2023 as compared to 87 days as of 31st March 2023

VALUATION:

• ·PNC has demonstrated sound execution and a steady margin trajectory. Asset monetization, which would increase scalability and free up money, is a medium-term trigger.
• ·We rate PNC at BUY with a target price of 460 per share.

Source

STOCX

Company Website

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