PNC’s execution was weaker than our estimate in 2QFY18, as revenue declined 25% y-o-y on delayed appointed dates and the early stages of execution of stalled projects hit revenue recognition. The National Highways Authority of India’s (NHAI) approval is pending, and once that is in place, financial closure should follow. Management expects the financial closure in December 2017, though revenue contribution in 4QFY18 is likely to be limited, in our view. However, we expect a strong revenue uptick in FY19F. Early-stage execution involves significant earthworks, which are relatively low value-added activities. At these stages, the financial progress lags physical progress. However, with the exit from these stages, we expect the financial progress to rise. Early-stage execution involves significant earthworks, which are relatively low value-added activities. At these stages, the financial progress lags physical progress. However, with the exit from these stages, we expect the financial progress to rise. PNC’s stand-alone net debt at `12 crore in 1HFY18 is the lowest in the sector.
We cut our EPS by 7-13 % over FY18-19F as we push back our estimated execution timelines. We continue to value the stand-alone EPC business at 15x FY19F EPS and the BOT assets at 1HFY19 BV to arrive at our new TP of `240, implying 34 % upside. A key risk is slower-than-estimated execution and build-in working capital. 2QFY18 revenue declined by 25 % y-y to R270 crore, which was significantly lower than our estimate. Management has attributed the weakness to the delay in receiving the appointed date, which led to late execution start coinciding with the monsoon season. For example, a previously-stalled project like Koliwar Bhojpur in Bihar received the appointed date on 4 July 2017 when the monsoon was about to set in, which led to lower revenue recognition. Similarly, heavy monsoon rains and early stages of work at the Varanasi-Gorakhpur project also impacted the financial progress. Since most of the previously-stalled projects have only recently received their appointed dates, the financial progress has been weak, though there has been substantial physical progress. We present the cost breakdown of the Aligarh Moradabad project, by activity. It suggests that the initial activities after project start-up such as site clearing, earthworks and base and sub-base courses are less value-adding in terms of financial progress, compared with physical progress.
