The recent Union Budget had an increased focus on infrastructure under PM Gati Shakti, where the plan is to expand the national highway network by 25000 kms in 2022-23. The government has increased the allocation for development of road network in the country by nearly 67 percent to ₹1.98 lakh crore in Budget 2022 from ₹1.18 lakh crore previously. The government has also allocated ₹60,000 crore for financial year ‘22- ‘23 for Jal Jeevan Mission, a programme to provide portable drinking water to all the rural households in the country. These developments signal a good traction for road infrastructure companies as well as those engaged in providing rural irrigation infrastructure such as PNC Infratech
PNC Infratech is primarily a road construction company which has also been diversifying its operations by entering other construction segments such as water supply & irrigation, railways, power transmission, airports, and industrial development. The stock is trading at a trailing P/E of 14.04 times while its peer KNR Construction is trading at 17.5 times. The stock seems relatively cheaper, supported by a strong orderbook and macro-economic tailwinds. Investors can buy the stock at these levels.
As on December 31, 2021, the company has an orderbook of ₹12055 crore which is the remaining value of contracts under execution which is higher than that of orderbook of December 2020 worth ₹9852 crore. In addition, they also have three new drinking water supply projects from State Water Supply & Sanitation Mission, Namami Gange & Rural Water Supply Department, Government of Uttar Pradesh, to be executed on an EPC basis together worth ₹2,377 crore which were won after December 2021. This brings the total order book value to ₹14,390 crore which is over 2.5 times of FY 21 revenue. Road EPC projects constitute nearly 66 percent of its total order book. The company derived nearly 87 percent of its revenue from EPC contracts (₹1491 crore) and remaining 13 percent from toll & annuity (₹ 230.82 crore) in the first nine months of FY22.
The operational projects of the company are around 961.08 kms (Toll, Annuity and OMT-Operations, Maintenance, and training contracts) with an invested equity of ₹589.1 crore, grant of ₹531 crore and debt (as on December 31, 2021) of ₹1599 crore. EPC contracts i.e., Engineering, Procurement and Construction are the type of contracts where the entire money or cost to build the project is provided by the government, including that for land acquisition and rehabilitation of people affected by the project. The private contractor will design and build the allocated project and then handover the project to the government. Whereas, in HAM (Hybrid Annuity model) which is a mix of EPC and BOT (Build Operate Transfer) annuity models where the government and the private contractor share the cost in the ratio of 40:60. The private player needs to arrange 60 per cent of the funding and once the project is complete the government collects toll and pays a fixed annuity to the private contractor over a period. Therefore, EPC contracts are generally favoured by the private contractors as there is no obligation to bring in heavy money and all the cost will be borne by the government.
The revenue for April-December 2022 rose 27 percent to ₹4982.02 crore from ₹3923.3 crore in April-December 2020. The EBITDA rose 10 per cent for nine-month FY22 to ₹1,093.49 crore from ₹ 997.95 crore in the year ago period. Although the EBITDA margin was maintained above 20 percent, the nine-month FY22 EBITDA margin was at 21.9 per cent and for nine-month FY21 it was 25.4 per cent. This seems mainly due to the rise in cost (especially cost of materials and contract paid) in Q3 FY21. The cost of materials rose 33 per cent y-o-y in the nine-month period in FY22.
The net profit of the company for April-December 2021 rose around 8 per cent year on year, but the PAT margin came down to 7.5 per cent from 8.8 per cent for the same period. The company posted a Return on Common Equity for FY21 of 17.74 per cent and operating margin of 13.66 per cent. The management informed that all its EPC contracts have price variation clause and therefore the inflation and rising raw material costs are not going to be a major problem going forward
Business prospects and valuation
The company has executed 73 major infrastructure projects spread across 13 states, of which 49 are road EPC projects. It is currently executing 26 projects. The company is operating 6 BOT & 2 OMT (OMT-Operations, Maintenance and training) projects, comprising both toll & annuity assets and a total of 11 HAM projects. In a bid to enhance its execution capabilities, the company is strengthening its in-house execution team with induction of engineers with strong technical knowledge and the count in April-December 2021 has gone up to 10,305 employees. On April 21, 2022 the stock price of PNC Infratech rose 11 per cent as the company received a bonus of ₹37 crore for completing a project of Purvanchal Expressway (Package VI) in Uttar Pradesh 97 days ahead of the scheduled completion date.
The company has stretched its net working capital to 96 days in Q3 FY22 from 67 days a year ago. But working capital is not a major issue as the company has fund-based limit of ₹ 1,000 crore and non-fund based limit of ₹5,000 crore.
The company is looking to monetise its Ghaziabad-Aligarh project where it holds 35 per cent of stake, along with its wholly owned subsidiary, PNC lnfra Holdings Limited and other partners/promoter. During the quarter ended December 31, 2021, the company has assessed the impairment of ₹39 crore in this project and has provided for the same in other expenses. This proposed divestment will add up to the financial sources of the company.