PNC Infrastructure: Expensive valuation

PNC Infrastructure, engaged in construction, development and management of infrastructure projects and having executed a series of highways, bridges, power transmission lines, airport runways, industrial and other infrastructure projects, plans to garner about Rs 490 crore through an IPO.

PNC intends to use the IPO proceeds to funding its working capital requirements (Rs 150 crore), invest in subsidiary for part-financing the Rae Bareilli-Jaunpur project (Rs 65 crore), capital equipments (Rs 85 crore), repayment/prepayment of debts (Rs 35 crore), general corporate purposes (Rs 90-100 crore), while Rs 55 crore is an offer for sale by an existing shareholder, Nylin Jacob Ballas India.

While the company's track record appears decent at the revenue and operating level given the weak environment, at the net level, profits were on a decline till FY14. Net profit on annualised basis for FY15 though is up. Nevertheless, there are concerns on the low return ratios and higher valuations as well, which make the offer unattractive.

Business

PNC provides EPC (engineering, procurement and construction) services on a fixed-sum turnkey as well as on an item rate basis for various infrastructure projects it undertakes to build. Some of them have also been undertaken on a BOT (build, operate and transfer) basis.

The company operates in about 13 states, but has a higher presence in the North. It has executed about 42 infrastructure projects and as on March 31, 2015 another 23 across sectors were under execution. There are seven BOT and one OMT (operate, maintain and transfer) projects under development and operation, comprising of both toll and annuity assets.

Total value of contracts on hand, including escalation costs as on March 31, 2015, was Rs 7,850 crore, which is healthy and indicates good revenue visibility.

In the last five years (during FY10-14), PNC has reported 16% CAGR in revenue to Rs 1,364 crore while PAT has grown at a compounded annual rate of just 4.04% to Rs 52 crore. However, if one looks at the FY12-FY14 period, growth rates have moderated, which can be attributed to the weak economic environment. The first nine months performance, however, indicates the growth momentum has pickup in FY15.

PNC has also seen improvement in EBIDTA margins, which the management attributes to increased concentration on EPC contracts. EBIDTA margins for first nine months of FY15 stood at 15.4% significantly higher than 12.8% in the previous year. Even PAT margins have improved to over 6%.

Road ahead

The company seems well placed set to benefit from increased investments in the infrastructure sector. The government's infrastructure outlay is estimated to grow annually by 22% over FY15-17. Of this, road sector is likely to see its outlay increase by 11% annually. Further, PNC's strength in Uttar Pradesh is phenomenal and the road investments in the state are to double to Rs 100,000 crore, which should benefit the company.

In nine months of FY15, contract turnover accounted for nearly 84% of total revenues, and roads accounted for 91.7% of contract revenues. Other segments as power, urban infrastructure, railways and airport are also to see higher increase in allocations.

While PNC looks well geared to benefit from the growth opportunities, rising competition could prove to be a challenge, say analysts. However, Yogesh Jain, MD, PNC Infrastructure says that we have always ensured that our tenders earn at least 15% EBIDTA margins. A strong credit rating of CARE A for long term and CARE A1 for short-term loans is also positive.

The other key concern that analysts at Asit C Mehta Investment point to is the return on net worth (RoNW) that has come down from 16.01% in FY12 to 8.52% in FY14. They add that the offer valuation at a PE of 21-22x of FY15 (annualised) earnings is on the higher side as compared with its peers such as IRB Infra (which is far larger and profitable) and J Kumar Infra which are trading at 15x and 18x of trailing earnings, respectively.

However, other analysts also believe the offer is expensive. Analysts at Motilal Oswal Securities say that given suppressed ROCE (return on capital employed) of 10%, negative cash flows, debt/equity of 2.2x, the stock would trade at an expensive 24x FY15 valuations. Hence, it is better to avoid the offer. Analysts at Choice Broking, too say that they that the PNC's IPO pricing level is not justified, given the lower profitability margins and return ratios as compared to its peers. Thus, they recommend investors to avoid the issue.