Tactical BUY Recommendation Of PNC Infratech Ltd By Edelweiss For 60% Upside Gain

PNC, an established player in India’s road sector, specialises in executing large scale EPC and HAM projects with special focus on North and Central India. A conservative bidding strategy centered on ‘cluster based’ project location (helping it reap backward integration benefits), strong asset base and lean working capital have reinforced its credentials. In order to insulate itself from any slowdown in the roads sector and to expand its growth opportunities, PNC is steadily venturing into other segments like Water, Irrigation, Metro, Airport Runways, as well. We believe that PNC’s stock is a probable candidate for significant re-rating due to (a) robust order book of INR 18,000 cr, (b) healthy balance sheet with strong internal accurals(c)sufficient liquidity(further strengthened from the sale of BOT asset), (d) steady working capital, and (e) stable debt & low debt/EBITDA. We recommend ‘Tactical BUY’ on PNC with a target price of INR385/share with an upside of 60%.

Strong thrust on infra spending – a key catalyst for PNC’s growth

Despite the pandemic , government’s commitment towards economic revival boosted road awarding and construction post Oct’20. NHAI awarded 4,800km of projects worth INR1.4lakh cr and constructed record 13,300km of highways in FY21. Increased spending on infrastructure in the FY22 budget and healthy NIP pipeline further indicated the possibility of higher project awarding in the coming years. The benefits of these initiatives can be gauged from PNC’s order book – the company reported record-high order book of INR18,000cr for 9MFY21, giving healthy revenue visibility for the next four years. Moreover, the company’s segmental and geographical expansion should further boost growth, and in turn, push its order book to INR22,000cr in FY23E.

Record-high order book to propel revenue; margin to recover from FY21 trough

While the pandemic created some problems, PNC showed great resilience with recovery in its Q3FY21 revenue (up 9% YoY). Backed by strong order book and higher order inflow, we expect revenue to grow 27%/24% in FY22E/FY23E. PNC has always maintained healthy profitability across cycles. Further, we believe PNC’s EBITDA margin will improve to 14.5% in FY23E on expectations of higher growth in the coming years and execution of water projects.

PNC’s strengths – stable NWC, low leverage and high RoCE

Historically, PNC has always maintained working capital cycle in a close range and kept leverage under control. Although large orders require higher investments, PNC’s internal accruals and funds from the BOT asset sale provide it with enough cushions to manage these expenses. The company is expected to generate strong cash flows and sufficient profitability to meet its capital needs, and thus, leverage will remain under check and RoCE is expected to reach 22% in FY23E.

Attractive valuation; recommend Tactical BUY with ~60% upside potential

At CMP of INR240/share, the stock is currently valued at 13x FY22E EPS and 9x of FY23E EPS. We believe PNC has multiple growth drivers such as (a) robust order inflows, (b) healthy revenue growth, lower debt, sufficient liquidity, and segmental and geographical diversification. Thus, we recommend ‘Tactical BUY’ with a target price of INR385/share.