DEWAN HOUSING. PNC Infratech Ltd. Hold. Growing business at cheap valuation

DEWAN HOUSING PNC Infratech Ltd. Hold Growing business at cheap valuation

31000 34000 55000 54000 48350 20-Dec-16 20-Jan-17 20-Feb-17 20-Mar-17 20-Apr-17 20-May-17 20-Jun-17 20-Jul-17 20-Aug-17 20-Sep-17 20-Oct-17 20-Nov-17 PNC Infratrch Ltd. Q2FY18 Result Update PNC Infratech Limited is an infrastructure construction, development and management company. The Company is primarily engaged in the areas of infrastructure projects, including highways, bridges, flyovers, power transmission lines, airport runways and other infrastructure activities. The Company's segments include EPC Contract and BOT (Toll and Annuity). It offers end-to-end infrastructure implementation solutions that include engineering, procurement and construction (EPC) services. It implements projects on various Public-Private-Partnership (PPP) formats, including Design-BuildFinance-Operate-Transfer (DBFOT), OperateMaintain-Transfer (OMT) and Hybrid models. It is involved in the construction and development of Highways, Bridges and flyovers, and Industrial area development. It focuses on road building projects in Punjab,0Haryana,0Tamil0Nadu,0Madhya0Pradesh, Maharashtra, Karnataka, Rajasthan, Uttar Pradesh, Uttarakhand, West Bengal and North Eastern India. Q2FY17 Result Analysis: PNC s revenues decreased by 30.7% to Rs.2685.7mn in Q2FY18 as against Rs.3599.1mn in Q2FY17. Revenue declined mainly on account of muted execution during the quarter and a heavy monsoon. EBIDTA decreased by 14.3% to Rs.396.9mn in Q2FY18 as against Rs.463.3mn in Q2FY17. EBITDA margins also increased to 14.8% in Q2FY18 as against 12.9% in Q2FY17. PAT decreased by 52.7% to Rs.166.5mn in Q2FY18 from Rs.351.8mn in Q2FY17. Net profit margin stood at 6.2% vs 9.8% in Q2FY17. Break up of key expenditures include cost of materials consumed/contract Paid at Rs.1753.6mn, employee cost at Rs.237.8mn and Depreciation & Amortization exp. at Rs.184.4mn and other expenses at Rs.285.7mn. Outlook: The government is looking to spend Rs. 6900bn over the next five years in the highway sector where private investment is estimated at Rs. 1060bn. Furthermore, the government aims to construct 57000 km of roads in rural areas under Pradhan Mantri Gram Sadak Yojana (PMGSY). The government is looking to spend Rs. 6900bn over the next five years in the highway sector where private investment is estimated at Rs. 1060bn. Furthermore, the government aims to construct 57000 km of roads in rural areas under Pradhan Mantri Gram Sadak Yojana (PMGSY). The National Highways Authority of India would award over 31,000km of road projects executable over FY 2017 and 2021, entailing an estimated investment of Rs3.6 trillion (civil construction works). Pipeline provides sufficient headroom for the company to improve its order book due to consistent project pipeline of ~10,000-12,000km of highway projects annually by the central & state road agencies. During the quarter revenue saw a dip mainly due to muted execution on account of delay in getting appointed dates and heavy monsoon. However the company has received dates for 3 of it s projects in the last few months and another project is expected to receive appointment date in the coming quarter, which helped the execution to pick up in H2FY18 and expected to start contributing to the revenue by Q4FY18. Toll collection during the quarter also saw a decline on account of the impact of GST, however this has shown signs of improvement in the recent months and is expected to be on track in Q3FY18 & Q4FY18. On the back of a strong order backlog of 4.9x to the revenue as on FY17 and pick up execution of projects, the company is well on track to achieve the guidance provided by the management of 15-18 % revenue growth in FY18E and 25-30% growth in FY19E. Valuation: Though the revenue declined over the last two quarters due to the impact of GST, heavy monsoon and land acquisition issues, execution is expected to pickup in the coming quarters thus posing a good opportunity in the company. On valuation front, at the CMP of 197.7, the stock is available at cheap valuation at P/E of 42.9(x) compared to peers average of 23.8(x), while EV/EBITDA stood at 11.1(x) compared to the peer average of 12.2. Thus we recommend a Hold rating on this stock. Particular (Rs. Mn) Q2FY18 Q2FY17 Change (YoY) Q1FY18 Change (QoQ) Total Revenue 2685.7 3599.1-25.4% 3566.5-24.7% In EBITDA the roads (Excl OI) sector, 396.9 the current 463.3 project -14.3% 519.6-23.6% EBITDA Margin (%) 14.8% 12.9% 190 Bps 14.6% 20 Bps PAT 166.5 351.8-52.7% 298.1-44.1% NPM (%) 6.2% 9.8% (360) Bps 8.4% (220) Bps 1 Dec 21, 2017 Rating Matrix CMP Rs. 197.7 Rating Hold Holding Period - Current Level - Target Price - 52 week H/L Rs. 214.3/99.0 Face value Rs. 2 Sector Roads & Highways Category Mid Cap F&O Stock N/A Shareholding Pattern Particulars Sep'17 Jun'17 Mar'17 Promoter 56.1% 56.1% 56.1% FPIs 5.4% 5.4% 4.4% Insti. 22.2% 22.1% 21.9% N. Insti. 16.3% 16.4% 17.6% Relative Capital Market Strength 1.90 1.70 1.50 1.30 1.10 0.90 PNC Infratech Ltd. Sensex Report Update History Highest price Date Rating CMP since last update Feb 27,2017 Buy 102.0 168.5 Oct 24,2017 Hold 165.5 203.3 Dec 21, 2017 Hold 198.9 60000 50000 40000 30000 20000 10000 Orderbook Trend (Rs. Mn) 0 * Q2FY18 orderbook does not include HAM project worth Rs. 63,130mn which will take the orderbook to Rs. 1,11,480mn. Source: Choice Research/ Annual reports; Financial data-ace equity

Peer Comparison: Companies CMP ROE (%) 12MR(%) M. Cap EBIDTA EPS BVPS (Rs. Mn) Margin (%) NPM (%) Ashoka Buildcon Ltd. 249.2-50.7 46637.3-0.5 89.3 30.8% -0.3% Dilip Buildcon Ltd. 924.9 20.8% 311.2 126498.6 26.2 125.7 21.8% 6.7% IL&FS Transportation Networks Ltd. 78.4 3.6% -28.4 25790.5 4.5 127.2 39.6% 1.9% IRB Infrastructure Developers Ltd. 231.9 13.6% 17.9 81501.3 20.4 150.0 52.3% 12.2% J Kumar Infraproject Ltd. 320.0 7.6% 45.9 24213.1 14.0 183.6 15.9% 6.7% KNR Construction Ltd. 295.6 14.1% 57.3 41567.3 8.2 57.9 15.7% 6.8% PNC Infratech Ltd 197.8 8.1% 90.0 50743.6 4.6 57.0 27.7% 5.3% Reliance Infrastructure Ltd. 18.8 6.1% -6.4 4945.0 54.2 887.6 17.3% 5.4% Sadbhav Engineering Ltd. 399.6-40.9 68559.4-3.1 52.8 27.6% -1.2% Supreme Infrastructure India Ltd. 106.7-35.9 2742.0-132.5 83.6 16.5% -29.3% Average 282.3 10.6% 61.5 47319.8-0.4 181.5 26.5% 1.4% Companies P/E (x) P/Bv (x) P/Sales(x) EV/EBIDTA EBIDTA(Rs. D/E PAT(Rs. Mn) (x) Mn) Sales (Rs. Mn) Ashoka Buildcon Ltd. - 2.8 1.6 10.4 2.8-99.6 8946.2 29049.5 Dilip Buildcon Ltd. 35.4 7.4 2.4 14.4 2.5 3576.8 11599.5 53191.6 IL&FS Transportation Networks Ltd. 17.3 0.6 0.3 10.3 7.5 1493.1 31597.4 79844.2 IRB Infrastructure Developers Ltd. 11.4 1.5 1.4 6.8 2.6 7154.7 30573.4 58459.4 J Kumar Infraproject Ltd. 22.9 1.7 1.5 9.4 0.8 1055.6 2493.5 15728.1 KNR Construction Ltd. 36.2 5.1 2.5 18.2 0.8 1149.0 2639.6 16795.9 PNC Infratech Ltd 42.9 3.5 2.3 11.1 1.3 1182.8 6240.8 22523.3 Reliance Infrastructure Ltd. 0.3 0.0 0.0 5.7 1.1 14251.8 46083.6 266076.1 Sadbhav Engineering Ltd. - 7.6 1.5 13.4 11.1-540.3 12621.9 45700.1 Supreme Infrastructure India Ltd. - 1.3 0.2 22.4 19.0-3404.1 1921.4 11610.1 Average 23.8 3.1 1.4 12.2 5.0 2582.0 15471.7 59897.8 Financial Snapshot : Particulars (Rs. Mn) (Consolidated) FY13 FY14 FY15 FY16 FY17 Revenue from operations 13056.5 13599.6 18608.9 28367.8 22523.3 Gr (%) 102.5% 4.2% 36.8% 52.4% -20.6% EBITDA (Excl OI) 1562.5 1754.5 2798.7 6223.4 6240.8 EBITDA Margin (%) 12.0% 12.9% 15.0% 21.9% 27.7% PAT 746.3 551.8 912.8 2086.6 1182.8 NPM (%) 5.7% 4.1% 4.9% 7.4% 5.3% Net Worth 5870.7 7097.3 8710.8 13578.7 14610.3 Total Assets 14211.0 20206.0 42433.5 48871.2 52807.3 Total Debt 5592.0 9859.4 16349.1 16012.6 17946.5 Cash flow from Operations 3177.8 1387.9 2467.7 939.9 2850.9 D/E (x) 1.0 0.7 0.5 0.8 0.8 Current Ratio (x) 1.14 1.26 1.08 1.86 1.6 Profitablity ratios (%) ROCE (%) 10.0% 7.2% 4.7% 8.8% 11.7% ROE (%) 10.6% 9.9% 8.8% 15.4% 8.1% ROA (%) 4.4% 4.2% 3.5% 6.2% 2.2% Efficiency ratios (x) Receivable days 81.8 57.8 44.7 43.4 86.1 Inventory days 35.9 28.6 32.1 29.5 31.6 Payable days 37.6 41.0 25.9 25.1 50.5 2 Source: Choice Research/ Annual reports; Financial data-ace equity

Strong Order Book Position driven by EPC and HAM Projects: PNC s orderbook is at Rs. 48,350mn as on Q2FY18, which does not include 4 HAM projects recently won by the company worth Rs. 63,130mn. After the recent financial closure of the certain HAM projects along with the letter of intent for a few projects, the overall orderbook will reach Rs. 1,11,480mn.Out of the overall orderbook 95% of the orders constitute of EPC orders. Furthermore, in the road sector, on the opportunity front, the company is bidding for Purvanchal Expressway and is also aiming to win two or three more HAM projects over the next six months worth Rs. 40000-60000mn. Also, bids for HAM projects worth Rs. 300000mn are expected to open in the next six months. Consequently, the management has guided for a strong order inflow of Rs. 40000-60000 mn in FY18E with 50% from HAM & rest from EPC division. Current the company has 7 operational BOT projects having a total project cost of Rs. 44347mn out of which 4 projects are BOT-Toll Projects, 2 are BOT- Annuity Projects and 1 is an OMT project. EPC Portfolio Particular Rs. Mn Nagina-Kashipur 11,560 Varanasi-Gorakhpur 7,850 Dausa-Lalsot 5,670 Aligarh-Moradabad 4,680 Bhojpur-Buxar 4,770 Koilwar-Bhojpur 4,540 Top 6 Road Projects 39,070 Other Projects 9,280 Total Order Book 48,350 Top 6 Road Projects as % to total order book 81.0% Project Project Total Porject Cost (Rs. Mn) BOT Portfolio HAM portfolio Total Porject Cost Authority % Stake (Rs. Mn) Management Guidance: The management expects revenue growth of 15-18% in FY18E, while it is expected to grow by 25-30% in FY19E. EBITDA margin are expected to be 13.5% in FY18E. It has also guided for Order Inflow (OI) of Rs. 40000-60000 mn in FY18E. There are around 80 HAM projects worth INR 300000 mn is expected to come for bidding over the next six months. Capex & Debt: The company has guided for a capex of Rs. 1000mn- Rs. 1250 mn for FY18E and Rs. 400-450 mn in FY19E. On a standalone basis, debt is at Rs. 1140mn with a cash of Rs. 1020 mn. Net working capital days were at 123 days in Q1FY18 due to high debtor days of 157 days. Early Completion Bonus: We expect the company to receive an early completions bonus worth approximately Rs. 1000mn in FY18E from the 3 projects. Further they are expected to receive a bonus amounting to 3% of the total project cost for the Aligarh-Moradabad Project which the management is confident to complete 5 months before schedule. Toll collections decline sequentially given monsoon impact: During the quarter the toll collection has decreased on account of a heavy and prolonged monsoon along with the impact of GST. The toll collection during the quarter for various project are as follows: Rs. 440mn for Ghaziabad-Aligarh, Rs. 660mn in Kanpur-Ayodhya, Rs. 191mn for Kanpur-Kabrai and Rs. 100mn in Bareilly- Almora.The company during the last few months has witnessed a growth in the toll collection and we expect it to contribute in the coming quarters. Toll collections in Ghaziabad Aligarh project remain low as overloading charges in UP have been removed. Authority % Stake Type State State Equity Requirement Toll Collection per day (Rs. Mn) Ghaziabad Aligarh 20190 NHAI 35% Toll UP 4.0 Kanpur Kabrai 4585 NHAI 100% Toll UP 1.7 Gwalior Bhind 3403 MPRDC 100% Toll MP 1.2 Bareilly Almora 6045 UPSHA 100% Toll UP 0.0 Rae Bareli Jaunpur 8374 NHAI 100% Annuity UP - Narela Industrial Area 1750 DIIDC 100% Annuity Delhi - Kanpur Ayodhya 0 NHAI 100% OMT UP 5.9 Total project 44347 - - - - 12.8 Invested equity Chitradurga - Davanagere including Chitradurga bypass 14340 NHAI 100% Karnataka 1070 1070 Jhansi-Khajuraho section of NH 75/76 (Package 1) 14100 NHAI 100% UP & MP 1280 1280 Jhansi-Khajuraho section of NH 75/76 (Package 2) 13100 NHAI 100% UP & MP 1040 1040 Chakeri to Allahabad section of NH - 2 21590 NHAI 100% UP 2000 2000 Dausa-Lalsot 8200 NHAI 100% Rajasthan 660 110 Total Project 71330 - - - 6050 5500 3 Source: Choice Research/ Annual reports; Financial data-ace equity

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