PNC Infratech
By Geetanjali Kedia
PNC Infratech is entering the primary market on Friday 8th May 2015 through a public issue of 1.29 crore equity shares of Rs. 10 each, priced in the band of Rs. 355 to Rs. 378 per share. The issue comprises a fresh issue of 1.15 crore shares and an offer-for-sale of 14.22 lakh shares by PE investor Jacob Ballas. The issue aims to raise Rs. 459 crore and Rs. 488 crore at the lower and upper end respectively, of which, Rs. 50-54 crore is the offer for sale portion. Issue represents 25.18% of the post issue paid-up capital and will close on Tuesday 12th May.
PNC Infratech is an Agra based road construction company, undertaking both EPC and BOT projects. While 80% revenues are currently derived from contracting business, balance are from operating 3 BOT (2 toll based, 1 annuity) and 1 OMT project (toll based). Company is currently developing 3 toll-based and 1 annuity BOT project in Uttar Pradesh.
Like all infra companies, it is also burdened with huge debt, which, on a consolidated basis, stood at Rs. 1,548 crore, on net worth of Rs. 671 crore, as of 31st December 2014, resulting in a very high net debt to equity ratio of 2.22:1. This ratio has been rising sharply, from 0.91:1 on 31st March 2013 to 1.47:1 on 31st March 2014. Even post the IPO, it will remain high at 1.31:1. Thus, company will annually be paying more interest than net earnings - FY15 expected finance cost is Rs. 93 crore while net profit is Rs. 83 crore. Why build exposure to a company with such a leveraged balance sheet?
For FY14, company reported consolidated revenues of Rs. 1,364 crore, up 4% YoY, as some BOT projects got operational, but net profit contracted sharply by 30% to Rs. 52 crore, down from Rs. 75 crore in FY13, which had already fallen 5% YoY from Rs. 78 crore net profit earned in FY12. Thus, while company’s topline growth has been muted, bottomline growth has taken a huge hit, resulting in net margins falling from 6.1% in FY12 to 5.7% in FY13 to 3.8% in FY14. During 9MFY15, although margins improved a bit to 4.7%, they are yet to get close to the 6% plus mark clocked during earlier years (FY10, FY11 and FY12). For 9 months ended 31st December 2014, consolidated revenue stood at Rs. 1,326 crore and net profit at Rs. 62 crore, leading to an EPS of Rs. 15.68 for 9MFY15, on equity of Rs. 39.81 crore.
Post IPO, promoter holding will shrink from 72.27% to 56.07%, while Jacob Ballas’ stake will decline to 8.31% from 14.29% currently. Having entered at Rs. 263.77 per share in Jan 2011, the PE investor has earned an IRR of 8.7% (assuming upper band of Rs. 378) on this 4 year plus investment, which is lower than what a bank FD would fetch during this time! Thus, going by history, shareholder has not been rewarded by the company.
Since EPC business is working capital intensive, Rs. 150 crore from funds raised in the IPO will finance working capital, while Rs. 85 crore will go towards purchase of construction equipment. Rs. 65 crore is proposed to be invested in an ongoing BOT project, while Rs. 35 crore debt repayment is a very miniscule sum.
Balance proceeds of close to Rs. 90 crore are to be utilized for general corporate purposes. RHP has listed down 5 sub-points for the same, 2 of which are over-lapping with other objects of issue i.e. debt repayment and funding working capital needs. This depicts the casual approach in using such sizeable funds allocated towards general corporate purposes, which are at company’s sole discretion.
Pg 32 of the RHP states that some of the supporting documents for academic and professional qualifications and experience of certain key managerial personnel have not been made available for verification to the company or BRLMs. Since it is mentioned in the RHP, it is a material point, although an uncommon risk factor, raising many unwarranted questions. Such documents are key and very important for an infra and BOT company.
While the company boasts of being awarded bonus for early completion of a couple of projects, NHAI has also found construction faults, two to be precise, on its same project, of which, 1 fault is still pending for rectification. This doesn’t bode well, as deficiencies lead to cost-over runs, expenses for which may not be recoverable.
Annualising 9MFY15 EPS, expected FY15 EPS stands at close to Rs. 21, which discounts the lower and upper end of the price band by a PE multiple of 17 and 18 times respectively. Peer IRB Infra, clocking net margins of ~14% is ruling at a PE multiple of 14 times, also having a larger topline of nearly Rs 3,000 crore. Others like KNR Constructions and J Kumar Infra, albeit lower in size, not only have better operating and net margins of over 20% and 7% respectively, they also carry very low levels of debt, with net debt to equity ratio of nil for KNR and 0.4:1 for J Kumar. Hence, their current PE multiples of 20x and 21x are justified.
By pricing the IPO at a PE multiple of 18 times, PNC Infra, with huge debt burden of over Rs. 1,500 crore, net margin less than 5% and operating margins in mid-teens (15.8% during 9MFY15), has not left much on the table. An unwritten rule of primary markets states that IPO pricing warrant over 20% discount, vis-à-vis listed peers, to incentivize the retail investors, which seems missing in this issue. Also, fate of debt-ridden infra companies is open to all, which have been showing miserable performance on the bourses, both in terms of the financials and stock price performance, over past 3-5 years. Hence, given its weak fundamentals, issue is not priced attractively.
Given the precarious terrain broader markets are currently in, who wants to invest in an infra company, when other hot sectors like banks, NBFCs, auto, consumers are out of flavor? In addition, many investors still have infra stocks acquired at sky-high prices during the previous bull-run in their portfolio. Adding another is not desirable.
Hence, skip this IPO and instead, focus on the secondary markets.
Disclosure: Not applying in the IPO.