PNC Infratech Rating: Buy; Nomura says GAEPL deal will unlock value for firm

We believe the re-opening of the economy and subsequent improvement in toll collections have revived the interest in the deal from Cube Highways.

PNCL has announced that the company along with other partners has reached an agreement with Cube Highways (unlisted) to divest the GAEPL (Ghaziabad Aligarh Expressway Pvt Ltd, unlisted) asset for an enterprise value of up to Rs 16 bn. We note that a deal was reached with Cube Highways earlier (in May 2019) for an EV of up to Rs 18.3 bn which was subsequently called off around May 2020 after the COVID-19 outbreak. We believe the re-opening of the economy and subsequent improvement in toll collections have revived the interest in the deal from Cube Highways.

Despite a lower EV valuation for the asset, we note that cash inflows for the deal at Rs 3.8 bn for PNCL is largely similar to that of the earlier deal. We view that the GAEPL asset deal eliminates the need for further equity infusions that may have resulted in a drag on standalone balance sheet. According to CARE Ratings, the toll collections of this asset is inadequate for debt servicing. This would have required PNCL and its partners to infuse capital in the form of equity or sub-debt on an ongoing basis.

Our cash proceeds estimate of Rs 3.8 bn is adequate in our view to meet equity obligations of HAM assets for FY22, which management had estimated at Rs 3.5 bn. Thus, the deal is not only value-accretive but also prevents a build-up in leverage.

PNC remains our top pick in the mid-cap EPC space: We maintain Buy rating with TP of Rs 364, implying 41% upside. The stock is currently trading at 9.7x FY23F EPS (underlying EPC PE at 8.0x). Key risks: slowdown in ordering by Centre and States and a sharp rise in working capital levels.

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