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Well-positioned to Reap Benefits of Infra Spending

We initiate coverage on KNR Constructions Limited (KNRCL) with a BUY recommendation and a Target Price (TP) of Rs 360/share, implying an upside of 18% from the current levels. We believe KNRCL is well placed to take advantage of the government push towards developing infrastructure, and emerging opportunities in the construction space aided by a strong management pedigree and the company’s healthy financial position.

Investment Thesis

Favourable industry tailwinds

The road construction industry in India is going through a paradigm shift in terms of investments and policy support. Under Phase-I of the Bharatmala Pariyojana highway development program, the government has approved 34,800 Km of national highways projects out of 65,000 Km national highways with an outlay of 5.4 Lc Cr, both through the EPC and HAM model. Furthermore, the government has undertaken several policy initiatives in the recent past including the announcement of the land acquisition act, a fast-track process of arbitration claims, the introduction of the new EPC (Engineering, Procurement, and Construction) policy, and bringing in models such as Hybrid Annuity Model (HAM) and Toll Operate Transfer (TOT), among others. These are significantly aiding the overall development of the sector.

Good revenue growth visibility backed by strong and diversified order book

As of Jun’21 end, KNRCL order book stood robust at Rs 6,596 Cr (2.44x of FY21 revenue), comprising both road and irrigation projects. It has further received four road projects totalling Rs 5,083 Cr, resulting in a healthy cumulative order book of Rs11,679 Cr. The current order book size reflects comfortable revenue visibility for the next 2-3 years. Moreover, the company is also diversifying its project profile to cater to other opportunities in the construction space and is increasingly eyeing opportunities from the public sector to capitalise on the government’s spending on Infra development. Supported by this healthy and diversified order book and emerging opportunities, we expect the company to deliver a revenue CAGR of 18% over FY21- FY24E.

Strong project execution skills & track record of timely project delivery

KNRCL has been one of the leading EPC contractors with 20+ years of project execution experience. It follows strict timelines for project delivery, which over the years, has resulted in repeat orders from the clients. Backed by its robust capabilities in complex project management, pan-India presence, and experienced technical professionals, KNR is well-positioned to capitalize on the emerging opportunities in the infrastructure sector in EPC and HAM projects from NHAI and Irrigation, water management schemes as well as metro flyovers. With better order inflows, we expect the company to maintain its margin profile between 18%- 19% over FY21-24E.

Healthy financial position to support future growth

The company exhibits a robust financial position reflected in its lean balance sheet, low Debt to Equity Ratio, and high interest coverage ratio. We expect the capital structure of the company to remain healthy from a medium to long-term perspective which will enable it to efficiently capture emerging opportunities.

Valuation & Recommendation -

Initiate with BUY Considering strong and diversified order book position, healthy bidding pipeline and new order inflows, emerging opportunities in the construction space, and efficient and timely execution, we expect the company to report Revenue/EBITDA/APAT CAGR of 18%/17%/30% over FY21- FY24E. Currently, the stock is trading at 15.5 x FY24E EPS. We initiate coverage with a BUY and value the EPC business at 17.5x FY24E EPS and HAM portfolio at 1x book value, to arrive at a target price of Rs 360/share, implying an upside potential of 17% from the current levels

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