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PNC Infratech's Q2FY19 results (Outperformer) - Robust growth prospects

Q2FY19 result highlights

• PNC’s Q2FY19 PAT grew 111% yoy to Rs351m (albeit low base), but was sharply below estimate of Rs455m, due to lower than estimate revenue and higher interest expenses.
• Revenues grew 108%yoy to Rs5.6bn (est: Rs6.2bn) led by strong order backlog and a pick-up in execution. EBITDA grew 87.9%yoy to Rs746m (est: Rs832m) and EBITDA margin contracted 140bp yoy to 13.4%, in-line with our estimate of 13.4%.
• Gross standalone debt grew Rs850m qoq to Rs3.4bn in Sep-18 while net debt stood at Rs2.8bn. Standalone interest cost doubled yoy to Rs153m (est: Rs110m) led by increase in debt. Increase in debt during H1FY19 is led by capex of ~Rs650m in H1, increase of ~Rs500m in loans to subsidiaries and mobilisation of sites for new HAM projects.  
• Other income grew by 16.7%yoy to Rs61m (est: Rs70m). Effective tax rate stood at 21.6% as against estimate of          23.2%.
• Gross toll collection grew 18.2%yoy to Rs1.8bn led by strong yoy traffic growth, especially at Ghaziabad-Aligarh and Kanpur-Ayodhya projects. Ghaziabad-Aligarh toll collections remained steady qoq at Rs5.5m/day in Q2FY19 and currently it stands at Rs6.1m/day.
• PNC’s order backlog stood at Rs66.2bn (2.7x TTM revenue) without including EPC orders of ~Rs84bn for 3 HAM projects awaiting financial closure and EPC projects of Purvanchal Expressway and Mumbai-Nagpur Expressway projects (LOAs received for both).
• Bid pipeline remains strong with orders worth Rs700bn expected to be bid by Jan-19 majorly on EPC basis. Consequently, management has guided for order inflow of Rs40-50bn in H2FY19  

Key positives: Strong execution and strong order backlog position.

Key negatives: Qoq increase in working capital and debt position. 

Impact on financials: Downgrade of 3.2% in FY19E earnings mainly on account of increase in interest expenses.

Valuations & view

With solid progress on availability of land (80-90% in new projects) and financial closure in new projects, we expect a sustained scale up in PNC’s execution in H2FY19 & FY20. Meanwhile, PNC continues to invest in building up its execution capabilities by investing in men and machinery. As a result, we expect robust 45.5%/42.2% revenue/EBITDA CAGR for PNC over FY18-20E on a standalone basis. PNC’s efforts at divesting its operating BOT assets, if successful, will provide cash flow for meeting its equity commitment in HAM projects. Stock trades at 12.1x/10.4x FY19E/FY20E standalone earnings adjusted for Rs44/sh of BOT assets value. Maintain Outperformer with a revised SoTP based PT of Rs196