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PNC Infratech (PNC) has signed definitive agreement with Highways Infrastructure Trust (KKR) for sale of 12 road assets at Enterprise value of INR 90bn. Equity value of the deal stands at INR 29bn, implying P/B of 1.7x. Monetization proceeds will be used to fund pending equity commitment and for future growth. Details are mentioned below:-

* PNC has entered into definitive agreement with Highways Investment Trust (KKR) for sale of 12 road assets. It includes 11 HAM assets and 1 BOT Toll asset.

* Enterprise Value of the sale is INR 90bn and the implied equity value is INR 29bn (including earn-outs). Implied valuation multiple is 1.7x on equity invested of INR 17.4bn.

* Of the above 12 assets, 7 HAMs and 1 BOT (Toll) are operational and the balance 4 HAMs are under construction (construction likely to be completed by Mar-24).

* We expect the sale proceeds to come in two or more tranches depending on the COD of the under construction assets. Since the deal valuation also includes earnouts, some part of the consideration may also come with a lag.

* KPMG India Services LLP acted as the exclusive financial advisor while Shardul Amarchand Mangaldas & Co acted as the legal advisor to the company.

* PNC had guided for the asset sale plans to be firmed up within FY24 and signing of this definitive agreement with a credible buyer like KKR is a big positive for the stock.

* The valuation multiple of 1.7x for the sale is higher than the past transactions in the industry (1.3x-1.55x) and is also sharply above our estimates.

* Transaction releases sizeable cash flow of INR 29bn for future growth. We also note that PNC has recently settled claims worth INR 7.7bn (pre-tax) with NHAI which should yield further cash flow.

* For PNC's current portfolio of HAM assets, total equity requirement stands at INR 29.4bn. Of this, PNC has already invested INR 18.4bn till Sept-23 and balance INR 11bn is to be invested by Mar-26E.

* Maintain Buy with revised price target of INR 515: Deal valuation is significantly above our estimates. We valued the assets at 1x P/B against deal valuation of 1.7x P/B with our lower valuation also reflecting uncertainty in timing/delays of asset sale. Based on the announced deal, we have upgraded our asset valuation by INR 55/share to INR 140/share. We continue to value other HAM assets at 1x P/B and BOT assets at 0.7x P/B. In addition, there is also room for a re-rating of the EPC business (valued at 13x FY25E EPS currently in SOTP) given the sizeable cash inflow from deal and claim settlement which will provide growth capital and also improve the balance sheet. Stock currently trades at 13.5x FY25E EPS (without adjusting for any value of assets). We value PNC on SoTP basis to arrive at a revised price target of INR 515 (increased from INR 460).

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