PNC INFRATECH. Land acquisition challenges remain. Land acquisition issues continue to play spoilsport. Toll collection: Robust spurt

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1 India Midcaps RESULT UPDATE PNC INFRATECH Land acquisition challenges remain India Equity Research Infrastructure - Construction Land acquisition issues restricted PNC Infratech s (PNC) Q3FY18 top-line growth to 2% YoY. Price variation benefit of ~INR33mn received in the Agra bypass project boosted EBITDA margin to 14% (up 100bps YoY). Higher capital charges led to adjusted PAT declining 16% YoY to INR432mn. Total orders in hand stand at ~IN101bn (7x TTM revenue), imparting healthy revenue visibility. With work expected to commence on three road projects over the next couple of months, we believe revenue growth will improve in FY19. Stock performance will track commencement of work on these projects, in our view. Maintain 'BUY' with SOTP based target price of INR205 as we roll over to FY20E. Land acquisition issues continue to play spoilsport Land acquisition delays have impacted PNC s performance over the past six quarters, though things seem to be improving now. The company has received appointed date for the Chitradurga Davanagere project. Management expects construction on three projects Jhansi-Khajuraho Package 1 & 2 and the Bhojpur-Buxar project to start before FY18 end. As a result, except the Chakeri-Allahabad project, work will start on all other projects by FY18 end. Management has guided for 40-50% revenue growth in FY19. We believe, commencement of work on the three projects will determine FY19 top-line growth. Toll collection: Robust spurt The company s BOT projects clocked healthy traffic growth during the quarter. Toll revenue jumped ~11-96% YoY across various projects (Q3FY17 toll collection was impacted by demonetisation). BOT portfolio revenues (ex-ghaziabad Aligarh project) came in at INR1.7bn (INR1.2bn in Q3FY17). Outlook and valuations: Land acquisition key; maintain 'BUY' We like PNC s cluster-based strategy, healthy order book and lean balance sheet. While land acquisition has been an issue over the past six quarters, we believe relief is in store and expect revenue traction to improve in FY19. Start of work on new projects is key monitorable for investors. We maintain BUY with SOTP-based target price of INR205 (INR150 from EPC business at 20x FY20E P/E and balance from DCF valuation of BOT projects) as we roll over to FY20E. Financials Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. (INR mn) Year to March Q3FY18 Q3FY17 % change Q2FY18 % change FY17 FY18E FY19E Revenues 4,725 4, , ,891 16,912 25,759 EBITDA ,210 2,365 3,474 Adj. profit (16.1) ,844 1,371 1,897 Dilu.EPS (INR) (16.1) Dilu.P/E (x) * EV/EBITDA (x) * ROAE (%) * for implied construction business EDELWEISS RATINGS Absolute Rating Investment Characteristics MARKET DATA (R:, B: PNCL IN) BUY Growth CMP : INR 173 Target Price : INR week range (INR) : 228 / 100 Share in issue (mn) : M cap (INR bn/usd mn) : 44 / 693 Avg. Daily Vol. BSE/NSE ( 000) : SHARE HOLDING PATTERN (%) Current Q2FY18 Q1FY18 Promoters * MF's, FI's & BKs FII's Others * Promoters pledged shares (% of share in issue) PRICE PERFORMANCE (%) BSE Midcap Index Stock Edelweiss Securities Limited : NIL Stock over Index 1 month (7.3) (10.7) (3.4) 3 months (2.3) 12 months Parvez Akhtar Qazi parvez.qazi@edelweissfin.com February 15, 2018

2 (INR bn) (x) Infrastructure - Construction Other highlights: Order book: As at Q3FY18 end, order book stood at INR79.8bn. Apart from this, PNC has also won the Chakeri-Allahabad project (bid project cost of INR21.6bn), taking its total order book to ~INR101bn. Chart 1: Robust revenue visibility FY12 FY13 FY14 FY15 FY16 FY17 Q3FY Order book (L.H.S.) Order book / TTM revenues Source: Edelweiss research Capex: PNC has guided for capex of ~INR1bn for FY18. Equity infused (till date) in BOT projects is ~INR4.9bn; pending equity requirement for the five HAM projects is ~INR6bn to be incurred over FY Karnataka HAM project status: PNC received appointment date in December Jhansi-Khajuraho Pkg 1 and 2 HAM projects: Management expects to receive appointment date before March Nagina-Kashipur: 80% land is available and work on the project has started. Bhojpur-Buxar: Management expects work to start before FY18 end. Chakeri Allahabad: Management expects work to start by October PNC has received INR582mn as bonus for early completion of Agra-Firozabad project in February Interest cost in operational BOT projects has declined by ~120bps in CY17, leading to interest cost savings of INR200mn annually. 2 Edelweiss Securities Limited

3 PNC Infratech Table 1: Toll collection on BOT projects (INR mn) Toll projects under operation Q216 Q316 Q416 Q117 Q217 Q317* Q417 Q1FY18 Q2FY18 Q3FY18 Kanpur - Kabrai** Gwalior - Bhind Kanpur - Lucknow - Ayodhya Bareilly-Almora *** Ghaziabad Aligarh**** Total 1,138 1,330 1,414 1,566 1,252 1,306 1,654 1,606 1,492 1,812 Source: Company, Edelweiss research * Toll collection impacted by demonetisation **Toll collection commenced from May 7, 2015 *** Toll collection commenced from October 19, 2015 **** Partial toll collection commenced with effect from 24th June Edelweiss Securities Limited

4 Infrastructure - Construction Financial snapshot (INR mn) Year to March Q3FY18 Q3FY17 % change Q2FY18 % change YTD FY18 FY18E FY19E Net revenues 4,725 4, , ,977 16,912 25,759 Direct costs 3,198 3,228 (0.9) 1, ,347 11,819 18,130 Staff costs ,208 1,839 Other expenses (1.0) ,187 1,520 2,316 Total expenditure 4,062 4, , ,398 14,547 22,285 EBITDA ,579 2,365 3,474 Depreciation EBIT ,024 1,603 2,578 Other income (33.1) Interest (15.3) Add: Prior period items Add: Exceptional items Profit before tax ,465 1,490 2,285 Provision for taxes 27 (6) NA Reported profit ,395 1,371 1,897 Adjusted profit (16.1) ,371 1,897 Equity capital Diluted shares (mn) Adjusted Diluted EPS (16.1) as a % of net revenues Direct costs Other expenses EBITDA Adjusted profit Tax rate 2.8 (0.8) Edelweiss Securities Limited

5 Company Description PNC Infratech Incorporated in 1999, PNC is a civil engineering and infrastructure development company with expertise in execution of highways, bridges, flyovers, airport runways, power transmission lines, railway projects, development of industrial areas etc. The company is also present in the asset development space. Its current portfolio consists of 6 BOT and 1 OMT project (post the sale of Jaora Nayagaon project). In January 2011, NYLIM Jacob Ballas infused INR1.5bn in PNC as part of PE investment, acquiring 14.29% stake in the company. It went public in May 2015 with public issue of ~12.9mn shares at INR378/share aggregating INR4.9bn (comprising fresh issue of 11.5mn shares aggregating INR4.4bn and an offer for sale of 1.42mn shares by NYLIM Jacob Ballas aggregating ~INR537mn). Issue proceeds were utilised for meeting the company s capex and working capital requirements, debt repayment and meeting equity commitment for a BOT project. Investment Theme PNC, an established player in India s road sector, specialises in executing large scale EPC contracts 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. A measured approach to sectoral diversification and gradual entry in BOT projects place PNC in a sweet spot to capture large upcoming opportunities in the infra space. In order to insulate itself from any slowdown in the roads sector (its bread and butter) and expand growth opportunities, PNC is steadily venturing into other segments like airport runways, BOT projects, railways, power T&D as well. Key Risks Execution risk While PNC has excellent execution skills, potential entry in new segments and geographies exposes it to execution risk. Moreover, the average size of projects is increasing and also they are more complex than what the company has executed so far. Completion of such projects within the stipulated time and cost will be paramount to maintain profitability. Concentration risk The company s order book is regionally concentrated, primarily in North and Central India. This exposes PNC to concentration risk. Also, it is skewed towards a few large orders with the top 5 projects contributing 83% to the current order book. In case these projects face execution issues due to land acquisition/other clearances, the company s revenue growth may be adversely impacted. Inherent risks associated with toll projects PNC s presence in the toll road segment exposes it to risks associated with unpredictability of traffic growth etc 5 Edelweiss Securities Limited

6 Infrastructure - Construction Financial Statements Key Assumptions Macro GDP(Y-o-Y %) Inflation (Avg) Repo rate (exit rate) USD/INR (Avg) Company Raw Material (% net rev) Order intake (INR bn) Y-o-Y growth (%) (62.7) (36.2) 56.6 Book-to-bill ratio (x) Order backlog (INR bn) Order backlog growth (%) (2.8) Revenue growth (% yoy) (16) Employee (% of net rev) Capex (INR mn) 1,771 1,250 1,100 1,100 Job work (as % of sales) Other admin (% net rev) Avg. Interest rate (%) Depreciation rate (%) Dividend per share Inc. in invts (INR mn) ,500 2,500 Debtor days Inventory days Other cur. assets days Payable days Other creditors days Provisions days Tax rate (%) Loans & adv (% net rev) Incremental debt 1, (2,291) - Income statement (INR mn) Income from operations 16,891 16,912 25,759 34,558 Direct costs 12,193 11,819 18,130 24,323 Employee costs 1,003 1,208 1,839 2,468 Other Expenses 1,485 1,520 2,316 3,107 Total operating expenses 14,681 14,547 22,285 29,898 EBITDA 2,210 2,365 3,474 4,660 Depreciation ,021 EBIT 1,677 1,603 2,578 3,640 Add: Other income Less: Interest Expense Add: Prior period items Profit Before Tax 2,192 1,490 2,285 2,925 Less: Provision for Tax Prior Period(Net of Tax) Reported Profit 2,097 1,371 1,897 1,930 Adjusted Profit 1,844 1,371 1,897 1,930 Shares o /s (mn) Adjusted Basic EPS Diluted shares o/s (mn) Adjusted Diluted EPS Adjusted Cash EPS Dividend per share (DPS) Dividend Payout Ratio(%) Common size metrics Operating expenses EBITDA margins Adjusted profit margins Growth ratios (%) Revenues (16.1) EBITDA (16.9) PBT (6.1) (32.0) Adjusted Profit (5.7) (25.7) EPS (5.7) (25.7) Edelweiss Securities Limited

7 PNC Infratech Balance sheet (INR mn) As on 31st March FY17 FY18E FY19E FY20E Share capital Reserves & Surplus 15,209 16,547 18,412 20,310 Shareholders' funds 15,722 17,060 18,925 20,823 Short term borrowings 1,115 1,115 1,115 1,115 Long term borrowings 576 1,176 2,876 6,576 Total Borrowings 1,691 2,291 3,991 7,691 Long Term Liabilities 1,675 3,892 6,609 7,455 Def. Tax Liability (net) (23) (23) (23) (23) Sources of funds 19,065 23,221 29,502 35,947 Gross Block 6,001 7,251 8,351 9,451 Net Block 3,459 3,947 4,151 4,231 Capital work in progress Intangible Assets Total Fixed Assets 3,557 4,025 4,230 4,309 Non current investments 4,676 5,176 7,676 10,176 Cash and Equivalents ,243 Inventories 1,535 2,027 2,642 3,355 Sundry Debtors 6,309 5,090 7,331 8,196 Loans & Advances 1,001 1,002 1,526 2,048 Other Current Assets 6,483 7,780 10,113 13,147 Current Assets (ex cash) 15,327 15,898 21,613 26,747 Trade payable 2,369 2,488 4,466 6,196 Other Current Liab 2, Total Current Liab 4,849 2,731 4,750 6,528 Net Curr Assets-ex cash 10,478 13,168 16,863 20,219 Uses of funds 19,065 23,221 29,502 35,947 BVPS (INR) Free cash flow (INR mn) Reported Profit 2,097 1,371 1,897 1,930 Add: Depreciation ,021 Interest (Net of Tax) Others (349) (344) (491) (682) Less: Changes in WC 2, ,510 Operating cash flow (213) 1,627 1, Less: Capex 1,771 1,250 1,100 1,100 Free Cash Flow (1,984) (691) Cash flow metrics Operating cash flow (213) 1,627 1, Investing cash flow (1,803) (1,750) (3,600) (3,600) Financing cash flow 1, (2,291) - Net cash Flow (444) 477 (4,109) (3,191) Capex (1,771) (1,250) (1,100) (1,100) Dividend paid (161) (32) (32) (32) Profitability and efficiency ratios ROAE (%) ROACE (%) Debtors Days Payable Days Cash Conversion Cycle Current Ratio Gross Debt/EBITDA Gross Debt/Equity Adjusted Debt/Equity Net Debt/Equity Interest Coverage Ratio Operating ratios Total Asset Turnover Fixed Asset Turnover Equity Turnover Valuation parameters Adj. Diluted EPS (INR) Y-o-Y growth (%) (5.7) (25.7) Adjusted Cash EPS (INR) Diluted P/E (x) P/B (x) EV / Sales (x) EV / EBITDA (x) Dividend Yield (%) *for implied construction business Peer comparison valuation Market cap Diluted P/E (X) EV / EBITDA (X) ROAE (%) Name (USD mn) FY18E FY19E FY18E FY19E FY18E FY19E PNC Infratech KNR Constructions Sadbhav Engineering 1, Median AVERAGE Source: Edelweiss research 7 Edelweiss Securities Limited

8 Infrastructure - Construction Additional Data Directors Data Mr. P. K. Jain Chairman & Managing Director Mr. N. K. Jain Whole Time Director Mr. C. K. Jain Managing Director Mr. Y. K. Jain Managing Director Mr. A. K. Rao Whole Time Director Mr. C.R. Sharma Independent Director Mr. S. C. Kalia Independent Director Mr. A. K. Gupta Independent Director Mr. R. K. Gupta Independent Director Mrs. Deepika Mittal Independent Director Auditors - M/s. Purushottam Agrawal & Co. & M/s S.S. Kothari Mehta & Co. *as per last available data Holding Top 10 Perc. Holding Perc. Holding HDFC Asset Management 7.12 Alberta Merchants 6.16 ICICI Prudential Asset Management 2.96 Goldman Sachs India Fund 2.72 SBI MF 2.43 Birla Sunlife Asset Management 2.34 Sundaram Asset Management 1.61 India Midcap (Mauritius) Ltd BNP Paribas Asset Management 1.25 Reliance Capital Trustee 1.18 *as per last available data Bulk Deals Data Acquired / Seller B/S Qty Traded Price 24 Mar 2017 Nylim Jacob Ballas India (Fvci) Iii Llc Sell Mar 2017 Nylim Jacob Ballas India (Fvci) Iii Llc Sell *as per last available data Insider Trades Reporting Data Acquired / Seller B/S Qty Traded No Data Available *as per last available data 8 Edelweiss Securities Limited

9 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 (INR) PNC Infratech Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai Board: (91-22) , Aditya Narain Head of Research ` Coverage group(s) of stocks by primary analyst(s): Infrastructure - Construction Ahluwalia Contracts, Ashoka Buildcon, Hindustan Construction Co., J Kumar Infraprojects, KNR Constructions, NBCC, Nagarjuna Construction Co, PNC Infratech, Sadbhav Engineering, Simplex Infrastructures Ltd, Supreme Infrastructure Recent Research Date Company Title Price (INR) Recos 15-Feb-18 NBCC Focus on execution; Result Update 15-Feb Feb-18 KNR Good performance; focus on Constructions order inflows; Result Update Ahluwalia Contracts Promising outlook; Result Update 208 Hold 322 Buy 346 Buy Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Rating Interpretation Buy Hold Reduce Total Rating Distribution* * 1stocks under review > 50bn Between 10bn and 50 bn < 10bn Market Cap (INR) Rating Buy Hold Reduce Expected to appreciate more than 15% over a 12-month period appreciate up to 15% over a 12-month period depreciate more than 5% over a 12-month period One year price chart PNC Infratech 9 Edelweiss Securities Limited

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