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Robust order book places KNRC on a strong footing

* KNRC witnessed a strong execution in FY22, with revenue growing 21% YoY to INR32.7b, and a healthy EBITDA margin of ~21%. Its order book currently stands at INR93.5b (2.8x FY22 revenue). Around 76% of the order book comprises of Road projects, and the balance consists of Irrigation projects.

*  The order pipeline is decent, with the management expecting INR30-40b of project wins in FY23. It is looking at bidding in other regions within India. ? KNRC is expected to invest ~INR5.8b over FY23, FY24, and FY25 towards its equity commitment of ongoing HAM projects, along with financial support for meeting cash flow mismatches in its underlying SPVs.

* Contribution from Irrigation projects stood at INR9.7b (30% of revenue) in FY22. Pending receivables from Irrigation projects currently stand at INR8.5b. It hasn’t received any payments after May’22 for the Irrigation projects that it is executing, but expects to receive payments over the next few months. At present, KNRC is selectively looking at Irrigation projects in Tamil Nadu as the state government has the funds to carry out execution.

Robust order book, track record of efficient execution and net debt free Balance Sheet augurs well for KNRC

* As of Jun’22, KNRC has an outstanding order book of INR93.5b. EPC Road and HAM projects constitute 76% of its total order book, while Irrigation projects constitute the remainder of its order book. Its current order book constitutes 2.8x of FY22 revenue, thus providing long-term revenue visibility.

* KNRC remains net debt free and will focus on asset monetization ahead.

KNRC’s strong execution capabilities augur well; strongly placed to capitalize on the huge industry opportunity

* The government plans to incur a higher expenditure on road construction. In Union Budget FY23, the Centre made its highest ever outlay of ~INR2t (compared to the estimated expenditure of INR1.3t for FY22).

* The Ministry of Road Transport & Highways (MoRTH) plans to construct 25,000km of highways in FY23, which includes 6,500km of projects by NHAI.

* KNRC expects the competitive landscape to be cyclical and sees strong growth ahead. It expects to bid for a huge number of projects across the Road and Irrigation segment, and is looking at strong order inflows in FY23.

* The management has consistently displayed its robust execution capabilities since its inception. This has been made possible, given: a) its robust asset base and b) active involvement of the top management across all stages of project execution.

Asset monetization in focus

* The board in Aug’21 accorded its approval for the sale of 100% stake in KNR Shankarampet Projects Pvt., KNR Srirangam Infra Pvt., and KNR Tirumala Infra Pvt. to Cube Highways and Infrastructures III Pte. (Cube Highways).

* KNRC has transferred its 49% stake each in KNR Tirumala and KNR Shankarampet HAM projects for a total value of INR1.4b and INR1.1b to Cube Highways in Dec’21, and includes a repayment of 100% sub-debt infused by KNRCL of INR0.9b and INR0.7b, respectively.

* It has received NHAI approval for the sale of its balance stake in the above two projects. The deal is expected to be closed by 2QFY23.

Focus on ESG initiatives

* KNRC has identified three focus areas of engagement: promoting education, rural development projects, and promoting gender equality.

* The management is focused on minimizing its environmental footprint by prudent use of resources such as fuel, electricity, water, and raw materials.

* The board comprises an appropriate balance of knowledge, skills, experience, diversity, and independence to objectively and effectively discharge its governance roles and responsibilities. Around 50% of the board consist of Independent Directors and also includes two women Directors.

Valuation and view

* Due to the monsoon and delays in receivables from the Irrigation segment, the pace of execution is likely to be slow in the near term. As additional projects move into execution in the later part of FY23, the pace of execution is expected to improve in FY24. We expect margin to remain stable, with a reduction in input costs and execution of some high-margin irrigation projects. We maintain our Buy rating on the stock with a SoTP-based TP of INR310.

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