PNC Infratech Ltd Management Discussions

Global Economic Outlook

The global economy has displayed remarkable resilience, maintaining consistent growth as inflation moves back to target levels. This progress has been marked by considerable challenges, such as supply chain issues post-pandemic, a conflict in Ukraine initiated by Russia that precipitated worldwide energy and food shortages, and a significant spike in inflation, which was met with coordinated monetary policy tightening worldwide.

However, contrary to forecasts, the world successfully averted a recession, with the banking system demonstrating considerable resilience. Furthermore, major emerging market economies managed to avoid sudden halts in growth. According to projections from the International Monetary Fund (IMF) as of April 2024, growth for both 2024 and 2025 is anticipated to remain stable at around 3.2%, with median headline inflation expected to decrease from 2.8% by the end of 2024 to 2.4% by the end of 2025.

Indian Economic Overview

Ten years ago, India experienced a tumultuous economic journey. Concerned about deteriorating economic fundamentals, investors rapidly withdrew funds from the capital markets. However, looking ahead a decade later, India has remarkably transformed its narrative within a mere span of one decade. Enhanced economic fundamentals have bolstered the outlook of various agencies, which have provided optimistic growth projections for India.

According to International Monetary Funds projections in April 2024, growth in India is projected to remain strong at 6.8% in 2024 and 6.5% in 2025, with the robustness reflecting continuing strength in domestic demand and a rising working-age population.

The Asian Development Outlook (ADO) for April 2024, published by the Asian Development Bank (ADB), states that India is expected to remain a major growth engine in the Asia-Pacific region, with a 7.0% expansion this , year and 7.2% next year. These forecasts have been revised upward from the earlier estimates of 6.7% for each year.

"Notwithstanding global headwinds, India remains the fastest-growing major economy on the strength of its strong domestic demand and supportive policies," said ADB Country Director for India Mio Oka. "The Government of Indias efforts to boost infrastructure development while undertaking fiscal consolidation and provide an enabling business environment will help in increased manufacturing competitiveness to augment exports and drive future growth".

Several factors have contributed to the economic growth in India, with the most notable being the 17% year-on-year increase in capital expenditure by the Central Government for FY 2023-24, alongside increased transfers to state governments. These measures are expected to further stimulate infrastructure investment. Looking ahead to FY 2024-25, growth momentum is poised to accelerate, driven by increased goods exports, heightened manufacturing productivity, and enhanced agricultural output.

Infrastructure Sector Overview

The infrastructure industry in India is highly competitive, with numerous players operating in various segments of the market. The industry comprises large and small players, including both domestic and international companies. However, only a few large players are present across India, given the requirements for huge capital investment. The Governments role in the construction sector is quite significant.

Indias infrastructure sector is experiencing a profound transformation, propelled by comprehensive initiatives designed to tackle enduring challenges and drive sustainable growth. The nation is significantly investing in revitalizing its transportation infrastructure, with major projects in progress to enhance roads, highways, railways, and airports. These developments aim to improve connectivity and alleviate logistical bottlenecks.

Additionally, there is a strong focus on strengthening the energy infrastructure, emphasizing the expansion of renewable energy sources alongside conventional power generation to accommodate the increasing needs of its rapidly expanding population and economy.

These efforts underscore Indias commitment to building a robust infrastructure framework that not only supports economic expansion but also fosters inclusive development and resilience in the face of future challenges. Indias infrastructure sector is set for significant growth, fueled by government initiatives and increased investments.

Union Budget Highlights for the Infrastructure Sector

The 2024 Interim Budget outlined the Governments overarching vision and policies, including proposed measures for the infrastructure sector. As part of the Viksit Bharat vision, the Government has introduced several policy reforms, especially those targeting the infrastructure domain. An allocation of 11.11 Lakh Cr, equivalent to 3.4% of the GDP, has been earmarked, with significant portions allocated to roads ( 2.72 Lakh Cr) and railways ( 2.52 Lakh Cr).

Under the PM Gati Shakti scheme, the implementation of three significant economic railway corridor programs is underway to facilitate multimodal connectivity, enhance logistics efficiency, and reduce costs. Additionally, support is being provided for the expansion of Metro Rail and NaMo Bharat in major cities, with a focus on transit- oriented development. Furthermore, efforts are ongoing to expedite the expansion of existing airports and the development of new ones.

In the Interim Budget for FY 2024-25, the allocation for road sector saw a 2.7% increase. The Ministry of Road Transport and Highways received 2.78 Lakh Cr from the Interim Budget. Just 0.5% more has been allocated than the revised estimate of 2,76,351 Cr. Of the total budgetary grant,

1,68,464 is towards funding NHAIs national highway corridor construction project under the Bharat Mala Pariyojana. The six laning of crowded sections of the Golden Quadrilateral being a vital spot for roads, is included in the total allocation for road works. The amount earmarked is 78,349 Cr.

In the budget for 2024-25, the Union Government has earmarked 70,163 Cr for the Jal Jeevan Mission (JJM).

The Union Ministry of Railways has been allocated 2.525 Lakh Cr for FY 2024-25, a 5.8% increase from 2.41 Lakh Cr for the previous year, with a focus on infrastructure investment. This modest rise is expected to support ongoing initiatives, including additional lines, electrification, track doubling, and the acquisition of modern rolling stock. In her budget speech, Union Finance Minister Nirmala Sitharaman announced plans for three major economic railway corridor projects and the upgradation of 42,000 Passenger Coach to Vande Bharat standards.

During the Interim Union Budget in February 2024, Nirmala Sitharaman said, "The aviation sector has been galvanized in the past ten years. The number of airports has doubled to 149. The roll-out of air connectivity to Tier 2 and Tier 3 cities under the UDAN 19 scheme has been widespread. Five hundred and seventeen (517) new routes are now serving 1.3 Cr passengers. Indian carriers have proactively placed orders for over 1,000 new aircrafts. Expansion of existing airports and development of new airports will continue expeditiously".

Overall, spend on infrastructure and partnership with the private sector will continue the growth momentum for an all-rounded development.

Highways

During FY 2023-24, MoRTH successfully constructed 12,349 km of national highways, showcasing the Governments strong commitment to expanding infrastructure. However, it remained far from the target of 13,800 km for FY 2023-24. This signifies a 31% decline from 12,375 km in FY 2022-23. Such low awarding is common before the election period.

A similar trend was seen in FY 2018-19 where the awarding activities declined by 67% on year-on-year basis.

Furthermore, MoRTH awarded the contracts for 8,581 national highways in FY 2023-24 to bolster connectivity.

ICRA has indicated that the Ministry of Road Transport and Highways (MoRTH) predominantly employs the EPC model for construction activities, followed by BOT and HAM methods. Approximately 70-75% of the projects awarded are under the EPC model, with the remaining allocated to BOT and HAM.

Furthermore, according to a report from ICRA, as of March 2024, MoRTH has a substantial award pipeline exceeding 45,000 kilometers.

53 projects with a combined length of 5,214 km and an estimated cost of 2.10 Lakh Cr have been designated for development under the Build-Operate-Transfer (BOT) - Toll model by the Ministry of Roads, Transport, and Highways (MoRTH). To protect the interests of all parties involved, MoRTH has updated the model concession agreement (MCA) to resolve a number of issues that arose during the BOT Toll projects operational, termination, and execution phases. Moreover, the Toll-Operate-Transfer (TOT) mechanism has undergone changes.

The Ministry of Statistics and Program Implementation has released detailed data highlighting the countrys developmental progress. From FY 2013-14 to FY 2023-24, there has been a 168% increase in major infrastructure project growth, valued at over 1.5 billion. Initially dominated by railways in FY 2013-14, roads have become the leading sector, accounting for 58% of the 1,902 major infrastructure projects monitored by MoSPI in FY 2023-24, with a minimal average cost overrun of 3%.

NHAI has exceeded its expected outcomes, generating approximately 31,500 Cr through asset monetization via NHAI InvIT and TOT in FY 2023-24. It garnered 15,968 Cr from four TOT bundles (11 -14) and 15,624 Cr through InvIT Round 3. This achievement accounts for about 72% of the FY 2023-24 target (in terms of value) set by the National Monetization Pipeline. Additionally, NHAI plans to raise another 15,000 Cr through the securitization of road assets, although this initiative is likely to be delayed until FY 2024-25.

Continued Growth Momentum in Toll Collections

In the FY 2023-24, total toll collection in India surged to 64,810 Cr, marking a remarkable 35% increase from the previous year and surpassing both government and industry expectations. This uptick was driven by a significant rise in commercial traffic, alongside the expansion of tolled roads and the influx of new FASTag users. The Government, initially estimating toll collection to reach 55,000 Cr, witnessed this exceeded projection due to these factors.

Government data reveals that the average daily collection through FASTags at national highway fee plazas amounted to 147.31 Cr during FY 2023-24.

Projections for the upcoming fiscal year indicate that total toll collection in India is anticipated to surpass 70,000 Cr, with a projected rise to 1,30,000 Cr by FY 2029-30.

Railways

Union Railways Minister Ashwini Vaishnaw said "An integrated approach to railway planning has been undertaken by consulting 18 Ministries and this plan has been in the works for the past two years. We are in the process of preparing detailed project reports, freezing final alignments and interacting with state governments for the smooth working of the development along these corridors."

Industry feedback on recent policy initiatives, such as the PM Gatishakti programs construction of logistics parks and railway terminals, has been encouraging, and it is anticipated that these measures will significantly lower logistics costs.

Water Sector

As of March 2024, three-fourths of all rural households were covered under the Jal Jeevan Mission. Nearly 145 million rural households, or 75% of the total, have been fitted with functional tap water under the scheme vis a vis only one-sixth of Indias households having functional tap water. So far, 11 States and Union Territories have achieved their target of 100% coverage ahead of the year-end deadline, including Gujarat, Haryana, Telangana, Punjab, Himachal Pradesh and Arunachal Pradesh.

The budget for FY 2024-25 includes 70,163 Cr from the Union Government for the Jal Jeevan Mission (JJM).

Airport Sector

There is a strong pick-up in both leisure and business travel in the domestic segment. With an increase in the need for connectivity to Tier 2 and Tier 3 cities, there is a boom in airport infrastructure construction activities.

The Governments regional connectivity initiatives, such as UDAN (Ude Desh Ka Aam Nagrik), are aimed at enhancing air accessibility to underserved regions.

Capex investments in the airport infrastructure remain healthy, with around 55,000-60,000 Cr of committed capex over the next 3-4 years, including new greenfield airports, brownfield expansions and expansion of airports under the Airports Authority of India.

According to the Ministry of Civil Aviation, the Government of India is planning to develop six twin city airports by 2030. This infrastructure development plan aimed to decongest existing airports in major cities and thereby address the rise in demand for air travel in the country. This plan further expands airport infrastructure with twin airport development of 15 airports by 2040 and more than 30 by 2047.

Company Overview

PNC Infratech Limited (The Company), which was incorporated in 1999, has contributed significantly and actively to the development of Indias infrastructure, especially towards the Highways. The Company provides end-to-end infrastructure implementation solutions, including EPC services on both an item rate and a fixed-sum turnkey basis. The Company also carries out and implements projects using various public-private partnership models, such as Design-Build-Finance-Operate- Transfer (DBFOT) and Operate-Maintain-Transfer (OMT). It is one of the few infrastructure firms in India with a track record for construction, development, and management.

One of the Leading Integrated Infrastructure Players with In-house Capabilities

Over the last three and half decades, the Company has established itself as a dependable player in the construction of roads, highways, bridges, and airport runways. It is now ready to undertake an EPC project with a budget exceeding 10,000 Cr. In preparation, the Company has invested 247 Cr over the past five years. It currently possesses a fleet of construction machines and assets valued at 1,341 Cr, enabling it to handle projects worth between 9,000 and 10,000 Cr annually. The Company also strategically manages its input costs through both renting and owning quarries.

Over the years, the Company has methodically built a robust team to enhance its project execution capabilities.

In the last five years, it has grown its workforce bringing the total over 8,800 employees. This diverse team includes specialists in in-house design, engineering, development, construction, operation, and management, along with highly skilled technical staff. As a result, the Company is well-equipped to launch and complete projects more efficiently, maintaining high standards of quality and profitability.

Well-Positioned and Geared to Achieve Next Leg of Growth through Diversification

Leveraging the technical and functional expertise honed over two decades, the Company is poised to continue its growth trajectory while implementing effective risk and working capital management strategies. Its strategic plan focuses on gradually expanding its presence in emerging sectors such as urban development, railroads, and water management.

To maintain its expansion momentum and mitigate the risk of concentration, the Company is diversifying its project development activities. While the road sector remains a primary focus, involvement in the Jal Jeevan Mission is expected to significantly bolster the Companys order book in the water sector in the near to medium term. Additionally, the business is actively working to increase its market share in the railway industry.

The Companys operations span several key areas, including road and highway projects under BOT/HAM and OMT models, irrigation and water supply, industrial area development, and airport runway projects.

Multi-State Presence with Cluster-Based Approach

The Company, with its headquarters in North India, has a strong track record of successfully executing projects in the region, leading to a significant portion of its order book being concentrated there. It operates across multiple states, including Delhi and NCR, Uttarakhand, Karnataka, Maharashtra, Uttar Pradesh, Rajasthan, Haryana, Punjab, Madhya Pradesh and Gujarat.

To date, the Company has completed 88 major infrastructure projects. This portfolio includes 64 road EPC projects, 21 airport projects, one railway track construction, two power transmission, one industrial area redevelopment project and one water supply project among other spread across 13 states.

Currently, the Company is managing 28 PPP projects, encompassing BOT-Toll, BOT Annuity, OMT, and HAM assets, with 23 of these being HAM projects that represent a bid project cost of approximately 31,000 Cr. Within the HAM portfolio, as of March 31, 2024, the Company has reached COD/PCOD for 10 projects, 9 are under construction, 3 have achieved financial closure, and 1 has had its concession agreement executed.

Uttar Pradesh has been one of the fastest-growing states in India, with rapid expansion in both urban and rural infrastructure. The Companys extensive background and deep knowledge of the region position it to capitalize on the states comprehensive infrastructure development initiatives. By employing a cluster-based approach, with a significant portion of its order book concentrated in Uttar Pradesh, the Company maximizes operational leverage and profit margins through optimal resource utilization. This long-standing presence in the region enables PNC Infratech Limited to bid competitively while maintaining strong margins and profitability. As a major winner in recent awarding events in North India, particularly in Uttar Pradesh, the Company anticipates continued success and similar growth in the coming years.

Existing Pre-Qualification Credentials along with Strong Relationship with Public Sector Clients

Over the last two decades, the Company has collaborated with both state and federal governments on numerous projects, accumulating extensive experience in the field. It has forged strong, enduring relationships with key infrastructure authorities such as the Uttar Pradesh State Highways Authority, Uttar Pradesh Expressways Industrial Development Authority, State Public Works Departments, Dedicated Freight Corridor Corporation of India Limited, NHAI, MoRTH, Airports Authority of India, Military Engineering Services, Delhi State Industrial and Infrastructure Development Corporation Limited, and the State Water and Sanitation Mission UP.

During FY 2023-24, the Company undertook multiple initiatives across various states, which helped in mitigating risks and managing the working capital cycle effectively.

Its exemplary track record in completing contracts on time has qualified it to bid independently on major projects, with the capability to undertake projects up to 10,000 Cr, meeting all required financial and technical criteria.

Financial Prudence, Healthy Order Book Position & Strong Balance Sheet

Through measures for cost optimization, a varied value proposition, and a strengthened balance sheet, the Company is experiencing several growth drivers. In FY 2023-24, the Companys net cash generated from operating activities stood at 1,261 Cr on Standalone basis. While the whole sector experienced difficulties due to delayed financial closure, and high cost of debt capital, the Company raised debt at lower rates, faster financial closure, and witnessed continual enhancement in credit ratings.

The Company recorded a standalone net debt-to-equity ratio of 0.08 times as of FY 2023-24 (consolidated net debt/equity at 1.52 times). The Company is likely to continue funding the HAM projects through internal accruals and monetization of BOT and HAM projects.

In FY 2023-24, PNC Infratech received fresh orders worth 1,873 Cr, which resulted in a strong order book and provided strong revenue visibility. The unexecuted order book of the Company as of March 31,2024, stood at 15,490 Cr. By including all the projects for which the Company has been declared as L-1, the order book would be over 20,400 Cr, providing good revenue visibility over the next two to three years.

Asset Monetization

During FY 2023-24, the Company, along with its wholly- owned subsidiary, PNC lnfra Holdings Limited, signed a Master Securities Purchase Agreement (SPA) with Highways Infrastructure Trust (HIT), an Infrastructure Investment Trust (InvIT) whose sponsor is affiliated with funds, vehicles and/or accounts managed and/or advised by affiliates of KKR & Co. Inc., to divest 12 of the Companys road assets which includes 11 National Highway (NH) Hybrid Annuity Mode (HAM) projects and 1 State Highway BOT Toll project. The total Enterprise Value of these 12 projects is 9,006 Cr, including the earn-outs, whereas the Equity Value of these projects is 2,902 Cr, including the cash balances in these projects and the total Equity Invested in these projects is 1,740 Cr. The transaction is subject to certain regulatory and other customary conditions that are standard to a transaction of this nature. Proposed disinvestment is aligned with the Companys strategic objective of recycling the capital invested in operating road assets to leverage the ambitious growth vision that the Government of India has outlined for this sector.

Financial Overview

The Company stands out as one of the select few in Indias infrastructure and construction sector to consistently report positive operating cash flow and free cash flow (OCF/FCF) after interest expenses from 2014 to 2024. With minimal net interest expense as a percentage of EBITDA, the Company enjoys substantial distributable cash flow. It has strategically steered clear of unrelated diversification and aggressive expansion campaigns.

For the fiscal year 2023-24, the Standalone Revenue was 7,699 Cr. The EBITDA for the same period is 1,277 Cr, and the Profit after Tax is 850 Cr. As of March 31,2024, the Companys Net Worth on a standalone basis stood at 4,781 Cr, with total debt at 382 Cr, resulting in a net cash surplus of 234 Cr.

The debt service coverage ratio for FY 2023-24 was 11.06x, showing an improvement from 7.73x in FY 2022-23. The current ratio, a measure of the Companys ability to meet short-term obligations, remained robust at 2.21x for FY 2023-24 as compared to 2.43x for FY 2022-23.

During the year, CARE Ratings Limited upgraded the Companys rating from AA to AA+ with a stable outlook for its long-term facilities and maintained an A1+ rating for its short-term bank. The Net Working Capital Days were also reduced to 102 days as of March 31,2024, as compared to 106 days as of March 31, 2023.

On a consolidated basis, the revenue for FY 2023-24 stood at 8,650 Cr. In terms of segment contribution, the Roads EPC segment contributed approximately 67%, the Water Segment contributed 22%, whereas the Toll/Annuity Income contributed 11% for FY 2023-24. The revenue from Water Segment for FY 2023-24 grew by 106% to 1,906 Cr, as compared to 925 Cr for FY 2022-23.

The consolidated EBITDA for FY 2023-24 was 2,005 Cr and the consolidated Profit after Tax (PAT) for FY 2023-24 was 909 Cr.

The Companys net worth as of March 31,2024, on a consolidated basis was 5,185 Cr, whereas the total debt stood at 8,016 Cr. The Net Debt to Equity on a consolidated basis stood at 1.52 times.

Risks & Mitigation

Competition Risk

Mitigation

The Company faces competition from a variety of local, national, and international firms across different business segments and geographic regions. In FY 2023-24, competitive pressure intensified due to various government measures, including relaxed bidding criteria. These changes may drive down contract prices, potentially leading to reduced operating margins for the Company.

With over 25 years of corporate legacy in Construction and Engineering, the Company boasts a robust track record. Its main focus lies on larger projects with a ticket size of up to 10,000 Cr, where competition is relatively low. Leveraging its strong balance sheet and domain expertise, the Company offers comprehensive services encompassing design, engineering, planning, management, and project execution. This enables the completion of complex projects in a safe, timely, and cost-effective manner. The Company remains committed to completing projects ahead of schedule to capitalize on early completion bonuses whenever feasible.

 

Geographical Concentration Risk

Mitigation

The Company primarily operates in North India, with the majority of its activities concentrated in Uttar Pradesh. It is subject to risks associated with varying regulatory and political changes in the region.

The Company actively addresses its high exposure in North India by diversifying its portfolio. It is strategically entering new segments like irrigation and expanding its operations into different states. Leveraging its strong track record of successful partnerships with various state governments, the Company is well-equipped to navigate these new territories. Moreover, it is utilizing its extensive fleet of construction equipment and machinery to efficiently mobilize resources for multiple projects nearby efficiently, enhancing operational efficiency. The Company recently secured two new projects worth over 4,000 Cr in Maharashtra, which demonstrates companys pan India capabilities.

 

Inflation Risk	Mitigation
The overall industry and economy as a whole have witnessed sustained upward inflationary trajectory. The industry faced an inflationary impact due to higher input costs, especially for steel and cement. Structural steel, cement, bitumen, concrete, metal plate, cable, and other electrical and mechanical components are among the Companys main products. The continued higher inflationary environment can impact its profitability.	Managing input cost volatility is crucial for the success of any infrastructure project. The Company adopts a strategic approach by exerting full control over various input costs through ownership or securing long-term contracts. It maintains a significant fleet of stone aggregate mines and crushers, which are major contributors to costs.
	Additionally, it procures key raw materials like cement and steel from reputable manufacturers with whom the Company has established strong business relationships, ensuring competitive pricing, top-notch quality, and punctual delivery. To mitigate the impact of input cost fluctuations, the Company incorporates cost-escalation measures into its contracts with government clients. These measures provide a safeguard for maintaining margins during the execution phase of projects.

 

Cyber Risk	Mitigation
Over the past few years, there has been a consistent increase in cyber attacks. The IT systems, which form the backbone of project execution, facilitate various innovative solutions that enhance the efficiency of project operations. Consequently, the Company is vulnerable to cyber threats, including cyber attacks, ransomware, and phishing attacks.	While the Company has not encountered any cyber attacks to date, it remains vigilant by continually evaluating potential cyber threats. It has proactively implemented all necessary systems and measures to bolster its cybersecurity defenses.

 

Liquidity/Cash Flow Risk	Mitigation
The risk entails the possibility that the Company could struggle to meet both its immediate and future financial commitments. This could arise from insufficient cash flow, unexpected financial burdens, or changes in market conditions, potentially impacting the Companys ability to sustain operations and growth over time.	The Company consistently upholds a robust financial standing, ensuring sufficient reserves to meet debt obligations. It adheres to disciplined budgeting practices, meticulously monitoring project costs and debt requirements. Additionally, it closely monitors both micro and macroeconomic developments, enabling prompt and informed financial decisions.

Human Resource Management

As of March 31,2024, the Company employed over 8,800 individuals. It consistently prioritizes skill development and team enhancement. The Companys senior management is predominantly composed of individuals who have risen through the ranks, holding extensive hands-on experience in engineering, procurement, project management, and overall execution. Additionally, the Company supports its staff in achieving their set goals through performance by fostering a culture of high accountability, bolstered by moral support and financial incentives.

Internal Control Systems and Their Adequacy

The Company has adequate internal control systems that are commensurate with the size and nature of its business, ensuring that all assets are acquired in a cost-effective manner and are safeguarded, protected against loss from unauthorized use or disposition and that all transactions are properly authorized, recorded, and reported. The Companys internal audit department supplements the internal control system with well-documented policies, guidelines, and procedures, as well as reviews, to ensure compliance and effectiveness.

The Companys internal auditors conduct audits of various departments in accordance with the yearly audit plan and report to the management and the Audit Committee of the

Board regularly. To determine the adequacy and efficacy of the internal control system and measures, the views of statutory auditors and ISO auditors are also taken into account. The Companys project locations are protected by sophisticated closed-circuit television camera surveillance and the SAP ERP system. The management monitors these metrics on a regular basis to verify that they are improving.

Cautionary Statement

The Company has included forward-looking statements and information in this annual report to help investors understand our growth potential and make educated investment decisions. This report, as well as other written and oral comments the Company makes on a regular basis, contain forward-looking statements that outline expected outcomes based on managements plans and assumptions. Forward-looking statements are predictions of future events based on certain assumptions. Risks, uncertainties, and even assumptions, play a role in achieving such findings. The quality, reliability, and completeness of market data and information acquired from numerous published and unpublished reports and sources cannot be guaranteed. The Company does not promise to make any announcements or amend any development or forward-looking statements made by or on behalf of the Company if any of the economic scenarios, industry developments, or forward-looking statements become materially inaccurate in the future.