A healthy order book and good execution track record are undone by expensive valuations. Conservative investors can skip the initial public offer (IPO) of infrastructure company PNC Infratech. The IPO is a combination of fresh issue and offer for sale by a private equity investor, together totalling ₹356-488 crore.
EPC promise PNC Infra had a strong order book of about ₹7,850 crore as of March this year, up 29 per cent from a year ago. Of this, the roads segment constitutes 95 per cent, with the remaining in railways and power transmission. In roads, PNC takes up construction contracts (EPC) of national highways and airport runways for third parties, besides its own build-operate-transfer (BOT) projects.
In the current environment of subdued economic growth and lack of funding, the EPC route is the less risky option. Project costs and investments required are lower and gestation periods shorter.
With the private sector’s interest in BOT projects dwindling, the government has been bidding out projects more on the EPC basis. PNC is well-placed to win projects here with a strong record of timely execution. The company also partners other players to win larger bids and improve its own qualification.
But in the price band of ₹355-378, the offer discounts PNC’s annualised consolidated earnings for 2014-15 by about 22-23 times (on post-issue equity).
That’s well above the 12 times of similar-sized road player MBL Infra. PNC’s issue is priced higher than even the far larger IRB Infra, which trades at 14 times its annualised 2014-15 earnings. While PNC has a good track record, it does not have a unique edge that sets it apart from peers. Besides, its return on equity is lower than that of many peers.
In any case, infrastructure stocks have already rallied sharply since the change in government last year. Stocks such as MBL Infra, KNR Constructions and J Kumar Infraprojects have either broken past the upper end of their three-year PE band or are close to it.
But with progress on the ground not along expected lines, sentiment is weakening. High valuation may thus, not sustain. With PNC Infra most likely to be a small-cap stock, post-listing, the risk will be higher.
BOT effect PNC has four road BOT projects (plus two via joint-venture, where it holds a minority stake), where it infuses equity, develops the road, and collects toll for a specified period. Of the four, one project is operational and two will go live this fiscal.
But to fund these projects, the company has taken on debt. The consolidated debt-equity ratio jumped to 1.8 times from 0.21 times in March 2011. Interest cost ballooned, swallowing 5 per cent of revenue in 2013-14 from 1 per cent in 2010-11.
With PNC looking to move further into the BOT space, debt could rise. That ₹35 crore of the issue proceeds will be used to repay debt will hardly make a dent in the borrowing of ₹1,500 crore. Some relief may come with ₹150 crore of the proceeds being used for working capital and ₹85 crore for equipment purchase; these were earlier debt-funded.
The company has also seen execution held up due to delays in clearances. PNC’s ₹837 crore BOT project from Rae Bareli to Jaunpur, its largest, began construction last year. The project, though, was actually won back in 2012. About ₹65 crore of the issue proceeds will be invested in this project.
Over the past three years, PNC’s consolidated revenue and net profit have grown at a compounded annual rate of 6 and 2 per cent to ₹1,353 crore and ₹47 crore in 2013-14, respectively; low growth is in line with the sector’s sluggishness. Sales and net profit for the April-December 2014 period were ₹1,320 and ₹62 crore, respectively.
Thanks to lower subcontracting, the company improved its operating profit margins to 16 per cent for the nine months to December 2014, up from the 12 per cent in the earlier years; this is better than peers.
But rising interest sent net profit margins to 4.7 per cent from the 6 per cent it used to average earlier.
The issue is open until May 12.