At bl.portfolio, in our edition dated April 23, 2022 ,we had recommended that investors buy the stock of PNC Infratech based on the government push for infrastructure development and cheaper valuations.

During April 2022, the rationale behind recommending the stock was macroeconomic tailwinds i.e., the infrastructure push in Budget 2022, and initiatives such as PM Gati Shakti and Jal Jeevan mission. This trend is expected to play out in FY24 also as the infrastructure push has been emphasised in Budget 2023 too. The current budgetary allocation to Ministry of Roads, Transport and Highways is ₹2.7 lakh crore, which is 25 per cent higher YoY. NHAI has 100-150 projects worth almost ₹1 lakh crore, this is a positive for construction companies and PNC Infratech looks well-placed to leverage this opportunity.

The stock has returned 33 per cent in the last 14 months whereas the valuation continues to remain reasonable with the stock now trading at trailing twelve months PE of 13.5 times. In addition to this the macroeconomic tailwinds and robust orderbook make it a good buy at the current levels.

Business and prospects

The company has executed 84 major infrastructure projects spread across 13 States. It is operating 5 BOT projects, comprising toll & annuity assets and 22 HAM projects. The current orderbook comprises 67 per cent road projects and 33 per cent water and canal projects.

In FY23, water and canal projects contributed 12 per cent of total revenue, at ₹924.6 crore against 1 per cent in FY22, which was ₹108 crore. The EBITDA margins of the water and canal projects are higher than that of the road projects, in FY23 the EBITDA margin of water projects was 17 per cent whereas that of road projects was 10 per cent. The management has given guidance (for FY24) of 14-15 per cent margins for water projects and overall guidance of 13-13.5 per cent on standalone basis. Standalone business is around 88 per cent of revenue at consolidated level. According to management commentary, in FY24 revenue, water projects could make up around 33 per cent, which may help in margin expansion.

The management has given revenue growth guidance of 15 per cent in FY24 and the orderbook inflow is expected to be ₹10,000-₹12,000 crore. PNC Infratech missed on its order inflow target in FY23 due to the sluggish ordering activity by NHAI, which seems to have picked up now. The company is also planning to monetise 12 of its operational assets (11 HAM projects and 1 BOT-Toll project), which would have a total debt over ₹6,900 crore and total equity of ₹1,700 crore, as of now. The debt raised for these projects is around ₹5,947 crore and equity infused is ₹1,623 crore.

The company expects to complete the divestment by the end of FY24, this will help free up funds for new investments. The company has completed its divestment of 35 per cent stake in Ghaziabad Aligarh Expressway Private Limited to Cube Highways and has realised the capital, which it had mentioned in an earlier earnings call.

Robust orderbook

The orderbook as on March 31, 2023, was ₹15,676 crore which is 7 per cent higher YoY. If the projects awarded after March 31, 2023, are included, the orderbook comes to ₹20,500 crore and the book to bill ratio will be 2.6 times, which means revenue visibility of 2.5 years. The incremental order inflow during FY23 was close to ₹8,969 crore.

PNC Infratech plans to diversify its operations by venturing into water supply and irrigation space. In June 2023 quarter the proportion of water and canal projects in the orderbook was 39 per cent and 33 per cent of current orderbook (March quarter orderbook and awards after March 31, 2023). Water projects undertaken by the company are mostly in Uttar Pradesh and the bid pipeline there is around ₹14,000 crore. The company expects to bag further ₹1000 crore worth of orders in June 2023 quarter.

Financials

In FY23, the revenue of the company rose 10 per cent YoY to ₹7956.08 crore. The EBITDA rose 4.2 per cent YoY to ₹1600.05 crores and the EBITDA margin contracted 120 basis points to 20.1 per cent in FY23 against that in FY22. In FY23 the net profit rose 13 per cent YoY to ₹658.45 crore and PAT margin expanded 20 basis points to 8.3 per cent. The EPS was ₹25 per share in FY23. The net debt at consolidated level is ₹5,264.2 crore and the net debt to EBITDA is 3.3 times. Although this ratio is on the higher end, debt levels can be expected to come down due to the company’s asset monetisation plans.

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