Surprises with revenue growth against all odds
Receivables from Telangana government need to be monitored
* KNR Construction (KNR) outperformed in terms of execution by reporting revenue growth v/s our expectation of 35% YoY decline. The EBITDA margin expanded YoY on account of the rising share of higher margin irrigation projects, resulting in a strong beat on earnings. Including L1 orders, the order book (OB) stood strong at INR78.5b, implying OB/rev at 3.5x and providing healthy revenue visibility.
* KNR continues to surprise with its steady performance. However, the working capital cycle has witnessed marginal deterioration. This is primarily on account of pending dues from the Telangana government, which have been stalled since Feb’20 and currently stand at INR6.8b. The management hopes to receive INR4.4b within the next few weeks.
* Factoring the strong performance in 1QFY21, we increase our FY21/FY22E EPS by 28%/7%. We maintain our Buy rating, with TP of INR295 (prior: INR280) based on: (a) unchanged 12x Mar’22E EPS to the EPC business and (b) the book value of road assets.
Strong order book provides higher revenue visibility
* Revenue increased 3% to INR4.8b. The positive growth came as a surprise and was 60% ahead of our expectations. EBITDA was up 5% to INR943m (2x our expectation). Lower depreciation and interest income aided profitability, although it was marginally offset by lower other income and a higher tax rate. Thus, KNR reported adj. PAT of INR398m (-16% YoY), much better than our expectation of loss of INR82m.
* OB stood at INR72.1b, with the OB/rev ratio at 3.2x. The company has the L1 position in a Hybrid Annuity Model (HAM) project, with an EPC value of INR6.4b. In 1QFY21, KNR bagged two irrigation project orders worth INR23.1b from the Telangana government, which is on hold as negotiations are underway for debt tie-ups. Including L1 orders, OB stood at INR78.5b, with the OB/rev ratio at 3.5x, among the highest since FY17.
Key takeaways from management commentary
* Efficiency in irrigation projects is at ~90%, with labor strength at ~70%. For road projects, efficiency stood at ~60%, with labor availability at 55–60%.
* Proceeds from the Walayar project sale (INR5.3b) are expected to be received in 1HFY21, with the deal closure in the final stages.
* KNR has already submitted its bids for seven projects and is awaiting their outcome; it is in the process of submitting 10 more bids by the end of September. KNR expects incremental order inflow of ~INR20b in 9MFY21.
* The company achieved financial closure for the OddanchatramMadathukulam HAM project in 1QFY21. With 72% of land available currently, management expects to receive the appointed date by the end of Sep’20.
* Margins in irrigation projects are usually 18–20%, but final realizations can be 16–17% due to payment delays.
Valuation and view
e increase our FY21/FY22E EPS by 28%/7% on account of a strong performance in 1QFY21. We forecast revenue/EBITDA/PAT growth of 18%/12%/22%. In spite of a recent increase in receivables, we believe KNR’s strong balance sheet gives it a key competitive advantage v/s peers: (a) in bidding for newer projects and (b) in terms of strong execution despite financing challenges in the sector as the dependency on bank financing is minimal. We maintain our Buy rating, with TP of INR295, based on: (a) unchanged 12x Mar’22E EPS to the EPC business and (b) the book value of road assets.
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