Strong execution; irrigation receivables rise
KNR Constructions’ (KNR) Q1FY23 PAT at Rs1bn (up 38% YoY) was above estimate of Rs779m led by stronger execution. Irrigation receivables and unbilled revenue at Rs8.5bn currently have risen from Rs6.5bn in May 22 with no incremental recoveries since April 22. Revenue guidance of +Rs35bn in FY23E (+7%YoY) remains muted due to concerns over availability of funding for irrigation projects. Given the strategic importance of these projects to Telangana we expect the required support to be brought in by the state in coming months. We believe revenue of ~Rs38bn appears feasible and factor 18 18.4% EBITDA margin in FY23/FY24. KNR expects to step up its order intake to Rs40 50bn in FY23 to maintain adequate growth visibility. Balance proceeds of Rs2 2.25bn from sale of 3 HAM assets to Cube are likely by Sept 22 and will further strengthen the balance sheet. Maintain BUY with PT of Rs346.
Earnings beat estimates led by higher revenues; irrigation receivables rise
Revenue grew 20.4% YoY to Rs8.9bn (estimate: Rs7.7bn) led by strong execution in both highways and irrigation segments. EBITDA margin was lower by 80bp QoQ to 18.5% (in line) with higher input costs impacting margins in the fixed price EPC orders (for Kerala HAM projects in particular). Irrigation receivables stand at Rs8.5bn currently (vs. Rs6.5bn in May) with execution of ~Rs3bn during Q1FY23 and no incremental recoveries since April`22. As a result, standalone debt stood at Rs1.25bn in June`22 (NIL in Mar`22).
Order backlog remains strong; to step up order intake to Rs40`50bn in FY23
Despite no order intake in Q1FY23, KNR’s backlog remains strong at Rs93.5bn (2.7x TTM revenues). KNR is targeting inflows of Rs40`50bn in FY23E driven by Highways. While bid prospects are strong in KNR’s traditional focus states of Kerala, Telangana and Tamil Nadu, KNR also plans to bid for projects in UP and Bihar. KNR expects competitive intensity to moderate given various tightening measures being undertaken/proposed by NHAI. As against FY23 revenue guidance of +Rs35bn, we believe revenue of ~Rs38bn appears feasible even after halving the expected irrigation revenue YoY to Rs4.5bn in FY23 (~Rs3bn in Q1FY23). We factor EBITDA margins of 18`18.4% in FY23/FY24.
Growth well supported by cash flows; HAM monetization to release capital
KNR has invested equity of Rs5.2bn in HAMs till June`22 with balance commitment of Rs5.7bn by FY25E. It targets to fully complete sale of 3 HAMs to Cube within Q2FY23 (49% stake transferred in 2 HAMs). KNR has already received Rs2.5bn from Cube in FY22 and will receive the balance ~Rs2`2.25bn in FY23. OCF of Rs8.9bn over FY23`24 should be adequate to fund its equity/capex commitments (FCF of Rs2.3bn over FY23`24).
Premium valuations backed by strong credentials; maintain BUY
We expect KNR’s revenue/PAT to grow by 21%/22% CAGR over FY22`24E led by a strong backlog and expected pick`up in order intake. Proceeds from Cube deal will further strengthen balance sheet (net cash: Rs3.7bn in FY24E) and provide ample growth capital. Unadjusted valuations at 13.6x FY24E earnings appear reasonable given KNR’s strong balance sheet and credentials. We value KNR’s EPC business at 17x FY24 EPS and BOT/HAM assets at Rs22/share (1x P/B). Maintain Buy with PT of Rs346.
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