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Soft revenue but CF positive, fundamentals intact; retaining a Buy

The prolonged monsoon, awaited appointed dates for its recent hybrid annuities and slow progress at the AP irrigation order meant PNC’s Q2 revenue was soft. With the entire hybrid annuity portfolio likely to be appointed in H2 and as more water-supply orders come under execution, Q2 softness is likely to be short-lived. Operating profitability is still healthy, and balance-sheet strength intact. Monetisation efforts are underway to unlock and churn capital for better scale ahead. Our stance holds owing to the proven execution abilities. We retain our Buy rating with a higher TP of Rs416 (on rolling forward to FY25e).

No order in Q2, yet assurance sturdy. With no orders to cover Q2 execution, the OB shrank ~Rs12bn q/q to ~Rs193bn but the assurance is still ample (at ~2.9x TTM revenues). With Rs37bn-40bn revenue targeted for H2, and as it intends to keep growing beyond FY23, management looks to add Rs80bn-100bn in FY23. For this, on the radar are ~Rs110bn of bids placed and ~Rs500bn identified opportunities (from ~Rs800bn total, likely to be bid by Dec’22). A general trend of brisk awarding in H2, too, keeps it sanguine.

Net-cash status strengthened. Q2 PAT cash of ~Rs1.6bn and the contracted receivables cycle (by six days q/q), together more than sufficed for Q2 equity infused (~Rs0.8bn), higher inventories (~Rs0.9bn q/q), and lower mobilisation advances (~Rs0.8bn q/q). Consequently, net cash balance rose ~Rs0.8bn q/q to ~Rs2.4bn, and ammunition for a better scale is upheld.

Monetisation efforts continue. A bouquet of six hybrid annuities, a BOTannuity and a BOT-toll with ~Rs9.4bn equity invested (and ~Rs47bn SPV-level debt) is on the block. Open to sell piecemeal to many buyers, due diligence is already underway for three hybrids. Management looks to sign definitive agreements by this year end, and consummation is targeted for FY24.

Valuation. On slightly softer Q2 revenue, revenue estimates have been pruned a tad. However, earnings are higher (~6% for FY23e, ~5% for FY24e) on efficiently-managed inflation, contained capex, and controlled WC cycle. At the CMP, the stock (excl. investments) is available at PER of 7.3x our newly introduced FY25e. Risk. Considerable delay in appointed dates.

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