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Stocks on expressway | PNC Infratech, KNR Constructions may speed up on order inflows, valuations

Attractive valuations and NHAI order inflows in the second half of this fiscal are likely to pep up the two EPC stocks despite a lull in the sector.

December 01, 2022 / 08:58 AM IST

The road sector is seeing a slowdown in capital expenditure and likely stalling of projects but engineering, procurement and construction (EPC) companies in the sector are catching investor fancy as they can brave the storm and stand strong, said market mavens.

KNR Constructions and PNC Infratech have emerged as decent investment bets on account of their long track records, robust order books and attractive valuations, said the head of one of the leading PMS firms which manages assets worth around Rs 1,700 crore.

“KNR and PNC have remained institutional favourites for a long period of time. And they have delivered good returns, even during the tough times for the industry,” said Santosh Meena, Head of Research, Swastika Investmart. The two companies remain his preferred picks in the EPC space given the healthy return ratios, lean balance sheets and better execution process, he added.

pnc infratech 3011

PNC has executed 70 major infrastructure projects to date, pointed out ICICI Securities.

“Strong order-book position, receipt of appointed date in most of its projects and execution pick-up are expected to translate to 11.7 percent topline CAGR (compounded annual growth rate) over FY22-24E along with stable margins,” it said, adding that planned monetisation of Hybrid Annuity Model (HAM), or annuity assets, is also another key positive.

“PNC has established itself as a capable executor in the segments of airport runways, water infrastructure, and roadways. Additionally, the company is able to complete projects on schedule thanks to its strong execution ability, ownership of contemporary equipment and internal teams,” Meena said.

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The majority of small infra companies witnessed a muted second quarter of FY23 due to extended monsoon throughout the country. Moreover, project awarding activities by the National Highway Authority of India (NHAI) have also been slow in Q2FY23. Due to a sluggish second quarter, many small infra firms have reduced their revenue guidance for FY23, said Mohit Nigam, Fund Manager & Head - PMS, Hem Securities.

PNC has reduced its earlier revenue guidance of 15 percent to 10-15 percent owing to the sector slowdown while a lull in tendering activities has led to no significant order inflow for KNR. Despite this, the market sentiment regarding both EPC companies is optimistic.

“It is expected that robust tendering activity will be done by NHAI in H2FY23 due to which significant order inflow will be witnessed. Moreover, the upcoming Budget will also play a key role as markets are expecting a significant announcement in infrastructure space like last year,” Nigam said.

Management commentary

The PNC management, in a Q2 earnings call, said it cut revenue guidance due to a lower-than-expected ramp-up in the execution of Jal Jeevan Mission projects as rains extended into October.

Even as PNC has not received any order inflows in FY23 YTD, it has maintained its order inflow guidance of Rs 8,000-10,000 crore for FY2023/FY2024. The management has guided for the operating margin to remain at 13.5 percent.

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Meanwhile, KNR, in its earnings conference call, said its current order book position remains healthy and provides clear visibility of execution over the next 2.5 to 3 years.

The order book, including recently won HAM projects, remains healthy at Rs 8,807 crore which is 2.5 times its trailing 12-month standalone revenue while the company has retained its order inflow target of Rs 4,000-5,000 crore for FY2023. The management has largely retained its guidance of Rs 3,500 crore revenue and 18-19 percent operating margin for FY2023.

Comfortable valuations

Talking about valuations, Meena believes there is comfort in PNC, which is trading at a PE of 10, below its five-year average, while KNR is trading at a PE of 19, which is above its five-year average. “We are likely to see a rally in this sector as the infrastructure sector did not participate in the ongoing rally in domestic economy-facing stocks despite the sector's positive outlook,” he said.

Nigam too believes that PNC is attractively valued at this point. The P/E ratio of PNC is lower than KNR and industry P/E in general, he said.

Moreover, the market capitalisation-to-sales ratio of PNC is less than 1 hinting at attractive valuations, Nigam added.

Over the years, PNC has created a strong track record in project execution while maintaining stable margins and balance sheet integrity, Centrum Broking said. “Valuations are attractive at 10.2 times/8.8 times FY24/25E EPS without adjusting for the value of assets,” it added.

The brokerage firm feels the valuation of KNR is also reasonable given the company’s strong balance sheet and credentials. The stock is trading at 14.5 times/12.7 times FY24/FY25 earnings, Centrum Broking added.

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KNR continues to engage with state agencies and has been assured of gradual payment releases, with the possibility of a lump sum as well, said Anand Rathi Share and Stock Brokers. Meanwhile, the management expects road orders to help deliver on its revenue guidance, and it also banks on healthy prospects for inflows.

“Though near-term challenges persist, KNR has its priorities right,” said Anand Rathi Share and Stock Brokers.

Technical view

KNR can start a fresh upside momentum once it crosses its resistance level of Rs 270, post which it could rally up to Rs 330-345, said Arpan Shah, Senior Research Analyst, Monarch Networth Capital.

Similarly, PNC could be bought once it surpasses the recent high of Rs 280, which could trigger an up move in the scrip to up to Rs 320, Shah added.

Dipti Sharma

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