KNR Constructions Ltd Research Report By IIFL

Buy KNR Constructions Ltd CMP: Rs 230; 12 Months Target: Rs 289

KNR Constructions (KNR), an established road contractor, is poised to register 20.4% revenue CAGR over FY19-21E led by (a) robust order book (~2.8x FY19 revenue), (b) strong execution skills, (c) healthy balance sheet (Q1FY20 standalone Debt/Equity ratio of ~0.2x), and (d) likely strong order inflows led by Bharatmala and irrigation projects.

The company’s earnings will be driven by its proven track record of early execution, better margins and working capital control. KNR’s strong balance sheet will support order book expansion given that momentum in road awards from NHAI (25,000km highways shortlisted by government for next 3 years) and state governments continue. Our SOTP of Rs 289 is based on 12x FY21E standalone EPS and Rs 36/share contribution from stake in 4 BOT assets. We recommend BUY on KNR Constructions.

Yes Securities upgrades KNR Constructions to buy, target price Rs 293 #ETMarkets #DailyRecos #StockPicks #DailyPicks https://t.co/onKo8twxFH

— ETMarkets (@ETMarkets) August 20, 2019

Strong order book promises revenue growth: KNR’s healthy order book of Rs 6,519cr (Rs 4,634cr order book as on Q1FY20 and Rs 1,885cr order book for three HAM projects, where KNR is likely to receive appointed date) executable over the next 2.5 years will aid the company to register revenue CAGR of 20.4% to `3,101cr over FY19-21E.

Strong execution capabilities to aid the timely execution of current projects coupled with two HAM projects (likely to get appointed dates from NHAI soon), will result in healthy revenue growth over next couple of years. Further, order inflow pipeline of ~Rs 2,500cr from irrigation and road infra projects for FY20E will boost KNR’s revenue growth momentum. Given its healthy order book position and balance sheet, KNR is in a sweet spot to secure selective high margin orders. KNR’s tax provisioning is likely to increase from FY20E onwards, since the 80-IA benefits are ending, which will lower the net profits to some extent.

Outlook & Valuation

We like KNR as it has light balance sheet (0.2x D/E for Q1FY20), low working capital (Q1FY20 NWC days at 42) and one of the highest RoCE among peers. It has strong execution track record of completing projects before schedule and favorably placed to be the key beneficiary of the government’s agenda of road infrastructure spending (25,000km highways shortlisted by government for next 3 years).

Further, it has order book position of 2.8x FY19 revenue, that lends comfort in terms of revenue visibility for next 2.5 years. Moreover, healthy order inflow pipeline of Rs 2,500cr for FY20E, makes us confident of strong growth momentum going forward.

In our discounted cash flow model, we have assumed 8% revenue growth for the company’s both BOT toll projects i.e. Walayar Tollways and Muzaffarpur‐Barauni for the balance concession period. We have discounted the cash flows in the range of 11.1-11.3% weighted average cost of capital (WACC) for both the toll projects. For its two annuity projects, we have valued the same on net asset value basis. Our SOTP of Rs 289 is based on 12x FY21E standalone EPS and `36/share contribution from stake in 4 BOT assets.