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Superior execution with a comfortable Balance Sheet

KNRC sits on a strong order book of ~INR100b (excluding recently won projects), which provides clear revenue visibility for the next three years. It has received appointed dates (AD) for two HAM projects in Jan’22 and financial closure (FC) in one HAM project in Apr’22, which will support execution in FY23E and FY24E.

We expect margin to stay elevated, despite inflationary pressures from higher commodity prices, as a sizable portion (~26%) of its order book consists of irrigation projects.

KNRC has strengthened its Balance Sheet further by monetizing two of its HAM projects via stake sale to Cube Highways, which allows it to bid for new projects.

With an order book of ~INR100b, we expect KNRC to clock 20% revenue growth over FY21-24, with EBITDA margin in the 18-20% range. We maintain our Buy rating, with a SoTP-based TP of INR360/share, implying an upside of 29%. Our TP is premised on: a) 16x FY24E EPS for the EPC business, and b) P/Inv of 1.2x for its Road assets.

The healthy order book provides comfort for future execution

KNRC hasn’t bagged any new orders in 4QFY22, but its order book of ~INR100b (FY22E order book-to-revenue ratio of 3x) provides comfort on the execution front.

Competitive intensity has been very high in NHAI projects and is likely to lead to muted order flows in 4QFY22. The management is highly focused on margin and has not gone ahead with aggressive bidding.

With competition expected to reduce going forward, order inflows can improve in the next few quarters

KNRC has transferred its 49% stake in KNR Tirumala and KNR Shankarampet HAM projects to Cube Highways and Infrastructure III for INR2.5b. This includes repayment of 100% sub-debt of INR1.6b infused by the company into the two SPVs

The balance 51% stake sale for the above two projects will be completed on or before 30th Jun’22.

This is in line with its strategy to remain asset-light. The asset sales will allow KNRC to bid for a large number of new projects.

Valuation and view

Including recently won projects, KNRC has bagged ~INR50b in orders in FY22. We expect the company to focus on faster execution of the current order book. Irrigation receivables are a key monitorable due to the payment delays witnessed.

On the back of a strong order book (~INR100b), we expect a revenue/EPS CAGR of 20%/30% over FY21-24, with EBITDA margin in the 18-20% range. We maintain our Buy rating with a SoTP-based TP of INR360/share, implying 29% upside.

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