By increasing the capital expenditure outlay for FY22 and opening up various other avenues for funding, the Centre, through its Budget announcements, reiterated its focus on the infrastructure space. The capex for the road sector in particular has been increased by 18 per cent over the budgeted estimate of FY21 to ₹1.7 lakh crore in FY22. Infrastructure stocks are, therefore, witnessing increased investor traction on expectations of a sustained momentum in order inflows. In this backdrop, companies with low existing levels of leverage in their balance sheet are expected to fare better.

PNC Infratech, a road construction company which has also forayed into other construction segments such as the Railways, metros, power transmission lines, water supply and other irrigation projects, seems a good bet for those who wish to play the infrastructure theme. With its prudent bidding strategy and strong execution track record, the company has been able to fund its projects mostly through internal accruals. While its consolidated revenues grew at a 36 per cent compounded annual growth rate (CAGR) over FY17-20 to ₹5,603 crore, the consolidated debt of the company only inched up to 1.38 times its equity in FY20 (from 1.3 times in FY17). Besides, the company’s existing dominance in north India, together with quick resource mobilisation, has helped keep a check on costs and maintain the operating margins in the range of 24-32 per cent levels (consolidated). The company also posted a return on equity of 21 per cent in FY20.

However, the stock currently trades at 14 times its trailing twelve month earnings, which is closer to its three-year average. Thus, while the earnings of the company are poised for growth, further uptick in the stock price may be range bound. Investors may hence consider accumulating the stock in dips.

Strong fundamentals

The company’s healthy order intake, with strong execution capabilities, led to a 36 per cent CAGR growth in its revenues over FY17-20 to ₹5,603 crore. Not only did the company save on cost overruns, but it also was awarded early completion bonus in many projects. This helped sustain 20 per cent plus margins for the company. Consequently, the company’s profits after tax splurged by 66 per cent CAGR over the same period to ₹543 crore. Despite the havoc wrecked by the pandemic, the company saw a meagre drop of 5 per cent y-o-y (after adjusting the previous year’s figures for arbitration award of ₹109 crore) in its top line to ₹3,923 crore in the first nine months of FY21. With increasing efforts on cost savings, the company managed to post an 8 per cent increase in its consolidated operating profits (₹998 crore) and a 11 per cent uptick in profits after tax (₹347 crore).

From hereon while execution is set to ramp up further (compared to the first half of FY21), the company’s outstanding order book at ₹9,852 crore (as of December 2020) provides healthy revenue visibility for 2-3 years. Besides, the management has in its earnings conference call, guided for an order inflow of another₹200 crore by the end of FY21. For FY22 also the management has guided for maintaining the order book in the range of ₹10,000 crore. This seems achievable given the company’s existing track record, healthy order pipeline expected from the Centre’s flagship projects- in both road (Bharatmala and other Economic Corridors) and Water supply (Jal Jeevan mission) segments.

Healthy cash flows

The company saw its order book grow at a 17 per cent compounded annual growth rate (CAGR) over FY17-20 to ₹8,629 crore. Its current outstanding order book comprises mostly of road construction projects (99 per cent currently) -- 6 EPC and 11 HAM projects. The HAM projects require an equity commitment of ₹1,468 crore, of which ₹542 crore has already been invested. By focusing on sustaining margins more than expansion, the company has been able to deliver healthy cash flows in the past. Its operating cash flows grew by 23 per cent CAGR over FY17-20 to ₹525 crore. The company is also looking to divest its complete stake (35 per cent) in a BOT(Toll) project --Ghaziabad- Aligarh Expressway-- which can further help fund existing and future projects.

However, the company saw a stretch in working capital during the pandemic, when the net working capital days surged to 85 days in September 2020. Although in the December quarter, the company reported 65 days, compared to 56 days in the corresponding quarter last year, indicating a return to normalcy.

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