Published on 19/06/2019 2:33:53 PM | Source: Motilal Oswal Securities Ltd

Buy KNR Constructions Ltd For Target Rs. 335 - Motilal Oswal

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Irrigation sprinkling a few opportunities

We met KNR Construction’s (KNRC) management, where our discussion revolved around the order inflow trends, the status of ongoing projects, the opportunity areas and its strategy to drive business. Key takeaways:

Order inflow trends in Roads yet to see meaningful pick-up:

KNRC expects order inflow of INR25b in FY20, mainly supported by the Irrigation segment. The company mentioned that it is well positioned to finalize a few projects in the near term, including

(a) two irrigation projects – Malanna Sagar and Palamurru irrigation projects – worth INR16b (INR8b each) and

(b) one HAM project worth INR10b. A pick-up in order inflows in Roads, however, remains elusive.


Promising near-term business opportunity in Irrigation:

KNR aims to finalize the aforementioned two Telangana-based irrigation projects over the coming quarter. Upon finalization, these projects will likely be executed in 18 months. KNRC highlighted that irrigation projects command better margins than its under-execution road EPC projects (15-16% operating margins). Importantly, the company sees a promising opportunity in river inter-linking projects, and has pre-qualification to bid for projects worth INR16b in the irrigation segment.


Funds, land – the key issues in Road Infrastructure:

We note key bankers are going slow on providing funds to road HAM projects, which, in turn, is delaying fresh awarding. On this matter, KNRC cited that it expects road projects of 12,000km to be awarded in FY20, provided the issue of funding/land is addressed. However, the company will be more strategic in its bids and has shortlisted ones that are in proximity to its ongoing projects. It expects to add road orders worth INR9b in FY20


Financial closure in place for NHAI-backed HAM projects:

KNRC has achieved financial closure for all the four NHAI-backed HAM projects. It has also received appointed date for two projects (Chittor-Mallavaram and Ramsanpalle-Mangloor), and expects the same for the Trichy-Kallagam project by Jun’19 and for the Meensurti-Chidambaram project by 2HFY20. For the KSHIP project, it expects to receive financial closure and appointed date by Nov’19 (as of now, land availability for this project stands at 45%).


Plans to monetize more assets, be asset-light EPC company:

KNRC has entered into a deal with Cube Highways to divest its stake in three HAM projects in two phases (49% during construction and entire post completion of the mandatory lock-in period as per the concession agreement). It is also in talks with Cube to divest its stake in the remaining two HAM projects. Moreover, the company intends to monetize its KNR Walayar Toll ways project by end-FY20 – it has invested INR3.9b in equity in this project and intends to monetize at the invested equity value or even at a marginal discount.


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