NEW DELHI: Shares of rallied over 50 per cent last week, and are up 200 per cent from their March 2020 lows, but analysts believe this rally isn’t over.
They see a further 35 per cent upside in the stock, as the company’s order book gives robust revenue visibility for the medium term. Low leverage, good pace of execution and strong cash flow track record place this stock among the top midcap EPC (engineering, procurement and construction) bets, analysts said.
Analysts noted PNC’s order book stood at Rs 9,852 crore at the end of the December quarter. But that excluded two HAM projects: Challakere-Hiriyur with an EPC value of Rs 935 crore and Meerut-Nazibabad project with a bid cost of Rs 1,412 crore.
They also exclude two EPC projects of Delhi-Vadodara alignment worth Rs 1,548 crore, and irrigation and water projects worth Rs 3,766 crore.
Including these projects, the company’s order book stands at nearly Rs 18,000 crore, and lift the order book-to-trailing 12-month revenue to 4.1 times, which is likely to become 100 per cent executable by April.
“This provides revenue visibility over the next three years,” ICICIdirect said.
Under the hybrid annuity model (HAM), the government bears 40 per cent of a project cost while the remaining funding comes from the contractor. It is a mix of pure EPC and BOT (build-operate-transfer) models. In the EPC model, a player just executes the order book and gives it back to the government, while in the BOT model, the player has to build, operate and maintain a road project for a specific period, before giving it back to the government.
For the first nine months of FY21 so far, PNC Infra bagged Rs 7,700 worth of orders and bade for Rs 15,000 crore worth of road projects. The company is expecting to bag additional orders worth Rs 2,000 crore in March quarter and Rs 10,000 crore in FY22.
“A high share of the orderbook (44 per cent) being L1, with two HAMs and two EPC road projects awaiting appointed date (AD), there remains only minor concerns and they are expected to be addressed by the end of this financial year,” said Phillip Capital.
L1 is the lowest commercial bid designated in a financial bid evaluation.
Nomura India said the company management had guided for 10 per cent revenue decline in June quarter, but now it is guiding for flattish growth (excluding early completion bonus) over FY20.
“This highlights that execution pickup has been materially higher than management estimates. This follows a trend of PNC Infra exceeding its sales guidance in FY19 and FY20 as well,” it said.
Profit for PNC Infra more than doubled to Rs 176 crore in December quarter from Rs 67 crore the year-ago period. Revenue rose 14 per cent YoY to Rs 1,582 crore from Rs 1,390 crore. Ebitda margin expanded to 25.7 per cent in the third quarter from 24.3 per cent in the second and 21.4 per cent in the year-ago quarter.
The company management said NHAI (National Highway Authority of India) has already awarded 2,424 km in the first nine months and is expected to award further 4,800-5,200 km soon. Thus, NHAI is likely to surpass its target of 4,500 km award in FY21.
For FY22, that target is likely to hit 8,500 km, which provides incremental opportunity for the company to bag road projects, analysts said.
Analysts noted that the company needs to infuse Rs 930 crore worth of equity in the HAM projects and is confident of doing so via internal accruals. Out of this, it has already invested Rs 540 crore. It would need to invest Rs 350 crore in FY22 and Rs 170 crore in FY23.
The management is looking to add more HAM projects to the portfolio in the light of its strong cash flow.
Edelweiss said the company’s toll collections rebounded sharply in the December quarter, as economic activity picked up. Total collections for the five key toll projects grew 16–42 per cent YoY. The management is in talks with strategic investors to monetise some of these assets. “This will further improve balance sheet strength,” Edelweiss said.
Nomura said PNC can fund equity requirements for HAM projects largely from internal accruals over FY21-23 — without deleveraging via asset sales, unlike its peers, due a low-debt balance sheet.
“In the event of sale of an asset like the Ghaziabad-Aligarh Expressway and potentially some toll/HAM assets as targeted by the management, the ability to take further orders to support growth would increase substantially,” it said.
PNC sees good opportunity in the water segment and is looking to bid in UP and neighboring states. It said it would continue to focus on the road sector, diversifying into water at the same time.
Phillip Capital said the company is smartly tracking the EPC evolution curve and diversifying its orderbook into non-roads segments, with water and irrigation now forming over 25 per cent of its overall order book.
“It has also maintained its net cash status, with a balance sheet strong enough to fund HAM equity requirements on its own,” the brokerage said.
Nomura values the stock at Rs 364 on a FY23 EPS estimate of Rs 26.7. The stock climbed to Rs 291 last week, but traded at Rs 272 on Monday. Nomura target suggests 36 per cent potential upside. Phillip Capital sees the stock at Rs 330.
“We estimate a robust 22 per cent revenue growth CAGR and 25 per cent EPS growth CAGR over FY21-23 led by a strong order backlog. Our FY22/FY23 estimates factor in slightly lower Ebitda margins at 13 per cent vis-à-vis 13.5-14 per cent, historically due to higher input prices and execution of water orders with higher share of bought-out components — nearly two-third of the order value,” Centrum Broking said.
Centrum valued PNC’s EPC business at 14 times FY23 EPS and saw the equity invested in road assets at Rs 45 per share to arrive at a target of Rs 340. IDBI Capital sees the stock at Rs 331, Anand Rathi at Rs 312, Edelweiss at Rs 305 and ICICIdirect at Rs 300.