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Buy KNR Construction Ltd For Target Rs.330

Another strong quarter; order book remains robust

Maintains net cash position

* KNR Construction (KNRC) continued its steady performance with revenue growth of 54% YoY, surpassing our expectations by 23%. The order book (OB) was strong at INR117b (including L1 orders worth INR51b), with the OB/revenue ratio at 3.9x.

* Pending receivables from the Telangana government now stand at INR6.5b (including unbilled revenue), of which INR2.7b receivables are already overdue. Some amount of delay is attributable to the ongoing pandemic, and the company expects to recover the overdue receivables within the next two to three months. The company is debt-free at the standalone level, with a net cash position of INR470m at 1QFY22-end (v/s net cash of INR1.2b at FY21-end).

* We cut our FY22 estimate on account of the shift to the new tax regime, while we raise our FY23/FY24 estimate by 5.3%/5.1%. TP increased to INR330 on a) 16x Sep’23E EPS for the EPC business and b) P/Inv of 1x for assets. Maintain Buy

Execution momentum continues

* 1QFY22 snapshot: Revenue came in at INR7.4b, up 54% YoY (23% ahead of our estimates). EBITDA stood at INR1.4b, with the EBITDA margin at 19.4% (v/s our estimate of 18%). Depreciation charges stood at INR249m, lower than our expectation of INR350m. Thus, PBT doubled YoY to INR1.1b (v/s our est. of INR780m). The effective tax rate stood higher YoY at 35.5% (30.3% in 1QFY21). Adjusted PAT came in at INR730m (v/s our est. of INR584m).

* KNR’s OB stands at ~INR117b (incl. an L1 position of INR51b), implying an OB/rev ratio of 3.9x.

Key takeaways from management commentary

* Project execution has gained momentum (primarily driven by HAM projects), with the average operational efficiency in the range of 95%. The company is not seeing any shortfall in the workforce.

* The incremental equity requirement for HAM projects as of 1QFY22 stood at INR1.4b for FY22 and INR0.7b for FY23. The company has also won two new projects wherein incremental equity of INR2.0b would be required in 4QFY22, once the company gets the appointed date for the same.

* During the quarter, the company received one HAM project worth INR10.4b in value and aims to receive 2–3 more HAM projects this fiscal.

* The revenue guidance is maintained at INR34b for FY22.

Valuation and view

* Incl. L1 orders, KNR has already surpassed our order inflow assumptions for FY22. We raise our order inflow assumption from INR50b to INR70b for FY22. We expect the company to focus on faster execution in the current order book. While growth is not a challenge, Telangana receivables are a key monitorable as there have been substantial payment delays.

* On the back of such a strong order book, we expect KNR to post a revenue/EPS CAGR of 24%/33% over FY21–24E. We maintain a Buy rating, with higher TP of INR330 on a) 16x Sep’23E EPS for the EPC business and b) P/Inv of 1x on road assets.

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