Company Name – PNC Infratech Limited (PNC Infratech) Current Share Price – INR 330 (January 13, 2023) Market Cap – INR 8,472 cr |
1. What is interesting about the stock?
The importance of transportation facilities for the nation's economic strength and efficiency is generally accepted. A fundamental requirement for manufacturers is to distribute their products to appropriate markets quickly and inexpensively; people must be able to get to work and conduct business. This recognized as a link between transportation and economic development continues to justify significant public expenditures in transportation systems at the local, state, and federal levels.
Road construction, at a large scale in India, started under Prime Minister Atal Bihari Vajpayee. The Golden Quadrilateral or “GQ” was former Prime Minister Atal Bihari Vajpayee’s first dream project and is considered the biggest infrastructure program in the highways sector in Independent India.
The National Highway Development program was largely based on the National Highway System of the United States. In 2001, he launched the Golden Quadrilateral and the North-South & East-West Corridor projects to build 4/6 lane highways between four top metropolitan cities of Delhi, Mumbai, Chennai, and Kolkata as well as from Srinagar to Kanyakumari and Porbandar to Silchar.
India had issues with public funding both in terms of raising capital (as there are many other pressing needs) or its effectiveness (a lot of leakages!). So, we moved to a public-private partnership (PPP) in road construction.
Most of the action for road development from an investing perspective happens on National Highways:
Development of new roads
Expansion of lanes (2->4 or 4->6)
Since 2001, we have had multiple cycles:
Started with pure EPC or BOT – Annuity projects (risk of traffic is with the government) – government finances started becoming a constraint
BOT – Toll projects – EPC developers started taking traffic risks, which led to significant issues as they had to bid high to get the projects, so the traffic assumptions were elevated. Banks were funding 80-85% of the project value and had many NPAs. A lot of developers went under like IVRCL, Lanco, etc
HAM – Hybrid Annuity Model where government funds 40% of the project cost in tranches and the developer raises capital (equity and debt) for the remaining project. Developer receives an annuity as compensation for the project like BOT-Annuity
Developers/construction companies are of two kinds:
Large national players like L&T –have advanced engineering and execution capabilities
Regional players – they have local execution capabilities and some direct/indirect political patronage
One such regional player is PNC Infratech Limited. PNC Infratech was incorporated in 1999 and is promoted by four brothers- Pradeep Kumar Jain, Naveen Kumar Jain, Chakresh Kumar Jain, and Yogesh Kumar Jain. Company is engaged in diversified construction activities such as the construction of highways, bridges, flyovers, airport runways, and allied activities. PNC Infratech has over two decades of experience in executing road projects and its major clients include the National Highway Authority of India (NHAI), Airports Authority of India (AII), Haryana State Roads & Bridges Development Corporation Limited (HSRDC), Uttar Pradesh State Highway Authority (UPSHA), Delhi State Industrial & Infrastructure Corporation of India (DSIIC), Military Engineering Services (MES), Public Works Department (PWD), UP Expressways Industrial Development Authority (UPEIDA) and Dedicated Freight Corridor Corporation of India.
Most of the Company projects are in UP, Delhi, MP, Rajasthan, or Haryana. It offers infrastructure implementation solutions which include engineering, procurement, and construction (EPC) services. It implements projects on various Public-Private-Partnership (PPP) formats, including Design-Build-Finance-Operate-Transfer (DBFOT), Operate-Maintain-Transfer (OMT), and Hybrid models.
Company started as a road EPC company but has recently diversified into water projects by receiving orders from Government of Uttar Pradesh under the ‘Jal Jeevan Mission’ which is jointly funded by the Government of India and the Government of Uttar Pradesh. The current order book is ~ INR 19,000 cr (2.6x FY22 revenue) with 61% of projects being Road EPC and ~40% being water and canal projects.
PNC Infratech has invested capital of ~ INR 1,500 cr in the road projects:
~ INR 400 cr in operational projects
~ INR 1,100 cr in under-development projects (HAM)
Company is looking to sell operational projects to unlock value and create space for investing in future HAM projects.
One of the promoters, Naveen Kumar Jain, is the mayor of Agra (UP) representing the ruling party in the state.
2. Key Historical Financials
In Q2FY23, EPC contributed ~90% of revenue with the remaining being Toll/Annuity
Company has increased revenue and net profit at a CAGR of 26% and 37% respectively over the last 5 years
EPC revenues tend to be lumpier so many times YoY or QoQ comparison isn’t relevant
Cash flow conversion was poor in FY22 with a significant jump in receivables
ROCE/ROE was healthy at 15%/17% in FY22
3. What is my view on company valuation?
Company share price has increased 1.7x over the last 5 years which is lower than the profit growth implying the P/E multiple has compressed.
PNC Infratech trades at a P/E multiple of 12x vs KNR Construction at 20x and Ashoka Buildcon at 5x.
We need to understand the value of the standalone EPC business. If we assume that the Company can recover the full value of invested equity (~INR 1,500 cr) and deduct the current cash balance (~ INR 400 cr), the market value of the standalone EPC business is INR 6,600 cr (market cap of INR 8,500 cr less INR 1,900 cr). The Standalone PAT (TTM) of the Company is INR 517 cr which captures the EPC profitability. So, the implied P/E (TTM) ratio for the EPC business is ~ 13x.
Company is slightly overvalued as paying anything north of 10x is quite risky for an EPC company expected to generate ~15% of profit growth as they carry a lot of political and project execution risks.
4. What are the risks to the investment analysis?
Risks to the analysis are:
Geographical and sectoral concentration of order book
Delay in the monetization of operational projects
Project Execution risks
Any EPC player has large contingent liabilities – performance security or retention amount exposing the Company to continued risk even after project delivery
Significant political risk – change of government at the state or central level
About the Author
I have over 17 years of experience in venture capital, private equity, and investment banking in India and the Middle East across a wide variety of sectors. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in the Middle East, to look after investments, M&A, and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB), and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.
I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).
I am an Insignificant Investor in the public market and co-founder of SocInvest.
Disclosure
I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.