PNC Infratech sale could lead to valuation upgrades for road assets

National highway bid pipeline has recovered from a low of Rs 15,900 cr in December 2023 to Rs 68,400 cr in January 2024

While activity in the highway segment has been slow, the bid pipeline saw recovery in January 2024, and awards are expected to improve in Q4FY24. The national highway (NH) bid pipeline has recovered from a low of Rs 15,900 crore in December 2023 to Rs 68,400 crore at present.  The NHAI’s pipeline stands at Rs 66,100 crore, with hybrid annuity model (HAM), build operate transfer (BOT) and engineering procurement and construction (EPC) projects accounting for 60 per cent, 29 per cent and 13 per cent share, respectively. There are 7 BOT projects worth Rs 19,100 crore in Maharashtra up for bidding, along with tenders under Bharatmala, NH (O) and NHDP. New awards under Bharatmala were halted until CCEA approves the revised cost of the programme.

Nearly 6,000-7,000 km of road projects are in the final stage of approval, which could come up for awarding in the near term. There are reports of the revamp of the process and drawing up of a new mega pipeline. Key players who stand to gain as awards pick up include L&T, NCC, HG Infra Engineering, PNC Infratech and Ashoka Buildcon.

Along with the pace of awards, monetisation of assets is a key monitorable. Recent news on this front includes the definitive agreement PNC Infratech (PNC) has signed with Highways Infrastructure Trust (KKR) for sale of 12 road assets at enterprise value of Rs 9,000 crore.

The equity value of the deal is Rs 2,900 crore, implying price-to-book value of 1.7 times. The proceeds will fund equity commitments by PNC to other projects and future growth in general.

 The 12 road assets includes 11 HAM assets and 1 BOT toll asset. Of these, 7 HAMs and 1 BOT (toll) are operational and the balance 4 HAMs are under construction and likely to be completed by March 2024.

The sale proceeds will come in two or more tranches. Since the deal includes earn outs, some part may come with a lag.

PNC says the asset sale plans will be firmed up within FY24. The signing of this agreement with a credible buyer like KKR is a big positive for the stock and a boost for the perceptions of the industry.

The valuation multiple of 1.7 times for the sale is higher than the past transactions 1.3 times-1.55 times and above estimates. It releases cash flows for future growth. PNC has recently settled claims worth Rs 770 crore (pre-tax) with NHAI, which should also yield further cash flow.

PNC’s current portfolio of HAM assets has a total equity requirement of Rs 2,940 crore. PNC has already invested Rs 18.40 crore by September 2023 and the balance of Rs 1,100 crore has to be invested by March 2026.

The stock jumped 5 percent on the news since asset valuation beat the street and there is clear visibility of cash flows. There could be valuation upgrades for other HAM and BOT assets too on the back of this deal. The optimism could also extend to upgrades of engineering procurement and construction business of PNC given the cash inflow from deal and the claim settlement.