High Conviction Idea : Buy KNR Constructions Ltd For Target Rs.375 - Centrum Broking
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Business Overview
KNR is an EPC focussed player with presence in Roads and Irrigation verticals
Present in 5 states. Strong order backlog of Rs108bn (3.4x TTM revenues), providing strong revenue visibility.
Investment thesis
Proven track record, dependable governance and sound cashflow management.
Robust backlog of Rs108bn provides revenue visibility till FY24 (~75% of FY24 revenue coming from current order backlog).
Expect strong scale up in revenue to Rs42.6bn/Rs52bn in FY23/24 from Rs27bn in FY21.
Margins protected due to indexation to WPI and CPI in highway projects from the bid date. Irrigation projects too have cost escalation provisions
Irrigation receivables remain elevated at Rs5.9bn but are safe going by past trends (recovered Rs3.8bn in Q3). Compensated by higher margins
Growth commitments are well supported by operating cashflows of Rs12.2bn over FY22-24; monetization of 3 HAM assets to release capital of Rs4.5bn
Triggers and Risks
Triggers
Guidance is conservative. Beat on guidance/consensus estimates a trigger
Pick-up in order inflows
Risks
Delay in recovery of irrigation receivables
Slowdown in order inflows
Deterioration in margin profile due to diversifications and competition
Valuation
With its moderate size (FY21 revenue of Rs27bn), robust order backlog of Rs108bn (3.4x TTM revenue), and proven execution track record is uniquely positioned for rapid scale-up over the next 2-3 years.
Proceeds from Cube deal will further strengthen the balance sheet (net cash at Rs3.9bn/Rs5.2bn in FY23/24E) and provide growth capital for KNR.
Valuations at 13.5x FY24E earnings (adjusting for value of assets of Rs24) are rich but justified by superior credentials.
Value KNR’s EPC business at 18x average FY23-24E EPS and HAM assets at 1x P/B. Maintain BUY with PT of Rs375
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