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Robust execution leads to a beat on all fronts

The Highways segment is in focus; Irrigation facing challenges

* Revenue grew 8% YoY to ~INR10.1b in 4QFY22, 7% above our estimate. EBITDA margin was a robust 20.6% in 4QFY22 (up 111bp YoY, est. 19.2%)

* Irrigation projects constituted 30% of revenue in FY22. However, pending receivables from irrigation projects in Telangana and AP (the state governments lack funds) stood at INR6.5b. It hasn’t received any payments from irrigation projects over the last two-to-three months.

* Irrigation projects constitute 25% of its FY22 order book of INR90b (v/s FY21: 44%), and there are not too many high margin projects in the pipeline.

* We lower our FY23/FY24 EPS estimate by 13%/12% to factor in a slowdown in the Irrigation segment and subdued outlook on order inflows. With an order book of INR90b, we expect KNRC to clock 15% revenue CAGR over FY22-24, with EBITDA margin in the 18-19% range. We maintain our Buy rating with a revised SoTP-based TP of INR320/share, an upside of 23%.

Execution beat our estimates

* 4QFY22 snapshot: Revenue grew 8% YoY and 32% QoQ to ~INR10.1b in 4QFY22 and was 7% above our estimate.

* EBITDA margin was a robust 20.6% in 4QFY22 (up 111bp YoY). EBITDA/PAT grew 14%/46% YoY to INR2.1b/INR1.1b (est. INR1.8b/ INR1b).

* KNRC hasn’t bagged any orders in FY22. Its current OB stands ~INR90b (excluding recently won projects), with an OB/revenue ratio of 2.8x.

Key takeaways from the management commentary

* KNRC has transferred its 49% stake in KNR Tirumala and KNR Shankarampet HAM projects to Cube Highways and Infrastructure III Pte. It has received approval from NHAI for the sale of its balance stake in the above two projects. The deal is expected to be closed by 2QFY23.

* The management is targeting an order inflow of INR40-50b in FY23, mainly in the Highways segment.

* Revenue guidance for FY23 stands at INR35b, impacted by the onset of an early monsoon.

* Consolidated debt as on Mar’22 stood at INR14.1b (Mar’21: INR7.2b).

Valuation and view

* With the receipt of appointed dates for two projects in Jan’22, the pace of execution will continue in FY23. We expect some pressure on margin, with a decreasing share of irrigation projects in the OB and high commodity prices.

* We cut our FY23/FY24 EPS estimate by 13%/12% to factor in a slowdown in the Irrigation segment and subdued outlook on order inflows. With an order book of INR90b, we expect KNRC to clock 15% revenue CAGR over FY22-24, with EBITDA margin in the 18-19% range. We maintain our Buy rating with a revised SoTP-based TP of INR320 per share, implying an upside of 23%.

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