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PNC Infrastructure, which is engaged in construction, development and management of infrastructure projects and has executed a series of projects relating to highways, bridges, power transmission lines, airport runways, etc, plans to raise about Rs 490 crore through an initial public offering (IPO).
The company intends to use the IPO proceeds to fund its working capital requirements (Rs 150 crore), invest in a subsidiary for part-financing the Rae Bareilli-Jaunpur project (Rs 65 crore), capital equipment (Rs 85 crore), repayment/prepayment of debt (Rs 35 crore) and general corporate purposes (Rs 90-100 crore); Rs 55 crore is for 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 levels, given the weak environment, at the net level, profits have been on a decline during FY12-14. However, the net profit for FY15 though is up on annualised basis. Nevertheless, there is concern on the low return ratios and higher valuations, 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 the infrastructure projects it undertakes. Some have also been undertaken on a BOT (build, operate and transfer) basis.
The company operates in 13 states; it has greater presence in the North. It has executed 42 infrastructure projects and, as of March 31, another 23 were under execution. There are seven BOT and one OMT (operate, maintain and transfer) projects under development and operation, comprising both toll and annuity assets.
As of March 31, the overall value of the contracts at hand, including escalation costs, was Rs 7,850 crore, which indicates good revenue visibility.
In the past five years (FY10-14), PNC has reported 16 per cent compounded annual growth in revenue at Rs 1,364 crore, while profit after tax has grown at a compounded annual rate of 4.04 per cent to Rs 52 crore. However, if one looks at the FY12-FY14 period, growth has moderated, which can be attributed to a weak economic environment. Performance in the first nine months of FY15, however, indicates the growth momentum has picked up. PNC has also seen improvement in earnings before interest, tax, depreciation and amortisation (Ebitda) margins, which the management attributes to increased concentration on EPC contracts. For the first nine months of FY15, the Ebitda margin was 15.4 per cent, significantly higher than 12.8 per cent in the previous year. Profit-after-tax margins have improved to about six per cent.
The company seems well placed set to benefit from increased investments in the infrastructure sector. The government’s infrastructure outlay is estimated to grow 22 per cent a year in FY15-17. The road sector is likely to see its outlay increase 11 per cent annually. PNC’s strength in Uttar Pradesh is phenomenal, and road investments in the state are to double to Rs 100,000 crore, which should benefit the company.
In the first nine months of FY15, contract turnover accounted for 84 per cent of total revenue, while roads accounted for 91.7 per cent of contract revenue. Other segments, such as power, urban infrastructure, railways and airport, are also to see an increase in allocations.
While PNC looks geared to benefit from the growth opportunities, rising competition could prove to be a challenge, analysts say. However, Yogesh Jain, managing director of PNC Infrastructure, says the company has ensured its tenders earn at least 15 per cent Ebitda margins. A credit rating of CARE A for long-term and CARE A1 for short-term loans is a positive.
A key concern analysts at Asit C Mehta Investment cite is the return on net worth, which has fallen from 16.01 per cent in FY12 to 8.52 per cent in FY14. They add the offer valuation at a price/earnings multiple of 21-22 of the FY15 (annualised) earnings is on the higher side compared to peers such as IRB Infra (which is far larger and profitable) and J Kumar Infra, which are trading at 15 and 18 times their trailing earnings, respectively.
However, other analysts say the offer is expensive. Analysts at Motilal Oswal Securities say given the suppressed return on capital employed of 10 per cent, negative cash flows, a debt/equity ratio of 2.2, the stock would trade at an expensive 24 times the FY15 valuations. Therefore, it is better to avoid the offer, they say. Analysts at Choice Broking also say PNC’s IPO pricing isn’t justified, given the lower profitability margins and return ratios compared to peers. As such, they recommend investors should avoid the issue.
