PNCL has been awarded arbitration claims of Rs 1.4 bn against the National Highway Authority of India (NHAI) and Rs 0.31bn from a state road project.
We met with PNCL’s management. Broadly, we found that the meeting confirmed our investment thesis for the stock of: a) high growth but coupled with strong focus on OCF generation, b) ability to maintain low standalone gearing levels (net debt of only `1.0 bn and with strong OCF generation and limited capex requirement is unlikely to shoot up materially.
PNCL has been awarded arbitration claims of Rs 1.4 bn against the National Highway Authority of India (NHAI) and Rs 0.31bn from a state road project. We expect these claims to accrue in FY20F and will directly flow upwards to the EBITDA level. Further, there will be receipt of `140 m as early completion bonus for the Aligarh Moradabad project. In addition to the above, which includes the P&L impact, there are receipts of `0.85 bn as repayment of debt by the Narela subsidiary following the favourable arbitration ruling against Delhi and `3.0 bn from the sale of the Ghaziabad Aligarh Expressway (GAEPL). Cumulatively, these account for `5.7 bn in cash inflows, which on our estimates largely suffice for the `6.0 bn equity commitment for HAM assets over the next 24 months.
Management expects OCF generation of `16 bn over the next three years . We have observed that historically PNCL has generated 6% OCF to sales and even with an improved assumption of ~10% OCF to sales we estimate that this will entail `160 bn of revenues over the next three years (or average annual execution of `50bn+).
Thus we believe PNCL is entering into a phase of strong multi-year revenue growth. Further, with `6.0bn equity committed for existing HAM projects and capex of `4.0 bn (based on management’s guidance of `1.25bn in annual capex) for the next three years, we estimate that FCF of `10 bn can be generated. This FCF cushion should allow PNCL to bid for additional HAM projects (10% equity requirement for project cost) where competition is low and EBITDA margins are significantly better. In addition, with strong FCF growth, we believe stand-alone leverage will remain under check (well below 0.3x Net Debt/Equity FY21F). This will allow PNCL to avoid taking in interest-bearing mobilisation advances and save on financial expenses.