PNC Infratech: On the growth highway

The Centre’s increasing emphasis on road projects through pure construction contract format (engineering, procurement and construction – EPC) should benefit major players in the segment such as PNC Infratech. The company has a pan-India presence and undertakes EPC and maintenance contracts to build roads and other structures, such as bridges, flyovers, airport runways, industrial areas and transmission lines. Long-term build, operate and transfer (BOT) mode of road projects form a smaller part of the company’s portfolio.

The company, with its large fleet of construction equipment and experienced employee base, has an impressive execution track record. Its healthy operating and net profit margin, strong order book growth and the Centre’s thrust on the road sector through the EPC format, should translate into healthy revenue and profit over the next couple of years.

The stock’s current P/E valuation is about 10 times and it trades close to its historical average of around nine times. Its listed EPC peer KNR Construction trades at a P/E multiple of around 13 times. Long-term investors can buy the stock.

The Centre’s intent to revive the road sector saw it shift focus from the BOT to projects through the EPC format since 2014-15. In 2015-16, the allocation for road projects through the EPC mode was close to 3,000 km, more than 70 per cent of the overall allocation. The introduction of a new hybrid annuity model (a combination of EPC and BOT-annuity), in which the Centre bears the toll risk, should accelerate the sector’s growth.

NHAI and the Ministry of Road Transport and Highways (MORTH) are expected to add close to 15,000 km in 2016-17, with the majority constructed through the EPC and HAM models. The total sum allocated for highway construction is close to ₹55,000 crore. This increased focus by the Centre on road investment is expected to continue for the next few years as well. Besides, the Centre’s co-operation with States for constructing State highways is also expected to increase demand for road projects.

PNC Infratech has executed close to 50 EPC projects across 13 States. Of this, 31 are road projects and 19 are airport runway projects. With around 10 established players in the EPC road segment, PNC’s experienced team with strong execution capabilities places the company on a strong footing. The current order book stands at ₹5,537 crore, which is 2.3 times the company’s 2015-16 revenue. More than 99 per cent of the current order book comes from EPC road projects. As of March 2016, the company operated a total of five road BOT projects (2,624 total lane km) and one road project (868 total lane km) in maintenance format.

The Nagina-Kashipur highway project along the Uttarakhand-Uttar Pradesh and Varanasi-Gorakhpur highway project in Uttar Pradesh are the two key EPC road projects under execution — the remaining order book values of these projects as of March 2016 are ₹1,156 and ₹869 crore respectively.

The company expects to add close to ₹5,000 crore orders in the next financial year. PNC’s approach of not adding more BOT projects but bidding for hybrid annuity model projects in addition to EPC contracts should bode well for the company.

PNC Infratech’s revenue at ₹2,411 crore for the fiscal year 2015-16 is 28 per cent higher than in 2014-15. Operating and net profit for fiscal year 2015-16 stood at ₹407 and ₹215 crore ,respectively. Both operating profit and net profit for fiscal 2015-16 stood at 45 per cent and 136 per cent higher than in 2014-15 respectively.

The operating margin and net profit margin in 2015-16 came in at around 17 and 9 per cent respectively. The consolidated debt-to-equity ratio is at a comfortable 1.22 times.

The BOT projects accounted for the entire debt of close to ₹1,600 crore at the end of 2015-16. PNC’s revenue grew at an annualised growth rate of 17 per cent between 2011-12 and 2015-16.

Between 2011-12 and 2015-16, operating and net profit grew at an average annualised rate of 28 per cent. The operating profit margin has increased from 12 per cent in 2011-12 to 17 per cent in 2015-16. During the same period, net profit margin increased from 6 per cent to 9 per cent.

The company’s EPC road business debtor days and net working capital days for 2015-16 was 68 and 92 respectively.

This is an improvement from the debtor days and net working capital days of 115 and 128 respectively in 2011-12.

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