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Execution to pick?up; irrigation receivables elevated

KNR Constructions’ (KNR) Q2FY23 adjusted PAT at Rs908m (up 13% YoY) was largely in? line with estimate of Rs883m. Reported PAT at Rs1.08bn includes net impact of Rs167m from sale of old arbitration claims in 2 JVs. Irrigation receivables and unbilled revenue have increased to Rs9.5bn currently (Rs8.5bn in Aug?22 and Rs6.5bn in May?22) due to delayed  payments  from Telangana government.  KNR is receiving  payments  of  Rs500? 600m  on  a  monthly  basis  for  its  budget  funded  irrigation  projects  which  is  helping execution.  Also,  KNR  indicated  likelihood  of  Telangana  getting  an  incremental bank disbursement in Kaleshwaram package IV which can lead to unwinding of some overdue payments. KNR plans to step up its order intake to Rs40bn in FY23 to maintain adequate growth visibility. Maintain BUY with PT of Rs314.

Earnings in?line; core EPC margins remained strong 

Revenue (ex?sale of arbitration claim) grew by 8.9% YoY to Rs8.2bn (estimate: Rs8.1bn) impacted by monsoon and lower execution in irrigation projects. Revenue includes early completion bonus of Rs73m. EBITDA margins fell 220bps YoY to 20% (estimate: 17.7%) on  relatively  high  base  while  margins  adjusted  for  bonus  impact  stood  at  19.2% (estimate: 17.7%). Debt increased QoQ to Rs2bn in Sept?22 from Rs1.25bn in June?22.

Order backlog remains strong; to step up order intake to Rs40bn in FY23

KNR’s order backlog has moderated to Rs88bn (2.5x TTM revenues) due to muted order wins of Rs343m in YTDFY23. KNR is targeting order inflows of ~Rs40bn in FY23E driven by Highways. Apart from South India, KNR is also open to North/North?East states given the strong prospects in these states. KNR has lowered its revenue growth guidance to +/?5% (Rs31?34bn) in FY23 (earlier: Rs35bn+). We believe that guidance is conservative as H1 revenue stands at Rs17bn and have factored revenue of Rs36.5bn in FY23E. KNR expects EBITDA margins to remain in 18?19% range.

Irrigation receivables further build up; monetization of 3 HAMs completed  

Irrigation receivables increased to Rs9bn currently (Rs8.5bn in Aug?22) due to delayed  payments  from  Telangana  government.  KNR  is  receiving  Rs500?600m/month  in  Palamuru project which is helping  to complete execution of  the project. KNR expects similar payments for Kaleshwaram package 3 worth Rs7bn which will support execution  ahead. KNR recently completed complete stake sale in 3 HAMs to Cube Highways and received proceeds of Rs4.9bn (Rs2.45bn each in FY22/23). These proceeds will help to partly fund the equity requirement in HAMs. Out of total requirement of Rs7.3bn, KNR has already invested Rs1.7bn till Sept?22 and pending would be invested by FY25.

Premium valuations backed by strong credentials; maintain BUY

We  expect  KNR’s  revenue/PAT  to  grow  by  16%/15%  CAGR  over  FY22?25E  led  by  a moderate backlog and expected pick?up in order intake. Proceeds from Cube deal have further  strengthened  the  balance  sheet  and  provide  growth  capital.  Unadjusted valuations at 14.5x/12.7x FY24E/FY25E earnings appear reasonable given KNR’s strong balance sheet and credentials. We value KNR’s EPC business at 16x average FY24?25 EPS and BOT/HAM assets at Rs23/share (1x P/B). Maintain Buy with PT of Rs314.

Valuations

We expect KNR’s revenue/PAT to grow by 16%/15% CAGR over FY22?25E  led by a moderate backlog and expected pick?up in order intake. Proceeds  from Cube deal have further strengthened the balance sheet and provide  growth  capital.  Unadjusted  valuations  at  14.5x/12.7x  FY24E/FY25E  earnings  appear  reasonable  given  KNR’s  strong  balance  sheet  and credentials. We value KNR’s EPC business at 16x average FY24?25 EPS and  BOT/HAM assets at Rs23/share (1x P/B). Maintain Buy with PT of Rs314.

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