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Strong performance

KNR Constructions (KNR) reported a 26% YoY jump in Q2FY22 top line to INR7.6bn while higher EBITDA margin of 22.2% (up ~190bp YoY) sent PAT surging 56% YoY. With total order book at ~INR116bn, revenue visibility is a healthy 3.7x. Despite ~INR7bn in outstanding payments for irrigation projects (~INR6.5bn at end-Q1FY22), the company’s net debt to equity is 0.02x.

A robust order book and healthy balance sheet underpin our bullish stance on KNR. Receipt of proceeds from stake sales in HAM projects will be a key stock catalyst, in our view. Maintain ‘BUY’ with a revised SoTP-based TP of INR346 (INR340 earlier) as we roll forward the valuation to Mar-23E.

Strong execution; net cash declines QoQ

Q2FY22 top line rose 26% YoY (up 2% QoQ despite monsoon). EBITDA margin improved to 22.2% (up ~280bp QoQ). Lower capital charges sent PAT soaring 56% YoY to INR952mn (up 30% QoQ). The company’s total outstanding payments from the Telangana government for irrigation projects rose to ~INR7bn (INR6.5bn in Q1FY22); consequently, it ended the quarter with net debt of ~INR0.5bn (net cash of ~INR0.5bn at end-Q1FY22). Of this ~INR7bn, ~INR2.5bn is on account of the Kaleshwaram project Pkg 4, wherein the company believes it can receive a payment next month. It expects to get the balance payment by end-FY22. The working capital cycle deteriorated to 106 days (96 days in Q1FY22). KNR expects to complete the sale of two HAM projects to Cube Highways in FY22 and another one in FY23; it expects to receive ~INR4.6bn in proceeds from this stake sale (overall P/BV at ~1.5x).

New order-wins boost revenue visibility

The company ended Q2FY22 with an order book of ~INR116bn (book-to-bill of 3.7x). It intends to submit bids for ten projects with an average ticket size of INR10–12bn and is targeting INR20bn of incremental orders during the rest of the fiscal. KNR expects to receive appointed date (AD) for one HAM project over the next month and for three HAM projects over the next couple of quarters.

Outlook and valuation: Attractive; maintain 'BUY'

We like KNR because of its strong execution skills and healthy balance sheet. Incremental order-wins and HAM stake sale are the key triggers for the stock. Maintain ‘BUY/SO’ with an SoTP-based target price of INR346 – INR302/share EPC (at 22x PE) and INR44 BOT (DCF valuation) – while rolling forward to Mar-23E.

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