Stocks to buy: PNC Infra, KNR stocks overcome sector blues, remain attractive

The ET Construction index has fallen by 10 per cent over the past 12 months following slower pace of orders from the National Highway Authority of India (NHAI), funding constraints, and delay in order execution. However, the stocks of PNC Infratech and KNR Constructions have gained 26-46 per cent on account of better execution, higher cash flows and low debt, their order book size gives revenue visibility over two years. As a result, these companies are expected to trade at a premium to their peers.

PNC Infratech and KNR Constrictions have distinguished themselves through their strong financial performance. At a time the industry is struggling with slow pace of execution, PNC’s revenue grew by 84 per cent while KNR’s topline rose by 31 per cent year-on-year in the September 2019 quarter. In comparison, its peers reported average growth of 9.5 per cent in their revenues.

A key variable which has caught the attention of analysts is the cash generation of these two companies. According to data from Capitaline, operating cashflow relative to sales of these two companies was 10-12 per cent in FY19 compared with around 7 per cent for the peers.

The two companies have debt-equity ratios of less than 1, which is attractive when compared with the average leverage ratio of 4.2 for the peers. On the business front, both PNC and KNR have strong orderbooks offering visibility of over two years.

In addition, the promoters of most of the peers have pledged their stakes — either partial or in some cases almost entirely — reflecting tight liquidity conditions. However, the promoters of PNC and KNR have not yet pledged any stake. On the valuation front, the stocks of PNC and KNR trade at 40 per cent and 28 per cent discount to their respective five-year averages EV/EBIDTA (enterprise value relative to operating profit before depreciation and amortisation).