IPO Review Rating matrix Rating : Unrated Issue Details Issue Opens 8-May-15 Issue Closes 12-May-15 Issue Size ( Crore) 458-488 Price Band ( ) 355-378 No of Shares on Offer (crore) 1.28 QIB (%) 50 Non-Institutional (%) 15 Retail (%) 35 Objects of the Issue Objects of the Issue Funding working capital requirements Investment in subsidiary, PNC Raebareli Highways Private Limited for part-financing the Raebareli-Jaunpur Project Investment in capital equipment Repayment/ prepayment of certain indebtedness General corporate purposes Shareholding Pattern Amount 150 crore 65 crore 85 crore 35 crore 123-153 crore Pre-Issue Post-Issue Promoter & promoter group 72.3% 56.1% Institutional 14.3% 31.4% Non-institutional 13.4% 12.5% Financial Summary Crore FY10 FY11 FY12 FY13 FY14 Total Revenue 751.6 1139.1 1273.3 1303.6 1145.6 EBITDA 92.3 128.8 153.5 155.8 140.3 EBITDA Margin (%) 12.3 11.3 12.1 12.0 12.2 PAT 45.2 71.1 78.4 76.5 66.9 Diluted EPS 8.8 13.9 15.3 14.9 13.0 Valuation Summary (at 378 ;upper price band) (x) FY11 FY12 FY13 FY14 EV/EBITDA 14.6 12.2 12.0 13.4 P/E 27.3 24.7 25.4 29.0 Research Analyst Deepak Purswani, CFA deepak,purswani@icicisecurities.com Nikunj Gala nikunj.gala@icicisecurities.com May 7, 2015 PNC Infratech (PNC) is an infrastructure construction, development & management company with expertise in the execution of projects like highways, bridges, flyovers, power transmission lines airport runways and industrial areas. The company has executed 42 major projects on an EPC basis and is currently executing 23 projects on an EPC basis. PNC has seven BOT (out of which three are operational) and one OMT projects in its portfolio. The order book in terms of total value of contract including escalation is 7849.7 crore (outstanding value: 3444.8 crore) as on March 31, 2015. In 2011, NYLIM JB, a PE firm, acquired a stake in PNC and currently holds 14.3% of the pre-offer capital of the company. NYLIM JB is diluting 25% of its stake via this issue. Investment Rationale Experienced, established EPC player PNC has an established track record in executing large construction projects, particularly in the roads, highways and airport runways sectors. The company has executed 42 major infrastructure projects on an EPC basis, acquiring experience particularly in the timely execution of EPC contracts since its incorporation. Additionally, PNC has also completed redevelopment of an industrial area at Narela, New Delhi. Currently, the company is undertaking a power transmission line project and also construction work for a double track electrified railway line as a part of the Dedicated Eastern Freight Corridor. Furthermore, PNC owns a significant part of equipment and personnel required for the execution of projects, which helps it to mobilise resources to project sites at short notice. Robust order book, strong financials The order book in terms of value of total contract value including escalation is 7849.7 crore (outstanding value: 3444.8 crore) as on March 31, 2015. In terms of financials, revenues have grown at 11% CAGR in FY10-14 to 1145.6 crore. The EBITDA margin has remained at the level of 11-12%. It has also received a credit rating of CARE A for long term and CARE A1 for short-term. Concerns PNC Infratech Price band 355-378 Foray into new functional and geographic areas Delays in construction of current projects Unable to pass on cost escalation in fixed sum contracts EPC business is highly dependent on a limited number of customers Outstanding litigation against company, promoters, directors, subsidiaries, JVs and other group entities High trade receivable collection cycle High fixed cost due to ownership of large equipment and large number of employees Priced at annualised FY15 PE multiple of 20.5x on lower band; 21.8x on higher band At the IPO price band of 355-378, the stock is available at a multiple of 20.5-21.8x FY15 annualised diluted EPS.
Operational Data As on March 31, 2015, PNC is executing 23 infrastructure projects on an EPC basis and has seven BOT (out of which three are operational) and one OMT project under its portfolio. The order book in terms of value of contract including escalation is 7,849 crore as on March 31, 2015. These ongoing projects are located across 13 states in India Company Background PNC Infratech (PNC) is an infrastructure construction, development and management company, with expertise in the execution of major infrastructure projects, including highways, bridges, flyovers, power transmission lines, airport runways, development of industrial areas and other infrastructure activities. PNC provides EPC services on a fixed-sum turnkey basis as well as on an item rate basis for various infrastructure projects. The company also executes projects on a BOT basis (including on a DBFOT basis), operates them during the concession period on toll or annuity basis and, subsequently, transfer the projects. In 2013, PNC entered into a project on an OMT model as well. PNC is executing projects across 13 states in India. The company has executed 42 major infrastructure projects on an EPC basis, gaining experience particularly in the timely execution of EPC contracts since its incorporation. Currently, PNC is executing 23 infrastructure projects on an EPC basis and has seven BOT (out of which three are operational) and one OMT project under its portfolio. The order book in terms of value of contracts including escalation is 7,849 crore as on March 31, 2015. PNC s major clients include NHAI, Airports Authority of India (AAI), Delhi State Industrial and Infrastructure Development Corporation Ltd, Uttar Pradesh Power Corporation Ltd, RITES Ltd, Military Engineering Services, Uttar Pradesh State Highway Authority, Uttar Pradesh Expressway Industrial Development Authority, Haryana State Road Development Corporation, Dedicated Freight Corridor Corporation of India Ltd, MPRDCL and Public Works Department and State Government of Uttar Pradesh. In 2011, NYLIM JB, a PE firm, acquired a stake in PNC and currently holds 14.3% of the pre-offer capital of the company. NYLIM JB is diluting 25% of its stake via this issue. Exhibit 1: Order book trend ( crore) 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 5568 Order book Source: Company, ICICIdirect.com Research 6085 7849 FY13 FY14 FY15 Exhibit 2: Current order book break-up Power T&D 2.8% Airport runway 2.0% Road 95.0% Source: Company, ICICIdirect.com Research Water supply 0.2% Page 2
Established, experienced EPC player PNC has an established track record in executing large construction projects, particularly in the roads, highways and airport runways sectors. Additionally, the company has also completed re-development of an industrial area at Narela, New Delhi. PNC is currently undertaking a power transmission line project and construction work for a double track electrified railway line as a part of the Dedicated Eastern Freight Corridor. The company has been able to mobilise resources including equipment, raw material and personnel to project sites at short notice, as it owns a significant portion of equipment and personnel required for execution of projects. It has also built up significant storage facilities for critical materials like petroleum products, machinery, machinery parts and cement. This has led to an established relationship with certain government authorities in the infrastructure sector, including NHAI. PNC s experience, expertise and execution track record, as well as its association with industry bodies like National Highways Builders Federation, enable it to maintain such established relationship with such government authorities. Prudent procurement process & efficient execution PNC has been successful in operating in a timely manner even in relatively adverse weather conditions including unavailability of key resources like personnel, material, machinery in the vicinity of project sites and security challenges. The company s prudent procurement process and efficient project execution have helped it to achieve early completion of two projects, which were completed prior to the scheduled date of completion and for which it either received bonus payment or commenced early collection of toll. For instance, the NHAI awarded PNC a bonus for early completion of the four-laning road project of the Agra- Gwalior section of National Highway 3 (from 8.00 km to 24.00 km) in Uttar Pradesh. The company could also commence collection of toll over three months earlier than the scheduled date of completion of the Gwalior- Bhind Madhya Pradesh/Uttar Pradesh Border Road two-laning project through two sections (from 0.00 km to 50.00 km and, subsequently, from 50.00 km to 107.68 km) on National Highway 92, which was executed on a BOT basis. Strong financial performance In terms of financials, revenues have grown at 11% CAGR in FY10-14 to 1145.6 crore. The EBITDA margin has remained at the level of 11-12%. PNC has also received a credit rating of CARE A for long term and CARE A1 for short-term. Exhibit 3: Financial Summary Crore FY10 FY11 FY12 FY13 FY14 9MFY15 Total Revenue 751.6 1139.1 1273.3 1303.6 1145.6 1096.7 EBITDA 92.3 128.8 153.5 155.8 140.3 155.5 EBITDA Margin (%) 12.3 11.3 12.1 12.0 12.2 14.2 Depreciation 15.9 19.0 18.9 22.8 24.8 25.8 Finance Cost 10.9 8.7 24.0 23.5 23.4 35.3 Tax 23.4 33.9 38.7 37.1 35.7 33.1 PAT 45.2 71.1 78.4 76.5 66.9 66.7 Diluted EPS 8.8 13.9 15.3 14.9 13.0 13.0 Source: Company, ICICIdirect.com Research Page 3
Strategies: Diversify, expand into new functional areas PNC seeks to capitalise on expected infrastructure opportunities by leveraging on its established project execution track record and by diversifying into new functional areas of infrastructure development sector. As part of business growth strategy, the company intends to expand its presence in developments of industrial areas and dedicated freight corridor projects and further diversify into waste management and water-related infrastructure projects like river-connecting. Additionally, while PNC has a presence across various states in India, it intends to further diversify its operations geographically across India as part of its future business model. Further, expanding its geographical presence and expanding into new functional areas will allow PNC to take leverage on projects proposed by the government and consolidate its position in the infrastructure sector. Continued focus on EPC contracts, higher penetration in BOT, OMT projects Historically, the company s core infrastructure operations have been through EPC contracts. Currently, PNC is executing 23 projects on an EPC contract basis and is developing/operating seven BOT projects and one OMT project. While the company intends to actively pursue BOT/BOOT opportunities, both independently and in partnership with others, it seeks to continue its focus on EPC contracts as well. PNC s experience and strong project execution track record in executing EPC contracts in roads and highways projects is expected to provide them with a significant advantage in pursuing BOT/BOOT opportunities. PNC seeks to increase its presence in BOT projects by leveraging its technical and financial credentials, which will be improved by the strengthened balance sheet that it expects to have subsequent to the offer. The company s strengthened financial position will allow it to take on more projects, including BOT projects on its own or in alliance with other infrastructure and construction companies. Additionally, PNC also seeks to foray into additional projects on an OMT basis, which provides primarily a maintenance contract along with revenues from toll collection. NHAI awarded the company the Kanpur Lucknow Ayodhya Road Project in FY13 on an OMT basis. PNC seeks to further expand its presence in the OMT projects. Page 4
Key risks and concerns Foray into new functional, geographic areas... PNC intend to expand the geographical and functional areas in which it undertakes projects. The company s construction activities have, however, historically been focused in north India and primarily in the areas of highways and airport runways. However, PNC proposes to expand its presence across India and diversify into dedicated freight corridors, waste management, and development of industrial areas and water related infrastructure projects such as river connecting. The company has limited background and experience in these areas. Any adversity would lead to an adverse effect on its business and financial condition. Further, as it seeks to diversify its regional focus, it may face the risk that its competitors may be better known in other markets, enjoy better relationships with customers and international joint venture partners, gain early access to information regarding attractive projects and be better placed to bid for and be awarded such projects. Increasing competition could result in price and supply volatility, which could cause its business to suffer. Fluctuations in estimated traffic volumes may affect adversely... When preparing the tender for a toll collection or OMT project, PNC needs to forecast traffic volumes for the road to estimate the expected revenue over the period of the contract and arrive at the bid amount. In such instances, if the traffic volume is less than forecasted traffic volume, revenues from such toll collection or OMT project may be lower than expected and may lead to losses or lower-than-expected profits on such contracts. High trade receivable collection cycle... The trade receivable collection cycle has increased from 60 days in FY10 to 109 days in FY14, on a standalone basis, which exposes it to higher client credit risk. During FY10, FY11, the trade receivable collection cycle, on a standalone basis, ranged from approximately 60 days to 65 days and increased to approximately 119 days, 111 days and 109 days in FY12, FY13 and FY14, respectively. The increase in this cycle was primarily due to the fact that PNC has now commenced executing a majority of contracts on a BOT basis through special purpose vehicles (SPVs)/joint ventures (JVs) that have been constituted. They, in turn, award EPC contracts to PNC and payments for such construction work are released usually after 80 days to 110 days approximately. This is owing to the dependence of SPV/JV on lenders for disbursing facilities availed by them, which is usually a prolonged procedure. A longer trade receivable collections cycle makes business more susceptible to market downturns and client credit risk. Failure of clients to make timely payments could require PNC to write off account receivables or increase working capital requirements or accounts receivable reserves, which could adversely affect the operational and financial performance. Page 5
Outstanding litigation against company, promoters, directors, subsidiaries, JVs and other group entities... The company, certain promoters, some of its directors and certain subsidiaries, JVs and group entities are involved in certain legal proceedings at different levels of adjudication before various courts, tribunals and appellate authorities. Few of the major litigations are mentioned below: Exhibit 4: Few of the major litigations against/by company Nature of proceedings Number of proceedings Amount involved to the extent ascertainable Litigation by Company Arbitration 5 257 crore Litigation against Company Mediation Proceedings 1 58 crore Litigation by subsidiary HBHPL Arbitration Proceedings 1 54 crore Litigation against subsidiary PNC Kanpur Ayodhya Tollways Private Limited Stamp Duty Proceedings 1 42 crore Litigation by PNC-BEL JV Arbitration Proceedings 1 196 crore Source: Company, ICICIdirect.com Research Page 6
Financial Summary Exhibit 5: Profit and Loss Statement ( Crore) FY10 FY11 FY12 FY13 FY14 9MFY15 Revenue from operations 751.6 1,139.1 1,273.3 1,303.6 1,145.6 1,096.7 Other Income 3.2 3.8 6.4 4.1 10.6 5.4 Total Revenue 754.8 1,143.0 1,279.7 1,307.7 1,156.2 1,102.1 Cost of Material consumed 283.4 182.8 353.1 366.8 371.5 442.0 Changes in inventories of work-in-prog 1.9 (73.1) 51.6 2.0 9.9 (25.2) Employee benefits expense 21.3 31.8 42.4 47.2 57.7 50.1 Other Expenses 352.7 868.8 672.8 731.7 566.3 474.3 Total Operating Expenditure 659.4 1,010.3 1,119.8 1,147.7 1,005.3 941.2 EBITDA 92.3 128.8 153.5 155.8 140.3 155.5 Interest 10.9 8.7 24.0 23.5 23.4 35.3 Depreciation 15.9 19.0 18.9 22.8 24.8 25.8 PBT 68.6 105.0 117.0 113.6 102.6 99.8 Total Tax 23.4 33.9 38.7 37.1 35.7 33.1 PAT 45.2 71.1 78.4 76.5 66.9 66.7 Diluted EPS 8.8 13.9 15.3 14.9 13.0 13.0 Source: RHP, ICICIdirect.com Research Exhibit 6: Balance Sheet ( Crore) FY10 FY11 FY12 FY13 FY14 9MFY15 Equity Capital 34.1 39.8 39.8 39.8 39.8 39.8 Reserve and Surplus 159.8 375.2 453.6 526.6 590.1 655.1 Total Shareholders funds 193.9 415.0 493.4 566.4 629.9 694.9 Short Term Loan 69.3 74.1 245.3 209.4 219.3 336.8 Long Term Loan (including current por 25.0 29.4 25.5 44.2 55.3 56.7 Total Debt 94.3 103.5 270.8 253.5 274.7 393.6 Deferred Tax Liability 2.5 2.1 2.0 0.2 2.7 0.9 Other Long Term Liabilities 37.1 16.8 111.8 95.9 173.8 208.8 Liability side total 327.8 537.4 878.1 916.0 1,081.1 1,298.2 Fixed Assets 89.0 101.3 116.6 125.8 154.4 166.6 Non-current Investments 22.9 51.3 167.2 271.2 351.0 366.5 Inventories 42.9 147.6 148.4 105.1 104.8 169.5 Debtors 133.9 190.2 415.7 398.1 343.6 427.1 Cash 49.1 40.8 38.0 38.2 99.9 20.7 Loans and Advances 42.1 55.1 137.9 174.4 222.0 345.3 Other Current Assets 11.3 11.4 9.9 4.6 5.1 4.0 Total Current Assets 279.2 445.0 749.8 720.4 775.4 966.6 Creditors 24.6 42.2 85.7 144.1 70.0 77.3 Provisions 5.6 1.4 3.4 7.8 8.2 18.4 Other Current Liabilities 33.1 16.6 66.5 49.5 121.5 105.9 Total Current Liabilities 63.3 60.2 155.6 201.4 199.7 201.6 Net Current Assets 215.9 384.8 594.2 519.0 575.7 765.0 Assets side total 327.8 537.4 878.1 916.0 1,081.1 1,298.2 Source: RHP, ICICIdirect.com Research Page 7
RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 400 093 research@icicidirect.com Page 8
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ICICI Securities Limited has been appointed as one of the Lead Managers to PNC Infratech. The report is prepared on publicly available information. Page 9