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Another strong quarter; order book remains robust

Further strengthens its net cash position

* KNR Construction (KNRC) continued its steady performance with revenue growth of 39% YoY, surpassing our expectations by 19%. The company ended FY21 with revenue growth of 22% (despite the lockdowns). The order book (OB) was strong at INR71.2b, and including L1 orders worth INR43b, the OB-to-revenue ratio stood at 4.2x.

* The pending receivables from the Telangana government now stand at INR5b (including unbilled revenue), with some amount of delay attributable to the ongoing pandemic. Gross debt was negligible at INR7m at the end of 4QFY21 (v/s INR160m/INR2.5b in 3QFY21/FY20). The company has turned debt-free, with a net cash position of INR1.2b in FY21 (v/s net debt of INR2b in FY20).

* We largely maintain our EPS estimates and TP of INR265 on a) 15x Mar’23E EPS for the EPC business and b) P/Inv of 1x for assets. We maintain Buy.

Execution momentum continues; higher tax expense dents profit​​​​​​​

* 4QFY21 snapshot: Revenue came in at INR9.4b, up 39% YoY and 19% above our estimate. Strong operating leverage led to EBITDA of INR1.8b, up 24% YoY and 27% above our estimate. The EBITDA margin fell to 19.5% (-220bp) YoY due to an adverse revenue mix (lower share of irrigation projects). PBT stood at INR1.5b (up 73% YoY), aided by lower depreciation and interest expense. The tax rate was higher at 48.2% (v/s 21.8% YoY) as the company provided INR193m additional provisions on tax related to previous years. Thus, PAT growth was limited to 15% to INR770m.

* FY21 snapshot: Revenue was up 22% YoY to INR27b. EBITDA increased 14% YoY to INR5.4b. The EBITDA margin declined 130bp YoY to 19.8%. PBT came in at INR3.9b (+48% YoY), aided by lower depreciation and higher other income. Adjusted PAT was up 24% YoY to INR2.5b.

Key takeaways from management commentary

* Average operational efficiency stood at 95% in 4QFY21. However, the company is currently at 60–65% efficiency due to lockdowns amid the second COVID wave. States such as Tamil Nadu are more affected, with efficiency at 40–45%.

* Execution was primarily driven by HAM projects in 4QFY21, with irrigation revenues forming ~20% of the total revenue.

* The management targets INR30–40b worth of order inflows in FY22. The company aims to bid for state highway projects (in Tamil Nadu and Telangana) as the competitive intensity for NHAI-led EPC and HAM projects has gone up significantly.

Valuation and view

* KNR’s OB stands at ~INR114b (incl. L1 position of INR43b), implying an OB/Rev ratio of 4.2x. On the back of such a strong order book, we expect KNR to post a revenue CAGR of 25% over FY21–23E. Additionally, the company would migrate to a 25% tax rate from next year. Thus, we expect an EPS CAGR of 36% over FY21– 23E. We maintain a Buy rating, with unchanged TP of INR265 on a) 15x Mar’23E EPS for the EPC business and b) the book value of road assets.

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