PNCINFRA is leveraging its expertise to venture into uncharted ‘waters’
An integrated operating model, healthy financials and order book, and diversification into water projects bodes well for PNCINFRA, though risk factors need to be watched closely. We are LONG
PNCINFRA is one of India’s leading infrastructure companies providing end-to-end infra implementation solutions within Engineering, Procurement & Construction (EPC), Design-Build-Finance-Operate-Transfer (DBFOT), Operate-Maintain-Transfer (OMT), Hybrid Annuity Model (a trade-off between EPC and BOT Annuity wherein NHAI releases some % of the project cost in tranches linked to milestones, balance being invested by the developer) and other PPP formats
The broader infrastructure sector requires an estimated investment of $1.4tn (INR105,000bn) in order for India to become a $5tn (INR375,000bn) economy by 2025. The Union Budget 2022 allocated $15bn (INR1,125bn) to the Ministry of Road Transport and Highways, with another $8bn (INR600bn) going to the water sector under Jal Jivan Mission
Expertise in road projects and a shifting focus towards water supply and irrigation projects
Over the years, PNCINFRA has executed major infrastructure projects, including highways, bridges, flyovers, power transmission lines, airport runways, industrial area development and other related activities. Till date it has executed 73 major infrastructure projects across 13 states, including 49 road EPC projects. Captive quarries, owned fleet of equipment, in-house design and engineering makes it a fully integrated business, ensures high operating leverage, and timely completion of projects
Rural drinking water sector is witnessing more project opportunities under the Jal Jeevan Mission. PNCINFRA is well positioned to benefit considering its water projects in UP under two phases sized at c. INR3,300cr. The company recently received LoA for 3 EPC projects in January 2022. Valued at c. INR2,337cr, these projects include survey, design, DPS preparation, construction, commissioning and O&M for 10 years of rural water supply for 2,337 villages in Uttar Pradesh
Healthy financials and strong order book de-risk the investment profile
Revenue/EBITDA has witnessed a CAGR of c. 34%/24% during FY 2017-2021 helping the company deliver a lofty 16% ROCE and 19% ROE on average. PNCINFRA is maintaining a healthy L3Y EBITDA margin of 26%. Leverage is on the higher side with Debt-to-equity ratio of 1.2x, however supported by net Debt-to-EBITDA of <2x resulting in a manageable interest coverage of 2.7x as at FY 2021. Moreover, the company has been maintaining a solid credit rating (CARE AA for long term and CARE A1+ for short term). Cash generation appears robust with FCFF generation of c. INR103cr
PNCINFRA released its Q3 2021 results recently with 9M revenue of INR4,982cr, 34% increase on Y-o-Y basis. Order book stands at INR14,390cr with road EPC projects comprising c. 66% slice. Water projects are a new focus area and expect to constitute c. 25% of the order book by FY 2024. The company’s total equity investment till Dec 2021 in HAM projects stood at INR749cr and balance requirement of INR720cr would be invested in next 2-3 years, funded entirely through internal accruals
Potential risk factors to be monitored closely
Management comprises Politically Exposed Persons (PEPs) which can be viewed as a potential benefit in the short-term owing to their proximity to the present dispensation. However, there would be an associated risk with PEPs in the long run. Diversification in a new segment i.e., water projects come with project execution risk. Other risk factors such as high capital-intensity, lower than expected traffic growth for BOT projects, rising input costs and stretch in payment cycle are not unique to PNCINFRA
Valuation on absolute and relative terms looks fairly attractive
PNCINFRA currently trades at 10.7x P/E and 5.5x EV/EBITDA on FY23F. Close comps GR Infraprojects (NSE: GRINFRA) trades at 19.1x P/E and 10.8x EV/EBITDA, KNR Construction (NSE: KNRCON) trades at 16.9x P/E and 9.4x EV/EBITDA and H.G. Infra Engineering (NSE: HGINFRA) trades at 10.8x P/E and 6.2x EV/EBITDA on FY23F. Promoters hold 56% shareholding while another 37% is held by institutional investors
Our Position
An integrated operating model, healthy financial trends, a strong order book, stellar credit rating and diversification into water projects which is expected to be a major segment in the coming years bodes well for PNCINFRA, though risk factors need to be watched closely. We are LONG
Disclaimer: The views expressed above are the views of Arkvega Partners LLP, and are subject to change at any time based on market and other conditions. This is neither an offer nor solicitation for the purchase or sale of any security, and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. We strongly advise you to do your own research and consult an accredited investment advisor before investing based on what you read in a newsletter. Arkvega Partners LLP or its employees may have exposure in the financial instrument discussed above and can close positions in the future without prior intimation.