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Backlog strengthens; margin outlook sustained

PNC Infratech’s (PNC) Q4FY22 recurring PAT at Rs1.44bn (up 11% YoY) was marginally below estimate of Rs1.5bn due to lower margins. Reported PAT grew by 7% YoY to Rs1.38bn as it included early completion bonus of Rs827m for Purvanchal e-way package-5 offset by impairment of investment of Rs903m in Ghaziabad Aligarh (GAEPL). Proceeds of Rs2.75bn from sale of GAEPL will supplement internal accruals for funding pending equity investments of Rs14.8bn in HAM assets. PNC’s backlog has strengthened to ~Rs214bn (3.4x FY22 revenues) aided by strong order wins in Q4FY22. PNC has guided for 15%+ revenue growth and is confident of 13-13.5% margins in FY23E. PNC also indicated it is willing to take a pragmatic view on its valuation expectations for HAM assets and will focus on freeing up its equity. Maintain BUY.

Earnings marginally below estimates due to lower margins

Revenue grew by 11.6% YoY to Rs18.3bn (in-line). EBITDA was flat YoY at Rs2.32bn (estimate: Rs2.45bn). EBITDA margins contracted 140bps YoY to 12.7% (estimate: 13.5%) due to higher input costs and weak collections of Rs890m in toll revenue contract (Rs40- 45m loss). EBITDA margin without this contract was 13.6%, in-line with general margin range. NWC improved QoQ to 77 days (96 days in Dec-21) aided by year-end recoveries. Revenue from BOT assets declined 4.9% YoY to Rs2.2bn in Q4 (down 11% QoQ).

Backlog improved led by strong inflows in Q4; targets order wins of Rs80-100bn in FY233

Inflows of Rs91bn in FY22 strengthened the backlog to ~Rs214bn (3.4x revenue). Out of these, seven newly won HAMs and one JJM order with total EPC value of Rs89bn await ADs. PNC expects to receive ADs for 7 HAMs in Q3FY23. Total contract value of 3 JJM orders under execution has risen from Rs28bn to Rs47bn upon finalisation of BOQ/DPR. PNC has guided for revenue of Rs15bn/Rs20bn in FY23/24E from its JJM backlog of Rs67bn. Overall, PNC has guided for revenue growth of 15%+ in FY23E with EBITDA margins of 13-13.5%. It was also clarified that JJM orders have escalation for HDPE pipes (~80% of project cost). Targeted inflows is Rs80-100bn in FY23E mainly from Highways.

Internal accruals and proceeds from asset sale to support capital commitments

PNC has total equity requirement of Rs24bn for HAMs of which Rs9.1bn is invested and Rs14.8bn is to be invested by FY25E. This will be funded through internal accruals and asset monetization proceeds and PNC has no plans to raise fresh equity capital. PNC completed sale of its 35% stake in GAEPL to Cube for receipt of Rs2.75bn (PNC’s total investment: Rs4.43bn) leading to impairment of Rs1.68bn (Rs1.28bn in standalone books). Monetisation process for 5 operational HAMs (equity investment of Rs5.2bn) has lagged guidance due to gap in valuation expectations. Management however indicated that it is willing to take a more pragmatic view and prioritise release of equity.

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

We estimate revenue/EPS CAGR of 14% each for PNC over FY22-24 led by strong backlog. Robust cash position and operating cash flows should be largely adequate to fund the outstanding equity commitments of HAM projects. Given the sharp rise in input costs, we have lowered margin estimates by 50bps each in FY23/24. Valuations are attractive at 11x/10.2x FY23/24E EPS. We value PNC’s EPC business at 14x FY24E EPS and value equity invested in road assets at Rs66/share. Maintain BUY with a PT of Rs416.

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