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Asset sale next deliverable 

PNC Infratech’s (PNC) Q2FY23 PAT at Rs1.31bn marginally beat estimate of Rs1.25bn  due  to  lower  interest  expenses  and  higher  margins.  Standalone  net  cash  position  increased to Rs3.1bn from net cash of Rs1.6bn in June?22. NWC increased to 63 days  in Sept?22 from very low levels of 45 days in Mar?22. While PNC has not received any  inflows  in  YTD,  order  backlog  remains  strong  at  Rs193bn  (3x  TTM  revenues).  PNC  targets order inflows of Rs80?100bn in FY23 given the strong bid pipeline in highways  and water  (JJM). Meanwhile, PNC has lowered  revenue growth guidance  to 10?15%  (earlier: 15%+) due to lower than expected execution of JJM projects. It is confident of 13.5%  EPC  EBITDA  margins  ahead.  Entire  Rs600m  loan  to  related  party  has  been  unwound  and  there  is  no  outstanding  exposure  currently.  PNC  expects  to  firm  up  monetisation of few HAM/BOT projects by Mar?23. Maintain BUY with PT of Rs410.

Earnings ahead of estimates due to lower interest/depreciation and higher margins

Revenue declined 3% YoY to Rs15.6bn (estimate: Rs16bn). It includes revenue of Rs1bn from EPE toll collection contract. EBITDA declined 6.6% YoY at Rs2.1bn (inline). Reported EBITDA margins declined 40bps YoY  to 13.3% while contracting margins  (adjusted  for low  margin  EPE  contract)  stood  at  13.8%  (estimate:  13.5%).  Depreciation/  interest declined 16%/36% YoY to Rs274m/Rs155m (estimate: Rs300m/Rs185m), respectively.

Backlog remains strong; targets order wins of Rs80?100bn in FY23  

While  PNC  has  not  received  any  order  inflows  in  YTDFY23,  PNC maintained  its  order inflow  guidance  of  Rs80?100bn  (70%  Highways,  30% Water  supply).  Backlog  remains  strong at Rs193bn (3x TTM revenues). It includes 7 HAM projects worth Rs74bn where AD is pending (to receive AD for 5 HAMs in Q3 and 2 HAMs in Q4). Of the JJM orders of ~Rs67bn, executable portion currently is ~Rs23bn which should increase to Rs40bn by  Mar?23. PNC expects revenue of Rs10bn/Rs25bn  from JJM orders in FY23/24. Overall,  PNC has lowered  revenue growth guidance  to  10?15%  (15%+ earlier) in FY23E due  to  lower than expected ramp?up in execution of JJM projects.

Internal accruals and proceeds from asset sale to support capital commitments 

Out of the total equity requirement of Rs24bn for HAM projects, Rs11.1bn is invested till  Sept?22  and  pending  Rs12.8bn  is  to  be  invested  by  FY25E.  It  will  be  funded  through  internal accruals and asset monetization proceeds. Entire Rs600m loan to related party  has been unwound and there is no outstanding exposure currently. PNC is in talks with  investors to monetize 8 assets (6 HAMs, 1 BOT and 1 annuity) and is confident of signing  definitive agreements of at?least few assets by Mar?23.

Proven credentials and strong execution?led earnings growth; maintain BUY  

We  estimate  revenue/EPS  CAGR  of  13.5/14.5%  for  PNC  over  FY22?25  led  by  strong  backlog. Robust cash position and operating cash  flows should be largely adequate to fund outstanding equity commitments of HAM projects. Over the years, PNC has created  a strong track in project execution while maintaining stable margins and balance sheet integrity.  Valuations  are  attractive  at  10.2x/8.8x  FY24/25E  EPS  without  adjusting  for  value of assets. Maintain BUY with SOTP based PT of Rs410.

Valuations

We estimate revenue/EPS CAGR of 13.5/14.5% for PNC over FY22?25 led by strong  backlog.  Robust  cash  position  and  operating  cash  flows  should  be largely adequate to fund outstanding equity commitments of HAM projects. Over  the  years,  PNC  has  created  a  strong  track  in  project  execution  while maintaining  stable  margins  and  balance  sheet  integrity.  Valuations  are attractive at 10.2x/8.8x FY24/25E EPS without adjusting for value of assets. We value PNC’s EPC business at 14x FY24E EPS and value equity invested in road assets at Rs60/share. Maintain BUY with SOTP based PT of Rs410.

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