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Asset sale on track; recovery in order inflow awaited

PNC Infratech’s (PNC) 2QFY24 results were in-line with our estimates. PAT grew by 6.6% YoY to INR 1.4bn (estimate: INR 1.42bn; consensus: INR 1.41bn). PY financials include revenue from toll collection contract of c.INR 1bn and impacts YoY revenue growth and margins. Revenue grew by 8.5% YoY to INR 16.9bn (16% YoY growth on adjusted base). EBITDA margin declined by 40bps YoY on adjusted base to 13.4% (estimate: 13.1%). Execution on JJM orders is largely on track to reach the guided level of INR 20bn+ in FY24. Order backlog moderated to c.INR 171n (2.3x TTM revenues) as on Sept-23 in absence of any inflows in YTD. PNC targets inflows of INR 100bn in FY24 backed by strong bid pipeline of c.INR 1.26tn (NHAI: INR 900bn, MSRDC: INR 300bn, MoRTH: 63bn). PNC is on track to monetize 12 assets from its portfolio (11 HAM + 1 Annuity) with part proceeds likely to be received within FY24. Maintain BUY with revised price target of INR 460.

* Results in-line with estimates: Revenue grew by 8.5% YoY to INR 16.9bn (estimate: INR 17.5bn) with adjusted growth at 16% YoY. JJM execution remained strong at INR 4bn in 2QFY24 (up 2.5x YoY). EBITDA grew by 10% YoY to INR 2.3bn while EBITDA margins declined 40bps YoY on adjusted base to 13.4%. PAT grew by 6.6% YoY to INR 1.4bn. Gross debt increased by INR 2.5bn YoY/INR 415mn QoQ to INR 5.3bn as on Sept-23. JJM debtors increased from c.INR 2.3bn in Mar-23 to c.INR 6bn in Sept-23 with execution too being robust at INR 8.2bn in 1HFY24 (up 3.4x YoY). Receivables increase is largely attributed to a tedious billing process rather than any funding constraint.

* Guides for order inflows of INR 100bn for FY24E backed by strong bid pipeline: PNC’s YTD inflows have been nil but it has maintained guidance of inflows of INR 100bn (Highways: 80-85%; Water, Railways, Metro: 15-20%) led by strong bid pipeline. NHAI bid pipeline stands at INR 900bn (HAM: INR 600bn, EPC: INR 300bn) with bid end date of Dec-23. Also, PNC has submitted bids for INR 300bn worth of MSRDC projects and INR 63bn of MoRTH projects in UP where bids are likely to open in Nov-23. PNC has guided for revenue growth of 10-15% YoY in FY24 with EBITDA margins of 13-13.5%.

* Asset monetization on track; proceeds will help fund equity commitment: PNC targets to monetize 12 assets (11 HAMs, 1 Annuity) of which 7 assets (equity invested: INR 9bn) have received PCOD/COD. Due diligence has been completed and PNC expects to sign the SPAs soon and receive part proceeds within FY24. Equity requirement for PNC’s portfolio of 22 HAM assets stands at INR 29.4bn of which INR 18.4bn is invested till Sept23. Balance proceeds of INR 12.3bn will be invested over FY24-27E and will be funded through internal accruals and monetization proceeds.

* Maintain BUY with SoTP based price target of INR 460: We like PNC for its track record of delivering robust growth while preserving margins and balance sheet. However, given the continued delay in NHAI ordering, we have lowered our FY25 revenue/PAT estimates by 4%/5%. We expect revenue/EPS CAGR of 12%/10% over FY23-25E. Valuations at 11.4x FY25E EPS vs. 5-year average trailing PE of 15x remain attractive. We maintain Buy with a revised SOTP based price target of INR 460 (EPC business valued at INR 394/share based on 13x FY25E EPS of INR 28.7 and HAM assets valued at P/B of 1x FY24E invested equity).

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