Re-rating on the cards for PNC Infratech if asset monetisation works out, say analysts

With the toast of the town being monetisation of PNC Infratech’s road assets, analysts are delighted that the stock could be re-rated. Apart from the release of equity capital for future investments, analysts believe fructification of asset divestment would materially de-leverage the consolidated balance sheet. The market buzz is that PNC Infratech is in advanced discussions to sell 12 road assets to KKR’s roads platform, Highways Infrastructure Trust, for an enterprise value of about Rs 9,000 crore (about $1.1 billion).

The divestment includes seven operational assets, including one BOT toll asset, and three assets that are due to become operational in the near term. As of end-FY23, the total debt in these assets is Rs 6,900 crore and equity investment is Rs 1,700 crore, Nomura pointed out.

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The company is targeting an order inflow of Rs 10,000-12,000 crore in FY24. The current order book remains strong at Rs 20,530 crore, which is three times its FY23 revenue and provides strong revenue visibility in the coming years.

The road projects constitute 62 percent of the total order book and 43 percent are for water and canals projects. If the deal materialises, it would be the biggest acquisition of road projects by the private equity firm in India, The Economic Times reported.

The monetisation plan is expected to be closed by FY24-end.

Talking about the deal valuation, Nomura said that the deal EV implies an equity value of Rs 2,100 crore, against a book equity value of Rs 1,700 crore, which leads to a Price to Book value of 1.24 times, which is higher than its current valuation of 1 time Price to Book for these assets.

If the divestment materialises, Nomura thinks a substantial re-rating is on the cards.

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“If the deal materialises, re-rating of the stock to 12 times is likely (vs 10 times we currently assign),” the foreign brokerage firm said.

The brokerage firm predicts that selling these assets will likely cause the stock’s rating to increase to 12 times Price to Earnings.

This is similar to the rating given to KNR Constructions, when it sold its assets in FY22. It is higher than the current rating of 10 times on FY25 EPS, assigned by Nomura to PNC Infratech’s business.

At a time when Nomura is negative on the broader roads EPC space, it is confident about PNC Infratech because of the company’s strong order book and low-debt balance sheet.

PNC Infratech is an infrastructure construction, development, and management company with expertise in project execution, including highways, bridges, flyovers, airport runways, industrial areas, and transmission lines.

The management has retained its standalone revenue growth guidance of 15 percent YoY for FY24 and operating margin of 13-13.5 percent.

Technical view 

“PNC Infratech’s overall market structure is currently displaying a bullish trend, indicating a positive outlook for the stock,” said Santosh Meena, Head of Research at Swastika Investmart.

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After undergoing a modest correction, the stock is now showing signs of regaining its bullish momentum, and is currently following an upward sloping channel formation, which suggests a continuation of the upward movement, he explained.

At present, the stock faces a key resistance level of Rs 350. Once this hurdle is surpassed, there is a strong likelihood of it reaching the previous all-time high of Rs 395, he said.

Furthermore, the stock has established a robust support level around Rs 300. This support level enhances the risk-reward ratio for investors, providing an advantageous opportunity to potentially capitalise on the stock’s upward trajectory, Meena said.

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