Published on 15/01/2020 10:35:46 AM | Source: Motilal Oswal Services Ltd

Buy KNR Construction Ltd For Target Rs.374 - Motilal Oswal

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Balance sheet strengthens further

KNR monetizes Walayar road project

KNR has entered into a share purchase agreement with Cube Highways to sell its 100% stake in the Walayar road project. Total enterprise value of the deal stands at INR5.3b. As of Sep’19, debt on the project was at INR1.4b. Thus, the equity value of the deal is estimated at ~INR3.9b or P/Inv of ~1x. This is in line with our valuation of the project. There are further NHAI claims and other governmental instrumentalities, which are a pass through to KNR as and when realized. Taking this into account, the deal value may surpass our valuation of the project.

Balance sheet strengthens further – best one in road sector

The transaction is likely to close in another 2-3 months. We factor in proceeds of INR3.9b by end-Mar’20. KNR has already monetized three of its HAM projects. We expect the balance sheet to strengthen further with net cash position of >INR2b/5b by FY21/22. The company has the best balance sheet position amongst mid-cap road EPC companies. This should support premium valuations for KNR, in our view.

Strong order book to support revenue growth

Given the company’s strong order book position (OB/Rev: 3.1x) and superior execution capability, we expect revenue CAGR of 18% over FY19-22. Thanks to the strong balance sheet position, KNR is well positioned to bid for new projects as and when bidding commences in the road sector. We expect NHAI awarding to pick up by end-4QFY20 with total awarding of 4,000km for FY20.

Maintaining Buy, increasing TP

We lower our interest expense estimate and raise our revenue estimate by 2/3% for FY21/22 to factor in the asset sale. As a result, we increase our FY21/22 EPS estimate by 12%/13%. Note that we have built cushion in our EBITDA margin assumption (200bp decline over FY20-22). Also, we estimate a strong CAGR (FY20- 22) of 18% in PBT but a lower 11% in PAT due to normalization of tax rates to 25.2% (KNR’s effective tax rate is lower as it has un-utilized MAT credit). At CMP, the stock trades at FY21/22E P/E of 11.7x/9.7x (adjusted for valuation of the road assets portfolio). We maintain Buy with a higher target price of INR374 based on SOTP – (a) EPC business at 15x Sep’21E EPS and (b) road assets at P/Inv of 1x.


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