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Strong growth visibility

KNR Constructions (KNR) reported strong earnings, which beat estimates driven by strong execution/margins. PAT grew 83% YoY to Rs730m (estimate: Rs560m). Order backlog including new HAM projects is robust at Rs117bn (3.9x TTM revenue) and growth visibility is high even beyond our forecast horizon of FY23. Revenue can nearly double by FY24 (we see potential of ~Rs52bn), with nearly 80% coming from its existing backlog. While valuations at 15.4x FY23E earnings (adjusted for value of Rs38/share for BOT/HAM assets) appear rich, we believe they are also being driven by a very strong and visible growth outlook for FY24. We maintain BUY, with a revised target price of Rs340.

Earnings beat estimates, driven by strong execution and margins

Revenue grew 54% YoY to Rs7.4bn (estimate: Rs6.1bn). EBITDA grew 52% YoY to Rs1.43bn (estimate: Rs1.1bn) and EBITDA margin declined 30bp YoY on higher base to 19.4% (estimate: 18%). PAT grew 83% YoY to Rs730mn (estimate: Rs560mn). Execution growth was driven by incremental revenue from Kaleshwaram pump-house project and strong execution in the initial 3 HAMs.

Irrigation receivables rise but remain in control; operating cash flows remain robust

Irrigation receivables (including unbilled portion of Rs3.8bn) presently stand at Rs6.5bn (Rs4.8bn in May-21) due to delay in payments from Telangana. Though there have been similar delays over the last 15 months, there has also been periodic unwinding, keeping the exposure confined to these levels. KNR has invested equity of Rs4.25bn in HAM assets till June-21 with balance commitment of Rs7.3bn over the next 2-2.5 years. KNR’s operating cash flow of Rs9.8bn over FY22-23 should be adequate to fund its equity/capex commitments over this period.

Order backlog robust; monetization of initial HAM assets to release capital

KNR’s order backlog of Rs117bn (3.9x TTM revenues) provides strong growth visibility. Nearly 100% of this backlog (46% currently) should be available for execution by Q4FY22, leading to strong scale up to revenue of Rs31bn/Rs42.6bn in FY22/FY23 from Rs27bn in FY21. In fact, we estimate revenue potential of ~Rs52bn in FY24, with almost 80% coming from the present order backlog. KNR’s initial 3 HAM projects are scheduled to be commissioned within the next 6 months (1 already commissioned). The company already has a share sale agreement with Cube Highways for these assets and it targets to complete their monetization by Mar-23/H1FY23 (equity of Rs3.4bn at fully invested stage).

Premium valuations backed by strong credentials; maintain BUY

KNR with its moderate size (FY21 revenue of Rs27bn), robust order backlog of Rs117bn (3.9x TTM revenue), and proven execution track record is uniquely positioned for a rapid scale up over the next 2-3 years. Revenue can nearly double by FY24 (we see potential of ~Rs52bn), with nearly 80% coming from its existing backlog and requirement for fresh order inflow being moderate at Rs45bn by Sept-22 (KNR is targeting Rs20-30bn incrementally in FY22). While valuations at 15.4x FY23E earnings (adjusted for value of Rs38/share for BOT/HAM assets) appear rich, we believe they are also being driven by a very strong and visible growth outlook for FY24. We raise our target valuation of KNR’s EPC business to 18x FY23E from 16x to factor the same. Maintain BUY, with a TP of Rs340.

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