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KNR Constructions Ltd>
  • CMP : 272.1 Chg : 3.65 (1.36%)
  • Target : 305.0 (15.97%)
  • Target Period : 12-18 Month

12 Feb 2023

Order inflows key monitorable ahead...

About The Stock

KNR Constructions is one of the leading companies in the Roads and Highways sector having executed 6,000+ lane km of projects across 12 states in India. The company also has an established presence in Irrigation and Urban Water Infrastructure Management.

  • Reported 16.3% revenue CAGR over FY17-22 and has consistently delivered industry-leading operating margin of ~20% throughout past 3 years.
  • Prudent management, robust return ratios (RoCE: 20%+)

KNR PAT was boosted by profit on HAM stake sale completion

  • Standalone revenue improved 8.3% YoY to ₹ 830.2 crore
  • EBITDA margin stood at an elevated level of 18.8% (down 194 bps). We highlight that base quarter margins were higher owing to higher proportion of water segment. EBITDA at ₹ 156 crore, was down 1.8% YoY
  • At net level, reported PAT at ₹ 161.8, was up 60.6% YoY, owing to profit on stake sale completion of HAM assets of ₹ 138 crore (pre-tax). The company also charged higher finance cost (₹ 9.5 crore) and taxes owing to provision for earlier year taxes (₹ 24.8 crore).
What should Investors do?

KNR’s share price has grown at ~11% CAGR over the past five years (from ~₹ 158 in February 2018 to ~₹ 263 levels currently).

  • We expect the same to pick up pace by FY24. Order inflow will be key near-term catalyst. We maintain our BUY rating on the company.
Target Price and Valuation

We value KNR at ₹ 305/share

Key Triggers for future price performance
  • KNR is likely to be one of the prime beneficiaries of roads & water segment
  • With receipt of appointed date in most of its projects, and execution pick-up to translate into ~12% topline CAGR over FY22-25E
  • A key trigger for the company would be order inflows which will improve execution visibility ahead.
New Stock Ideas

Besides KNR, we like HG Infra in the EPC space.

  • Strong execution, lean balance sheet and healthy order book
  • BUY with a target price of ₹ 915/share

Key Financial Summary

| crore FY20 FY21 FY22 5 yr CAGR (FY17-22) FY23E FY24E FY25E 3 yr CAGR (FY22-25E)
Net Sales 2,244.2 2,702.6 3,272.6 16.3 3,471.5 4,035.9 4,593.0 12.0
EBITDA 487.1 535.8 677.7 24.2 666.5 746.6 849.7 7.8
EBITDA Margin (%) 21.7 19.8 20.7 - 19.2 18.5 18.5 -
Adj. PAT 235.9 255.4 360.4 18.0 387.8 445.0 512.6 12.5
EPS (|) 16.0 8.7 13.6 - 16.2 15.8 18.2 -
P/E (x) 16.4 30.3 19.3 - 16.2 16.6 14.4 -
EV/EBITDA (x) 15.5 13.6 10.4 - 10.3 9.3 7.9 -
RoNW (%) 14.5 13.7 16.1 - 14.4 14.3 14.2 -
RoCE (%) 19.0 23.4 25.8 - 20.2 19.6 19.4 -
- - - - - - - - -
Source: Company, ICICI Direct Research

Key performance highlight and outlook

Targeting order inflow in near term

KNR’s order book at the end of Q3FY23 stood at | 8,100 crore, majorly contributed by Roads - HAM (49%), Roads - EPC (28%) and Irrigation (23%) segments. Going forward, the company is targeting order inflows of ~| 4,000-5,000 crore during FY23, largely in roads segment. The company has indicated towards execution challenges with a) slowed execution pace in irrigation projects due to funding issues at government level and b) extended monsoon season impacting construction activities in M9FY23. Considering these, the company expects revenue to hover ~|3,500 crore during FY23 and | 4000 crore in FY24. In-line with these, we expect company to report ~12% CAGR during FY22-25E with margin to hover at ~18.5%.

Debt free balance; dues from irrigation comes down…

KNR largely maintain lean balance sheet structure backed by its prudent strategy to mainly focus on an asset light business model and efficient manage working capital. With receipt from Cube deal and improved irrigation collection, it is debt free. Going forward, it has total equity requirement of | 732 crore (| 293 crore already invested till Q3FY23; | 78 crore estimated to be spent during rest-FY23, | 256 crore in FY24 and balance | 97 crore in FY25) towards already secured HAM projects. Despite these, we expect its debt to remain at minimal to zero levels with healthy operating cash flow generation arising from improved profitability, and better cash flow management. Further, its net working capital at the end of Q3FY23 improved to 53 days (vs 60 days at Q1 FY23            -end). We note that the company has become cautious towards incremental execution in Irrigation segment and is now focusing higher towards clearance of pending bills which would aid its working capital cycle to improve further.

Key conference call takeaways

  • Order inflow: Order inflows in the recent past has been impacted by a) heightened competition, b) company’s focus on margin protection, and c) higher emphasis on projects on southern region. However, the company is targeting order inflows of ~| 4000-5000 crore during FY23 with higher focus on roads and highways segment. The company expects 22 bids to open by March and currently it also plans to submit bid for further 10-12 projects.
  • Competitive intensity: As per the management, the competitive intensity in the roads segment remains at an elevated level with higher participation from unorganized player trying to undercut project costs to bag higher market share.
  • Under-construction HAM projects: As on Q3FY23-end, the physical progress on KNR’s 5 under-construction HAM projects stands at: a) Ramanattukara-Valanchery: 14.3%, b) Valanchery- Kappirikkad: 16.8%, c) Chittor-Thatchur: 0%, d) Magadi-Somwarpeth: 68.9% and e) Oddanchatram-Madathukulam: 85.6%.
  •  Irrigation projects: KNR has slowed down execution pace at its existing irrigation jobs due to major payment issues from state government (outstanding current dues: ~| 650 crore vs. | 900 crore in Q2). Revenue from the segment during Q2 FY23 stood at ~| 190 crore while it has received ~| 250 crore. The management had indicated that Vettam and Package 3 has been slow and the company is cautiously undertaking based on payment plan. Package 4 is however bank funded and thus the execution on the same is normalised.
  • Deal with Cube Highways: KNR has completed transaction with Cube highways on 20th October 2022 for 3 HAM projects namely a) KNR Tirumala Infra Pvt Ltd (investment: | 160.2 crore in form of equity and sub-debt; consideration received: | 204.9 crore), b) KNR Shankarampet Projects Pvt Ltd (investment: | 126.8 crore; consideration: | 154.6 crore), and c) KNR Srirangam Infra Pvt Ltd (investment: | 78.4 crore; consideration: |131.1 crore). Additionally, an additional amount totalling to | 34.1 crore is expected to be received subject to receipt of certain approvals form NHAI.
  • Income tax matter: The Income-Tax (IT) Department had carried out a search operation at the Companys various business premises in March’22. The company has extended full cooperation to the IT officials during the search. As on the date, the company has not received any formal communication from the IT department. However, the company conservatively has provided for finance cost (| 9.5 crore) and taxes owing to provision for earlier year taxes (| 24.8 crore).
  • Capex: KNR has incurred capex of ~| 110 crore during M9FY23. The management has guided for overall capex to the tune of | 140-150 crore in FY23 (vs | 200+ crore in FY22) with no major machinery to be added in the irrigation segment.

KNR is a proxy play on increased focus on roads and overall infrastructure push. Considering a) strong execution, b) healthy margins, c) monetisation of BOT/HAM assets, d) healthy balance sheet, and e) strong return ratios. We maintain BUY rating on the stock with SOTP TP of | 305. Key trigger will be order inflow momentum in the near term



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