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Strong performance; healthy guidance!

PNC Infratech’s (PNC) execution was robust, with a stronger than expected topline and higher margins led by operating leverage. Topline came in at | 1644 crore, up ~42% YoY, driven by improved executable order book and optimum labour availability. The consequent margin was at 14.1% (up 63 bps YoY), led by operating leverage. PAT came in at | 129.4 crore, up 70% YoY, led by a strong operating performance, lower interest costs and despite higher taxation.

Order book provides robust revenue visibility in medium term

As on Q4 end, PNC’s order book (OB) was at | 11,648 crore. However, this OB excludes: a) two EPC projects of Delhi Vadodara alignment worth | 1,548 crore and b) irrigation and water projects worth | 3427 crore. Including these projects, the OB is robust at ~ | 16,623 crore (OB/TTM revenues: 3,4x) and provides revenue visibility over the next three years. The order book is well diversified with HAM, EPC, water & canal forming 45%, 27%, 28%, respectively. The company expects additional orders worth | 8000-9000 crore in FY22E (excluding L1), which is likely to strengthen its elevated OB position even further. The key focus, going ahead, would be on road (EPC, HAM, both) with order inflows from water/irrigation largely done.

Execution to accelerate; well-placed to fund HAM projects

We expect execution to stay robust with appointed date received for all road projects coupled with execution in water/irrigation projects. We highlight that the company has guided for ~20% revenue growth in FY22 and margins in the range of 13.5-14%. Given the escalation clause in the contracts, PNC does not expect raw material to impact margins materially. Post a likely flattish FY21, we expect revenues to grow at 20% CAGR in FY21-23 to | 7073 crore, with new orders contributing to growth pickup. We expect operating margin to remain elevated at ~13.75% in FY22E and FY23E (mid-range of guidance). Additionally, the company is well-placed to fund its remaining equity requirement of | 860 crore (including new HAM projects) over the next three years to be aided by its healthy internal cash accruals and current net cash of | 389 crore

Valuation & Outlook

PNC remains our preferred pick in the EPC space given its robust order book, healthy return ratios and lean balance sheet. Irrespective of its asset monetisation plan fructification (it is looking to monetise its BOT/HAM assets and expects some development by year end), sufficient internal accruals from current order book and current cash is enough for equity infusion. The government focus on roads and water sector also bodes well. We maintain our BUY rating with an unchanged SoTP target price of | 300/share. We value its construction business at | 253/share (at 6.5x FY23E EV/EBITDA implying ~12x FY23 EPS).

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