Above-estimated performance driven by better-than-expected margin
* Revenue growth muted, but operating profit grows robustly: Revenue grew by a muted 5.3% YoY, but operating profit increased 47% YoY, led by low sub-contracting cost (11.5% v/s 31.2% in 2QFY17) and cost reversal done by the company for projects like Madurai and Thirvananthpuram (where it has achieved 75% project completion). KNR expects margins to sustain in 2HFY18, given that contribution from the low-margin Hubli-Hospet order is expected to remain low. KNR estimates FY18 operating margin at 16-17%. PAT of INR591m (+34.5% YoY) was ahead of our estimate of INR375m.
* Order inflow at INR5b in 1H; expects INR20b orders to be finalized in 2H: Order inflow in 1HFY18 was muted at INR5b, given lower order finalizations from the NHAI. The INR5b order inflow is supported by an INR8.8b irrigation project in Telangana (KNR share: INR4.5b). Order backlog of INR35.9b provides revenue visibility of 2.3x its FY17 revenue. Of the total order book, 76% comes from road segment and balance from irrigation segment.
* BoT portfolio starts collecting 100% toll: KNR’s both projects are 100% complete; toll collection for Kerala BoT stood at INR13.5 lac per day and for Muzzafarpur Baurani project at INR13.4 lac per day as of 2QFY18 (has now reached INR16.5lac per-day collection).
* Valuation view: We raise our estimates for FY18/19 by 7/3% to factor in better-than-expected margins in 1HFY18. We like KNRC for its robust execution track record, driven by backward integration, strong balance sheet (net debt-equity of 0.1x) and consistent operating margins (14.5-15%). We value KNRC on an SOTP basis: INR256 for standalone EPC business (18x P/E on Sept-19EPS of INR14.2 and 1x P/B on investments of INR37/share – BOT projects and land parcels). Maintain Buy with a TP of INR295.
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