pppnc infratechnc infratech - india...

India Private Clients

PNC InfratechPNC InfratechPNC InfratechPNC InfratechSmooth Road AheadSmooth Road Ahead

Analyst: Alok Deora

Kaushalya Narendran

[email protected]

Stock Data

Sensex: 25,338

52 Week h/l (Rs): 554 / 346

Market cap (Rscr) : 2,575

6m Avg t/o (Rscr): 1.9

Bloomberg code: PNCL IN

BSE code: 539150

NSE code: PNCINFRA

FV (Rs): 10

Div yield (%): 0.3

Prices as on March 23, 2016

Company Rating Grid

Low High

1 2 3 4 5

Earnings Growth

Cash Flow

B/S Strength

Valuation appeal

Risk

Shareholding Pattern

Jun‐15 Sep‐15 Dec‐15

Promoters 56.1 56.1 56.1

FII+DII 28.8 20.2 22.8

Others 15.1 23.7 21.1

Share Price Trend

50

150

May‐15 Aug‐15 Dec‐15 Mar‐16

PNC Sensex

PNC Infratech Ltd Smooth Road Ahead!

BUY Sector: Infrastructure Sector View: Positive

CMP: Rs502 1‐yr Target: Rs641 Upside: 28%

This report is published by IIFL ‘India Private Clients’ research desk. IIFL has other business units with independent research teams separated by 'Chinese walls' catering to different sets of customers having varying objectives, risk profiles, investment horizon, etc. The views and opinions expressed in this document may at times be contrary in terms of rating, target prices,

estimates and views on sectors and markets… (Read the complete disclaimer at the back of this report)

Company Report

March 28, 2016

PNC Infratech Limited (PNC), an EPC player, possesses significant expertise in construction of roads and highways, airport runways, and other civil projects. Backed by focus on select regions (primarily UP and Bihar) and execution of major works in‐house, PNC consistently generates one of the strongest operating margins among the peer group. It has also been awarded bonuses for early completion of projects. While it took up select BOT projects to tackle slowdown in EPC space, it now intends to focus only on EPC which has been its forte. The existing BOT projects in its portfolio are largely operational and do not require further equity infusion by the Company. PNC which raised funds via IPO during May 2015 prudently utilized part of it to clear majority of debt and is now almost debt‐free at standalone level (D/E of 0.04x). This has enhanced its ability to bid for large EPC projects in coming period. With order book of ~Rs.3,200 cr (2x FY15 revenues) and strong L1 position in projects worth a whopping ~Rs.1,800 cr (>50% of existing order book), PNC is well placed to witness strong growth. Expected conversion of L1 into orders in near term would further augment its position. Additionally, we expect strong order flow in PNC‐focused areas of UP and Bihar. Upcoming elections in UP during 2017 and new government in Bihar would be key drivers for infrastructure development in the region. Despite tough market conditions during FY10‐15, PNC figured among the handful of construction companies that witnessed topline CAGR of ~15%.

Driven by strong order book and L1 position, robust industry outlook, tight cost control, and comfortable balance sheet, we expect revenue and PAT to witness 21% and 29% CAGR respectively during FY15‐FY18E with ROE at ~14%. Despite being backed by a strong growth profile, PNC trades at attractive P/E of ~12x. Moreover, we believe rerating is on the cards and have valued the EPC business at 13x; further, we have valued BOT projects based on book value to arrive at SOTP target price of Rs.641, which implies 28% upside. We recommend BUY on the stock.

Financial Highlights Y/e 31 Mar (Rs cr) FY15 FY16E FY17E FY18E

Revenues 1,561 1,873 2,341 2,810

yoy growth (%) 36.3 20.0 25.0 20.0

Operating profit 217 252 322 387

OPM (%) 13.9 13.5 13.7 13.8

Reported PAT 100 127 181 218

yoy growth (%) 49.9 26.1 43.3 19.9

EPS (Rs) 25.2 24.7 35.4 42.4

P/E (x) 19.9 20.3 14.2 11.8

Price/Book (x) 2.8 2.0 1.8 1.6

EV/EBITDA (x) 10.6 9.9 7.9 6.5

Debt/Equity (x) 0.5 0.0 0.1 0.1

RoE (%) 14.9 12.7 13.5 14.2

RoCE (%) 20.2 18.4 20.0 21.1 Source: Company, India Infoline Research

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PNC Infratech Ltd

Decent order book and strong L1 provides revenue visibility PNC has a decent order book of Rs.3,200 cr and is L1 in projects worth Rs.1800 cr that would translate soon into orders. Backed by this development, PNC is poised to deliver strong revenue growth. Further, huge order flows are expected in the road segment, especially in UP and Bihar, which would fortify its position. Thus, we expect PNC to deliver ~21% revenue CAGR over FY15‐18E.

With election due in UP and a new government in Bihar, infra development to see a push; PNC well placed to benefit Road awards across India are set to gather considerable pace. Drawing strength from the government’s increasing emphasis on infrastructure development, UP and Bihar are likely to witness strong order awarding. With a new government in Bihar and elections in UP in 2017, we expect significant infrastructure development in the near to medium term. PNC remains focused on these two states. We believe that the company is well placed to capitalize on available opportunities in UP and Bihar.

Fully funded and largely operational BOT portfolio; PNC to remain focused only on EPC segment in near to medium term PNC bid for asset‐heavy BOT projects to tackle slowdown in the road EPC space during the past few years and has a portfolio of seven BOT projects. Most of its BOT projects are operational and the portfolio does not require further equity funding from PNC. As attention now shifts towards the EPC space, PNC plans to avoid bidding for BOT projects in the near to medium term. We believe this strategy would be beneficial as it would keep leverage under check, while ensuring a strong order pipeline.

Integrated business model and focus on selected regions allow PNC to deliver strong operating performance consistently PNC is well integrated in terms of access to raw material as well as decent fleet of owned equipment. Its focus on UP and Bihar has helped achieve one of the strongest profitability compared with peers. Given the rising scale of operations, operating performance would remain robust and thus would more than offset any pressure that stems from increasing competitive intensity in the sector.

IPO funds used to pay significant portion of debt; currently operates with one of the strongest balance sheets PNC used the IPO proceeds to repay a significant portion of debt. Its standalone debt came down to Rs.45 cr in 3Q FY16 from Rs.325 cr in 4Q FY15. This translates into D/E of just ~0.04x vis‐à‐vis 0.5x during 4Q FY15. PNC’s D/E is unlikely to increase significantly during the next few years despite strong growth. Leverage would be under check as PNC would bid only for EPC projects, exercise tight cost control, and focus on select regions.

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PNC Infratech Ltd

Equity dilution to impact returns ratio in near term; to improve gradually with strong operating performance and balance sheet PNC has consistently delivered strong ROE at ~14% level during the past few years. ROE is likely to decline to 12.7% during FY16E due to the impact of equity dilution because of the IPO. However, with expected improvement in operating performance and a strong balance sheet, we expect ROE to improve gradually to ~14% level by FY18E.

Outlook and Valuation As PNC has a portfolio that includes EPC and BOT projects, we value it using sum‐of‐the‐parts (SOTP) methodology. While the EPC segment (Standalone business) is valued based on the FY2018E P/E multiple, BOT portfolio has been valued based on book value. Value of EPC business PNC is operating with an order book of ~Rs.3,200 cr (~2x of FY15 revenues). Additionally, it is L1 in projects worth a whopping ~Rs.1,800 cr, where the company expects to receive LOA within a month. It also has a strong balance sheet (D/E of 0.04x) following the IPO, which provides additional comfort. Given the strong growth prospects, we assign 13.0x P/E multiple to our FY2018E EPS of Rs.43 per share and arrive at EPC business value of Rs. 551 per share. Value of BOT business We have valued the BOT projects based on price/book value. The value of investments (PNC share) in the existing BOT projects adds to Rs.90 per share. On combining the value of EPC business and BOT business, we arrive at a SOTP target value of Rs.641 per share, reflecting 28% upside in the stock price from current levels. We recommend BUY.

SOTP Valuation

Particulars Segment Basis FY18E EPS Target

Multiple Value per

share

Standalone EPC business

Construction P/E Rs.42 13x

Rs.551

BOT Projects

Price/Book 1.0x Rs.90

SOTP Target Rs.641

CMP Rs.502

Upside/(Downside) 28%

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PNC Infratech Ltd

Decent order book along with strong L1 pipeline provides significant comfort on revenue growth During the past few years, PNC had subdued growth in revenues, owing to feeble order flow outlook in the across industry. Additionally, the BOT segment dominated most NHAI order flows; the segment is not the forte of PNC. While the company took up select BOT projects to tackle slowdown, the sheer lack of EPC orders affected the whole industry including PNC. However, with the recent pickup in awards, the company has seen a sharp increase in order inflows. Furthermore, it has been declared L1 in large value projects (~50% of the current order book) and is hopeful of conversion of L1 position into orders during the next few months, which would further augment PNCs position in the industry. The company has an order book of ~Rs.3,200 cr (~2x standalone FY15 revenues). Besides, it has been declared L1 in projects worth ~Rs.1800 cr. We believe the conversion of L1 into orders would lead to further improvement in PNCs position and place it well to achieve strong revenue growth. Projects where PNC stands L1 Job Type Period of award Region Value Client

EPC March‐16 UP Rs.869 cr NHAI

EPC Feb‐16 UP Rs.294 cr PWD

EPC Nov‐15 UP Rs.645 cr NHAI

Source: Company, India Infoline Research

Also, regions where PNC primarily operates (UP and Bihar) are likely to see strong infrastructure development backed by new government in Bihar and elections due in UP in 2017. We believe PNCs focus on these regions would be significantly beneficial in the coming period. Considering the decent order book, expected conversion of healthy L1 positions, and new order flows in the industry, PNC is well placed to deliver strong topline growth.

Order book to remain robust Revenues to witness strong growth

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PNC Infratech Ltd

Infrastructure development remains top priority for government; Roads and Highways segment set to scale new heights Although the sector passed through a phase of insipidity as there were fewer awards and investor interest turned lacklustre, the situation seems to have changed for the better. Infrastructure developers have veered towards the EPC segment due to myriad predicaments in the BOT space, including undue delays in land acquisition, approvals, and cost overruns. In line with the shift in preference for cash contracts, the proportion of EPC projects have increased significantly in the past one year. Considering PNC’s plans to focus on the EPC segment, we believe the company is well placed to capture the emerging opportunities in the segment.

The rate of awarding road projects by NHAI and MoRTH has gathered momentum along with improvement in pace of execution. As of January 2016, NHAI has awarded seven BOT projects with an aggregate length of ~873 km and 50 EPC projects with an aggregate length of ~2,300 km. The aggregate value of awards between April 2015 to January 2016 stood at ~Rs.49,737 cr. Infrastructure developers are still scrutinizing the newly introduced Hybrid Annuity Model (HAM) and are yet to overcome their initial scruples pertaining to the model. Although the HAM mode remains an uncharted territory, it is likely to attract participants in the coming years. The government has set a target for execution of road projects at 30 km/ day in the next two years from ~20 km/day at present. The government aims to augment national highways’ length from the current 96,000 km to 200,000 km by August 2016. In order to meet these targets, the total outlay for roads and highways has been pegged at Rs.97,000 cr for FY17 in the recent Union Budget, while the outlay for the infrastructure sector on the whole has been pegged at Rs.2.21 lakh cr.

While Road awarding by MoRTH has been strong during FY16, pace of construction has gathered some pace. This indicates improvement in activity at the ground level and shows the serious intentions of the Government to develop road infrastructure in the country.

Cumulative Road Awards and Construction during FY16

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Source: MoRTH, India Infoline Research

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PNC Infratech Ltd

Snowballing awards in the northern region to drive strong growth in company’s order book The company has established its presence in the northern region, especially Uttar Pradesh and Bihar and will remains focused on the region. The number of road project awards in the said states has increased significantly in recent times. The momentum is likely to continue given the enormous scope for infrastructure development in these states. PNC is well placed to capitalize on the emerging opportunities in the region, given its geographical advantage and demonstrated track‐record of timely/early completion of projects.

Focus majorly on UP

and Bihar which are likely to witness strong infra development

PNC focus areas

Out of 50 projects awarded by NHAI in EPC mode from April 15 to Jan 2016, 32 projects were awarded in the northern region. Similarly, two out of the seven BOT projects were awarded in the northern region during the same period. The aggregate project cost of the projects awarded in this region, including EPC and BOT, is to the tune of ~Rs.29,173 cr. While infrastructure development and road project awards have been robust in some states, others have seen some indolence. The western and southern states saw a larger number of road project awards compared with the northern and eastern states. However, in the recent past, the focus seems to have shifted to the northern and the eastern regions with large proportion of orders being given in these regions. As the majority of the projects in the company’s order book are in UP and Bihar, which remain a key focus area, PNC would benefit significantly from awards in these states.

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PNC Infratech Ltd

Northern region garners major share of EPC awards during FY16

67%

35%

Value of EPC Awards in the Northern region Value of EPC awards in Other regions

Source: NHAI Note – Northern region constitute road project awards in Delhi, UP, J&K, Bihar, Haryana and Chhattisgarh

State UP-beat on plethora of opportunities in the Infrastructure space Uttar Pradesh (UP) has a total national highway length of 8,483 km, of which, 4,500 km is with NHAI, 3,143 km is with the State Public Works Department, and the balance stretch is awaiting NOC. The state has 61 projects under implementation with a total length and project cost of 2,145 km and ~Rs.15,750 cr respectively. Out of the 50 EPC projects awarded between April 2015 and January 2016, 13 projects have been awarded in UP with an aggregate project cost of ~Rs.10,231 cr and an aggregate length of ~484 km. While five new national highways have been announced in the state with a length of 620 km, an additional 590 km has been approved in principle. Under the Setu Bharatham Programme, which aims at building bridges on national highways for safe travel, construction of 9 Road Over Bridges and Road under Bridges have been identified in the UP region. Certain big‐ticket projects have recently been awarded in the state. The Eastern Peripheral Expressway, with a total project cost of ~Rs.5,763

cr, has been awarded in six packages and is currently under implementation.

Lucknow‐Azamgarh‐Ballia Expressway with a length of ~350 km and aggregate project cost of Rs.180 bn is being awarded in eight packages. This project aims to connect Purvanchal and the National Capital Region.

Agra‐Lucknow Expressway, which is a flagship project of the UP government, is a 302 km stretch and has been awarded in five packages with an aggregate project cost of Rs.105 bn.

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PNC Infratech Ltd

Key projects bagged projects in UP by PNC during FY16 Project Name Counterparty Contract

Value (Rs. Cr)

Four laning of Varanasi‐Gorakhpur Section of NH‐29

NHAI 869

Construction of 4 lane road on both sides of Sharda Sahayak Feeder Canal

PWD (UP) 294

Aligarh‐Moradabad section of NH‐93 NHAI 645

Strengthening of runway at Air Force Station in Kanpur

Military Engineering Services

167

Total 1,975


Major projects in bidding stage in UP Project Name Estimated Project

Cost (Rs. Cr) Length (Km) Mode

Lucknow Sultanpur Section of NH‐56 1,662 127 HAM

Rampur Kathgodam section of NH‐87 616 43 HAM

Gagalheri‐Saharanpur‐Yamunanagar (UP/Haryana Border) section of NH‐73

1,009 51 HAM

Chutmalpur‐Ganeshpur section of NH‐72A 810 53 HAM

Delhi – Meerut Expressway (Package 2) 1,377 19 HAM

Nagina‐Kashipur section of NH‐74 1,291 99 EPC

Haridwar Nagina section of NH‐74 990 72 EPC

Total 7,754 465

Source: NHAI

While the awarding environment in the state already seems to be upbeat, the impending State Assembly Elections in 2017 could provide the extra push to government efforts directed at fast‐tracking execution as well as awards, as indicated by empirical evidence. PNC, with its long‐standing experience of executing projects in the state, is likely to be a key beneficiary of positive developments in the segment.

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PNC Infratech Ltd

Bihar brimming with Opportunities Similar to many other states, awards in Bihar have not been commensurate with the state’s infrastructure needs. However, like UP, Bihar too has seen an improvement in the awarding environment between April 2015 and January 2016. The formation of the new Government is expected to speed up pace of infrastructure development in Bihar. PNC is executing two projects in Bihar, Koilwar‐Bhojpur and Bhojpur Buxar with a contract value of ~Rs.931 cr (PNCs share).

Key Highlights on Bihar

Source: MoRTH, NHAI

Note – Projects under bidding and pipeline are from MoRTH

Bihar State Road Development Corporation Limited (BSRDC) is the implementing agency of Asian Development Bank and Japanese International Cooperation Agency assissted Bihar State Highway Projects (BSHP). BSHP‐I has nine state highway projects that are currently under implementation; they have an aggregegate length of ~820 km and are worth ~Rs.2,630 cr. BSHP‐II has five state highway projects with an aggregegate length of ~387 km, worth ~Rs.2,547 cr, that are currently under implementation, while BSHP‐III has four state highway projects with an aggregegate length of ~254 km, worth ~Rs.1,659 cr, that are currently under implementation.

Moreover, BOT projects with an aggregate length of ~275 km are under various stages of implementation by BSRDC, whereas projects with an aggregate length of 184 km are in the pipeline. Infrastructure development in the state has picked up pace and the momentum is likely to continue. PNC, being one of the leading infrastructure development companies in the northern region, will be a strong contender to capture the plethora of opportunities emerging in the region.

Major Upcoming Projects in Bihar Project Name Estimated Project

Cost (Rs. Cr) Length (Km)

Mode

Construction and Upgradation of NH‐131A near Narenpur to Purnea

1,161 49 HAM

Four laning of Bhaktiyarput‐Mokama Section 1,016 45 EPC Construction of new link in Jharkhand and Construction of Manihari Bypass near Narenpur in Bihar including Ganga Bridge

1,906 22 HAM

Total 4,082 115 Source: NHAI

Projects awarded during

FY16

Projects in process of

award/bidding stage

Projects in pipeline

MoRTH: 13 projects of 451 km, worth ~Rs.3,298 cr

NHAI: 10 projects of 502 km, worth ~Rs.6,895 cr

19 projects of 915.25 km, worth ~Rs.8,500 cr

11 projects of 716.29 km, worth ~Rs.14,567 cr

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PNC Infratech Ltd

Integrated business model with focus on selected regions support operating performance PNC operates with an integrated business model, where it has an in‐house design and engineering team and is able to control the entire process from conceptualization to commissioning of the project. Further, it owns a large part of the equipment required in execution of projects and therefore has limited dependence on third‐party contractors. PNC has access to raw materials from owned/leased quarries, which allow it to complete the project at the desired pace. It has been awarded bonuses in the past for early completion of projects. Owing to these factors, PNC is able to generate one of the strongest operating margins. PNC, which is primarily focused on UP and Bihar, is all set to see substantial growth in order book. In Bihar, the newly formed Government is likely to focus on improving infrastructure. UP is due for election in 2017 and therefore large number of infrastructure projects are likely to be awarded in the region. With the rise in scale of operations, operating performance is likely to improve further. Further, with focus on select regions, the company is able to achieve better control over movement of equipment and save on costs. While the competitive intensity has increased in the road EPC segment in recent times, we do not believe PNC would have concerns in maintaining its performance at the operating level. It has a strong order pipeline, which gives it ample scope to target projects that fit its margin criteria. We believe the competitive pressure would be more than offset by benefits ensuing from the rising scale of operations. PNC would therefore be able to improve its operating performance gradually during the next few years.

UP region dominates the order book Operating margins to remain strong

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Bihar

Others

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PNC Infratech Ltd

Fully funded and largely operational BOT portfolio; PNC to focus only on EPC segment in near to medium term PNC has a fully funded BOT portfolio of seven projects, majority of which are operational. PNC has fully met the equity requirement of BOT projects and does not need to infuse further equity into any of the projects. PNC also used portion of the IPO proceeds to partly fund equity requirements of the Raebareli Jaunpur Project.

Intends to focus only on EPC in near to medium term PNC, which ventured into BOT during 2010‐11 with receipt of first independent BOT Road project, operates a portfolio of seven BOT projects with most of them being operational. It also has a good mix of toll, annuity as well as OMT projects in its BOT pie. While PNC does not plan to exit any of these projects, it intends to focus only on EPC projects in the near to medium term. As it sees immense order flow in the asset light EPC projects, it has no plans to add new BOT projects. We believe this would be a prudent strategy as significant orders are likely to be awarded through the EPC route. Further, PNC would also be able to keep its balance sheet light with the EPC business and would be in a position to take more orders and capitalize on the opportunity.

BOT Portfolio

Sr.No Project Client State Type Invested Equity

(Rs. Cr) PNC Share of Equity (Rs. Cr)

Balance Commitment

1 Ghaziabad Aligarh NHAI UP Toll 194 67.9 0

2 Kanpur Kabrai NHAI UP Toll 67.5 67.5 0

3 Gwalior Bhind MPRDC MP Toll 78.3 78.3 0

4 Bareilly Almora UPSHA UP Toll 74.6 74.6 0

5 Rae Bareli Jaunpur NHAI UP Annuity 139.6 139.6 0

6 Narela Industrial Area DSIIDC Delhi Annuity 35 35 0

7 Kanpur Ayodhya NHAI UP OMT 0.1 0.1 0

Total 589.1 463


No further Equity infusion required

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PNC Infratech Ltd

Steady operating performance, debt reduction through IPO funds to pump up net profitability PNC has maintained decent performance at the operating level along with reasonable leverage position. This is despite the fact that the company ventured into asset heavy BOT projects to improve its order flow during the past few years. The company’s standalone D/E has been consistently less than 1.0x, which ensured that operating level performance percolated to net performance. Even at the consolidated level, D/E has stayed below 1.5x, which can be considered as reasonable compared with players who are into the road BOT space. PNC, which raised funds via IPO in FY16, has now used the funds to pay a significant amount of debt as well as fund its capital expenditure needs. This has reduced debt further and has placed PNC in an extremely comfortable position. Its standalone D/E now stands at 0.04x, which is one of the lowest in the industry. We believe the strong operating performance along with sharp reduction in debt would lead to significant improvement in net profit over the next few years. IPO fund allocation

Particulars (Rs.cr) Planned

allocation Allocated till

December 2015 Pending

allocation

Funding working capital requirements 150 150 0

Investment in subsidiary, PNC Raebareli Highways Private Limited for part financing Raebareli Jaunpur Project

65 65 0

Investment in capital equipment 85.06 64.46 20.6

Partial repayment or prepayment of Debt 35.14 31.86 3.28

General Corporate purposes 81.1 81.1 0

Issue related expenses (only those apportioned to company)

18.4 17.5 0.9

Total 434.7 409.92 24.78


The company has also allocated IPO funds towards capital equipment. We expect PNC’s capex requirement to be limited. The company operates with a low asset turnover of ~1.5x and is in a position to scale up revenues without any significant capex. PNC expects to allocate the balance IPO funds meant for capital investment during the next six months. With prudent allocation of IPO funds, PNC has placed itself in a comfortable zone. Therefore, it would be able to capitalize on ensuing opportunities in the road segment.

IPO proceeds majorly used to repay debt and fund capex

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PNC Infratech Ltd

The subdued performance over the past few years has had an impact on return ratios of PNC. While return ratios have been more or less on par with industry standards, the company has felt pressure in maintaining its performance in recent times owing to lack of order flows in the industry. However, the situation is likely to improve during the coming period. With the strong order pipeline, topline and operating performance is likely to be robust in the coming years. The company has paid a large portion of its outstanding debt. It would not require any significant capex, which would improve its net performance. While net performance would improve, equity dilution would have near‐term impact on return ratios. Therefore, we expect return ratios to be marginally lower in the near term and improve gradually thereafter. We believe the reduction in debt would be beneficial from the long‐term perspective, as it would allow the company to bid for more orders. It would also allow PNC to take more debt in case the need arises to execute a large order book.

Net Profit to witness strong growth Return ratios to improve gradually from FY17

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PNC Infratech Ltd

Comparative analysis

Company Name

Mkt Cap

Order book

(Dec 15) EBITDA Margin (%) PAT (Rs.Bn) CAGR (FY15‐18E)

(Rs Bn) (Rs Bn) FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E Sales EBITDA PAT

EPC Focused

PNC Infra* 25.2 30.6 13.9 13.5 13.7 13.8 0.1 0.1 0.2 0.2 21.6 21.3 29.4

JKumar* 21.0 33.8 18.8 18.7 18.7 18.8 1.0 1.2 1.6 2.2 20.2 20.0 31.4

ITDC*# 17.2 34.7 5.3 6.2 7.6 9.7 (0.1) 0.1 0.1 0.1 32.0 61.5 NA

KNR* 14.5 34.7 14.4 15.0 13.2 14.2 0.7 0.9 0.9 1.2 15.5 15.0 18.0

MBL Infra 6.6 47.5 12.1 11.6 11.4 11.3 0.8 0.9 1.0 1.2 11.9 9.4 12.4

BOT focused

IRB 82.3 173.2 58.1 54.2 54.6 55.8 5.4 6.3 6.8 7.3 19.9 18.3 10.2

Ashoka Buildcon 34.3 41.9 20.4 28.2 28.0 27.2 0.8 0.9 1.3 1.4 16.4 28.2 20.0

Sadbhav Engg 46.7 82.7 17.3 21.7 24.7 26.3 (1.8) (0.1) 0.6 1.6 22.0 40.3 NA Source: Bloomberg, India Infoline Research *IIFL estimate, Price as on 23 March 2016 #As ITDC follows calendar year, Data provided above for FY15, FY16, FY17, FY18 corresponds to CY14, CY15, CY16, CY17 in case of ITDC

Company Name

P/E (x) EV/EBITDA (x) ROE % D/E (x)

FY15

Promoter Holding (%)

As on Dec 31 Key Segments FY17E FY18E FY17E FY18E FY15 FY16E FY17E FY18E

EPC Focused

PNC Infra* 14.2 11.8 7.6 6.2 14.9 12.7 13.5 14.2 0.04 56 Roads

JKumar* 17.0 12.5 8.1 6.8 14.3 11.5 11.8 14.3 0.7 44 Roads, Metro

ITDC*# 18.7 10.6 7.8 5.7 (15.6) 12.0 15.3 22.4 1.0 52 Marine, Roads

KNR* 15.4 12.8 10.2 7.8 13.5 14.6 13.1 14.9 0.2 61 Roads, Irrigation

MBL Infra 6.5 5.8 5.4 4.8 14.5 13.3 13.4 13.3 1.6 47 Roads, Housing

BOT focused

IRB 11.7 10.8 6.0 5.2 13.7 13.5 13.1 12.4 2.6 58 Roads

Ashoka Buildcon 26.7 23.0 8.4 7.5 6.2 5.4 6.0 7.2 2.8 57 Roads, Power

Sadbhav Engg 54.3 28.1 9.1 7.4 (12.5) 0.8 4.9 9.4 4.4 47 Roads, Irrigation Source: Bloomberg, India Infoline Research *IIFL estimate, Price as on 23 March 2016 #As ITDC follows calendar year, Data provided above for FY15, FY16, FY17, FY18 corresponds to CY14, CY15, CY16, CY17 in case of ITDC

Trades at attractive valuation considering the strong order pipeline and strong earnings prospects PNC is sitting on a decent order book and has a strong L1 position. Moreover, huge orders are on the anvil in UP and Bihar, which are the focus areas of PNC. We expect players like PNC to capitalize on the opportunity. We expect PNC to maintain its margin performance, owing to strong integration and focus on select regions despite the rising competition in the segment.

PNC trades at ~12x on FY18E standalone earnings. We believe the stock could see re‐rating on the back of conversion of L1 pipeline, strong order pipeline especially in the UP and Bihar segment, and one of the strongest balance sheets in the industry. The company’s L1 status in projects constitutes more than half the value of the existing order book, which provides significant comfort. Backed by a strong order pipeline and comfortable balance sheet position, PNC is well poised to kick‐start its next leg of growth.

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PNC Infratech Ltd

Trades at cheaper valuation despite stronger ROE than many peers

0

5

10

15

20

25

30

35

2.0 7.0 12.0 17.0 22.0 27.0

FY18E P/E (x)

FY18E ROE

PNC

MBL

JKumar

Ashoka Buildcon

KNR

ITD

Sadbhav Engg

IRB


Re-rating on the cards with strong revenue and earnings visibility PNC sits on a decent order book, which excludes a strong L1 position. We believe conversion of these orders and inflow of new orders would set the tone for strong topline growth in the coming years. Earnings are also likely to be healthy on the back of strong topline performance and significant reduction in debt with the IPO funds.

PNC is trading at attractive valuations to most peers despite a strong ROE than many players. Therefore, we believe re‐rating is on the cards for the company. We value the company’s standalone EPC business with a target multiple of 13x, implying an EPC business value of Rs.551 per share.

Value of BOT business We have valued the BOT projects based on price/book value. The value from BOT projects adds up to Rs.90 per share.

Combining the value of EPC and BOT business, we arrive at a SOTP target value of Rs.641 per share, reflecting 28% upside in the stock price from current levels. We recommend BUY.

SOTP Valuation

Particulars Segment Basis FY18E EPS Target

Multiple Value per

share

Standalone EPC business

Construction P/E Rs.42 13x

Rs.551

BOT Projects

Price/Book 1.0x Rs.90

SOTP Target Rs.641

CMP Rs.502

Upside/(Downside) 28%

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PNC Infratech Ltd

Key Risks Focusing on only few regions

PNC has been focusing on select regions of UP and nearby areas. While this is considered positive in terms of cost control, it reduces the addressable market size for the company significantly, which leads to higher competition.

Lack of diversification to other infrastructure sectors

PNC has always been engaged in the road segment and has minor exposure to other areas such as industrial construction and power EPC space. This is evident with more than 99% of the order book in the road segment. The lack of diversification could have implications over the long term.

Risk of maintaining high profitability with increasing competition

PNC generates strong profitability at the operating level, which is higher than most EPC players. It is able to do so through focus on select regions and tight cost control. However, with an increase in road awards, the competition is also on a concomitant rise. Given this backdrop, the company may have to compromise on margins marginally to win orders.

Lower‐than‐expected growth in traffic could hamper BOT projects

PNC has multiple BOT toll projects and is therefore vulnerable to toll risks associated with those projects. BOT players have been suffering from lower‐than‐expected traffic growth due to weak economic activity. Additionally, low WPI inflation meant lower‐than‐anticipated hike in toll rates. The low pick‐up in traffic and toll remains a risk for PNC toll business.

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PNC Infratech Ltd

Company Background PNC is primarily engaged in the EPC space with wide experience and proven expertise in execution of major infrastructure projects, including highways, bridges, flyovers, power transmission lines, airport runways, and industrial area development. It has a well‐established track‐record of successful execution of projects across sectors and geographies. PNC has executed more than 25 Road EPC projects and has seven BOT projects (toll and annuity) and one operations and maintenance project in its kitty. The strong and timely execution can also be ascertained from the fact that the company has received bonus from NHAI for early completion of the four‐laning road project of the Agra‐Gwalior section of NH 3 in UP. It also completed work and commenced toll collection four months earlier than the scheduled date of completion for Gwalior‐Bhind BOT Road Project. It has also received ISO 9001:2008 certification for quality assurance from DNV and Super Special Class accreditation for civil engineering works from Military Engineering Services, Government of India. The SS accreditation is for unlimited value of contracts.

Timeline of events

1999 2001 2005 2010‐11 2013‐14 2015

Incorporated as ‘PNC Construction Company Private Limited’

Executed 1st international airport runway project for AAI at Kolkata

1st OMT project awarded (Kanpur Lucknow AyodhyaRoad project)

‐ Received ‘Super Special’ class certification from MES ‐ Executed 1st project with NHAI (4‐laning of the Agra Gwalior Section)

‐ Awarded 1st independent road project on BOT basis.‐ NYLIM Jacob Ballas India Fund invested Rs. 150 Cr

IPO and listing on NSE and BSE

Source: Company

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PNC Infratech Ltd

Operates with an integrated business model PNC operates with an integrated model, wherein it controls end‐to‐end process from conceptualization to commissioning of projects. Further, it ensures limited outsourcing of jobs, owing to the strong fleet on owned equipment. It also has secured access to key raw materials, which ensures timely completion of projects. Well‐integrated business model

Integrated Business Model

In‐house Designing

Low reliance on third parties for construction

Secured sources of Raw Material supply

Strong fleet of owned Equipments


Strong Management team PNC is managed by an experienced and able team. Backed by strong expertise and experience of the team, PNC has executed a large number of projects and completed many projects way before schedule.

Key Management team

Mr. Pradeep Kumar Jain Chairman & Managing Director

‐ Over 37 years of experience in the construction, infrastructure sector and allied areas

‐ Responsible for overall administration and supervision of projects and liaison with agencies

Mr. Chakresh Kumar Jain Managing Director

‐ Over 27 years of experience in development of infrastructure sector, such as construction of highways, airports, rail over‐bridges among others

‐ Responsible for overall finance, project management and administration

Mr. Yogesh Kumar Jain Managing Director

‐ Over 22 years of experience in planning, execution, supervision of work starting from pre‐qualification and tendering up to completion and handing over of sites

‐ Responsible for technical supervision of projects up to completion stage of such projects

Mr. Naveen Kumar Jain Whole‐time Director

‐ Over 28 years of experience in industries such as construction, cold storage, transportation, machineries and transport organization

‐ Responsible for supervision of administration, human resources, legal and logistics‐related functions

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PNC Infratech Ltd

Diversified clientele across central and state governments PNC has a strong client network majorly from Government agencies (Central and State) focused on the roads segment. Large quantum of projects is expected to be awarded by the Central and State Government agencies, which would create strong opportunities for PNC. Additionally, the company intends to increase penetration in the private sector. Key Clients

Source: Company

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PNC Infratech Ltd

Financials Income statement (Standalone) Y/e 31 Mar (Rs cr) FY15 FY16E FY17E FY18E

Revenue 1,561 1,873 2,341 2,810

Operating profit 217 252 322 387

Depreciation (36) (49) (54) (59)

Interest expense (46) (31) (15) (23)

Other income 14 14 14 14

Profit before tax 148 186 266 319

Taxes (47) (59) (85) (102)

Adj. profit 100 127 181 218

Exceptional items 0 0 0 0

Net profit 100 127 181 218

Balance sheet(Standalone) Y/e 31 Mar (Rs cr) FY15 FY16E FY17E FY18E

Equity capital 40 51 51 51

Reserves 679 1,216 1,371 1,589

Net worth 718 1,267 1,423 1,640

Debt 324 45 75 105

Other LT Liabilities 0 0 0 0

Total liabilities 1,043 1,313 1,498 1,746

Fixed assets 217 275 338 401

Deferred tax asset (net) 0 0 0 0

Investments 424 424 424 424

Net working capital 381 500 633 766

Inventories 223 282 353 423

Sundry debtors 367 462 577 693

Other current assets 81 97 121 145

Sundry creditors (257) (309) (386) (463)

Other curr liabilities (32) (32) (32) (32)

Cash 21 113 103 155

Total assets 1,043 1,313 1,498 1,746

Cash flow (Standalone) Y/e 31 Mar (Rs cr) FY15 FY16E FY17E FY18E

Profit before tax 148 186 266 319

Depreciation 36 49 54 59

Tax paid (47) (59) (85) (102)

Working capital ∆ (105) (120) (133) (133)

Operating cash flow 32 56 102 143

Capital expenditure (99) (107) (117) (122)

Free cash flow (68) (51) (14) 21

Equity raised 6 446 ‐ 27

Investments (73) ‐ ‐ ‐

Debt fin/disposal 76 (279) 30 30

Dividends paid (17) (24) (26) (27)

Other items (2) ‐ ‐ ‐

Net ∆ in cash (79) 92 (10) 51

Key ratios (Standalone) Y/e 31 Mar FY15 FY16E FY17E FY18E

Growth matrix (%)

Revenue growth 36.3 20.0 25.0 20.0

Op profit growth 54.4 16.5 27.4 20.2

EBIT growth 54.0 11.9 29.5 21.5

Net profit growth 49.9 26.1 43.3 19.9

Profitability ratios (%)

OPM 13.9 13.5 13.7 13.8

EBIT margin 12.4 11.6 12.0 12.2

Net margin 6.4 6.8 7.7 7.7

RoCE 20.2 18.4 20.0 21.1

RoNW 14.9 12.7 13.5 14.2

RoA 8.2 8.5 10.2 10.5

Per share ratios

EPS 25.2 24.7 35.4 42.4

Dividend per share 3.7 4.0 4.3 4.5

Cash EPS 34.4 34.2 45.9 53.8

Book value per share 180.5 247.0 277.3 319.7

Valuation ratios (x)

P/E 19.9 20.3 14.2 11.8

P/CEPS 14.8 14.8 11.1 9.4

P/B 2.8 2.0 1.8 1.6

EV/EBIDTA 10.6 9.9 7.9 6.5

Payout (%)

Dividend Payout 17.4 19.1 14.1 12.5

Tax payout 32.1 31.9 31.9 31.9

Liquidity ratios

Debtor days 86 90 90 90

Inventory days 52 55 55 55

Creditor days 60 60 60 60

Leverage ratios

Interest coverage 4.2 6.9 18.7 15.2

Net debt / equity 0.4 (0.1) (0.0) (0.0)

Net debt / op. profit 1.4 (0.3) (0.1) (0.1)

Du‐Pont Analysis Y/e 31 Mar (Rs cr) FY15 FY16E FY17E FY18E

Tax burden (x) 0.68 0.68 0.68 0.68

Interest burden (x) 0.76 0.86 0.95 0.93

EBIT margin (x) 0.12 0.12 0.12 0.12

Asset turnover (x) 1.28 1.26 1.31 1.35

Financial leverage (x) 1.81 1.50 1.33 1.36

RoE (%) 14.9 12.7 13.5 14.2

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‘Best Broker of the Year’ – by Zee Business for contribution to broking Nirmal Jain, Chairman, IIFL, received the award for The Best Broker of the Year (for contribution to broking in India) at India's Best Market Analyst Awards 2014 organised by the Zee Business in Mumbai. The award was presented by the guest of Honour Amit Shah, president of the Bharatiya Janata Party and Piyush Goel, Minister of state with independent charge for power, coal new and renewable energy.

Recommendation parameters for fundamental reports:

Buy – Absolute return of over +15%

Accumulate – Absolute return between 0% to +15%

Reduce – Absolute return between 0% to ‐10%

Sell – Absolute return below ‐10%

Call Failure ‐ In case of a Buy report, if the stock falls 20% below the recommended price on a closing basis, unless otherwise specified by the analyst; or, in case of a Sell report, if the stock rises 20% above the recommended price on a closing basis, unless otherwise specified by the analyst

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