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KNR Constructions Ltd>
  • CMP : 260.2 Chg : -6.20 (-2.33%)
  • Target : 310.0 (33.05%)
  • Target Period : 12-18 Month

27 Jun 2022

Top Pick in the Infra Sector

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. It also has an established presence in irrigation & urban water infrastructure management

Triggers
  • KNR is likely to be the major recipients of thriving roads and water supply segments. Order book at FY22-end was healthy at ₹ 9,766 crore (including L1 worth ₹ 765 crore; 3x book to FY22 revenues)
  • The company has reported robust 21.1% revenue growth in FY22 (to ₹ 3,272.6 crore). Going forward, its strong order book position, decent inflows, and receipt of appointed date in most of its projects to translate into 14.3% topline CAGR over FY22-24E
  • Price escalation clause in NHAI’s contract, and better margins at irrigation jobs to keep operating margins at an elevated level of ~17-18.5%. Cash surplus position at FY22-end, strategy to focus on asset light business, and efficient manage working capital augurs well
What should Investors do?

Most of the EPC developers, in our coverage, have lean balance sheet structure backed by their prudent strategy to mainly focus on an asset light business model and efficient manage working capital. Also, we do not expect major swing in debt position going forward with  healthy operating cash flow generation . 

Target Price Valuation
  • We maintain BUY rating with target price of ₹ 310 (based on SoTP valuation)
Sector Outlook

On road to better future…

Activities under the infrastructure sector have been clearly growing at a decent pace – being the Government’s focused area and with consistent increase in budgetary allocations. Additionally, the roads segment within infra has put up a stellar show with improving construction pace and robust awarding. Moreover, measures undertaken by the NHAI/MoRTH such as a) shifting from milestone-based billing to monthly billing, b) releasing of retention money/performance security in proportion to execution, and c) faster resolution of disputes through reconciliation ensured continuance of gained momentum. While these actions have benefited developers with better working capital during uncertain times, inflows got impacted for organised players due to increased participation from the unlisted small contractors. Going forward, expected restoration to original bidding norms in the near term is likely to aid inflows for organised players. Further, healthy order book position for players provides revenue visibility over the next two to three years. Built-in raw material price variation clauses offer much-needed cushion against margin volatility. Additionally, pick-up in demand for real estate and commercial space to aid contractors offering a diversified range of construction and allied services. Overall, we are positive on roads and construction sector. Also, recent stock price correction offers good entry point to accumulate companies having healthy b/s, pan India presence and sustained long term revenue and earnings growth prospects. Key top picks: KNR Constructions, HG Infra and PSP Projects.

Awarding activities to pick up ahead; inflows muted for listed players due to higher competition

Long term tendering activities by NHAI have been improving consistently – increasing from 2,222 km in FY19 to 4,788 km in FY21. Further, awarding has inched up to 6,306 km during FY22 with capital expenditure by NHAI reaching an all-time high of ₹ 1,68,770 crore (despite hindrance from several waves of Covid-19). However, major players remained conservative on bidding stage and witnessed modest order inflows in the recent times as tendering norms were eased since H2FY21, which led to higher competitive intensity. With the expectations of NHAI going back to normal bidding norms and continued strength in awarding actions (target: 6,500km in FY23), organised developers are likely to witness healthy inflows tractions.

 Healthy order book positions to drive revenue growth; margins likely to normalise with softening in RM prices

The order book position for most listed organised players remains healthy at 2.5-3.5x of FY22 sales (despite inflows being impacted due to higher competitions), providing revenue visibility for the next two to three years. Additionally, the increase in commodity prices has marginally impacted the margin performance during FY22 protected by built-in escalation clauses in most of NHAI’s projects. However, margins are expected to normalise, going forward, with softening in key raw material prices such as steel and cement.

Key Financial Summary

Particulars FY19 FY20 FY21 FY22 5 yr CAGR (FY17-22) FY23E FY24E 2 yr CAGR (FY22-24E)
Net Sales 2,137.3 2,244.2 2,702.6 3,272.6 16.3 3,578.0 4,273.2 14.3
EBITDA 427.0 487.1 535.8 677.7 24.2 608.3 790.5 8.0
EBITDA Margin (%) 20.0 21.7 19.8 20.7 - 17.0 18.5 -
PAT 263.3 225.2 244.2 381.8 19.4 348.5 494.3 13.8
EPS (|) 18.7 16.0 8.7 13.6 - 12.4 17.6 -
P/E (x) 12.5 14.6 26.9 17.2 - 18.8 13.3 -
EV/EBITDA (x) 15.9 13.8 12.0 9.2 - 10.3 7.9 -
RoNW (%) 18.8 14.5 13.7 16.1 - 13.5 16.2 -
RoCE (%) 19.0 19.0 23.4 25.8 - 19.4 21.9 -
- - - - - - - - -
Source: Company, ICICI Direct Research

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