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Debtors recovery in sight

KNR delivered yet another strong quarter with Rev/EBIDTA/APAT beat of 21/26/51%. Roads/irrigation segment contributed 77/23% to the revenue. The order book (OB) is robust at Rs 85.5bn (~3.6x book to bill), having won projects worth Rs 34.6bn (1HFY21)and Rs11.6bn (2QFY21). The NHAI bid pipeline is strong with KNR targeting Rs 30-35bn inflow for the rest of FY21. Based on social distancing site efficiency is ~80% with KNR expecting Rs 6/7bn of revenue for 3Q/4QFY21. Of the outstanding Rs 7.4bn irrigation receivable about Rs 5.5bn may get realized by Nov-20 and balance by Mar-21. We maintain a BUY on KNR with target price of Rs 390/sh (15x Sep-22E EPS).

* Execution driven 2QFY21 financial outperformance: Revenue: Rs 6bn (+10% YoY, 25% QoQ, 21% beat on estimates). EBITDA: Rs 1.2bn (-1% YoY, +31% QoQ, 26% beat). EBITDA margin came in at 20.6% (-239bps/+95bps YoY/QoQ, 70bps beat). Interest Cost: Rs 158mn (+62%/+55% YoY/QoQ). Depreciation: Rs 352mn (-26%/+6% YoY/QoQ). During the quarter KNR booked Rs 112mn exceptional write off/impairment in Kerala BOT stake sale. RPAT came in at Rs 498mn (-29%/+25% YoY/QoQ). APAT came in at Rs 611mn (+9%/+54% YoY/QoQ, 51% beat). We have adjusted the exceptional item. The sites operated at 80% efficiency during 2QFY21.

* Kerala BOT asset monetization achieved: During the 2QFY21, KNR received Rs 3.1bn of sale proceeds from the KNR Kerala BOT. The proceeds were utilized to repay Rs 2.1bn promoter debt and balance kept aside for working capital. KNR generated Rs 667mn of negative CFO due to elevated receivable in the irrigation projects and contraction in creditors. Standalone debt reduced to Rs 640mn from Rs 2.3bn in Mar-20. Debt/Equity is 0.01x. NWC also improved by 9days vs Mar-20 to 44days.

* Irrigation debtors realization by Nov-20, no more an overhang: KNR has been repeatedly cross examined for the piling up of the Telangana State Govt irrigation project receivable which have been piling up since COVID- 19 pandemic. The total debtors from Irrigation project stand at Rs 7.4bn as of 2QFY21 end. KNR has guided that about Rs 5.5bn may get realized by Nov- 20 end and balance Rs 1.9bn by Mar-21 end. Telangana Govt has tied up the funding for the irrigation projects with the NABARD and hence the payments will be received shortly. For the two new Irrigation projects worth Rs 16/7bn, the work is expected to start from 4QFY21. The payment here will be more regular as financial closure is in place with NABARD loan. This removes the key overhang on the stock.

* Multiple triggers for re-rating: Bid pipeline is strong with KNR targeting 10-15HAM projects of which it expects to win 2-3projects worth Rs 30bn. The irrigation debtors realization will allay concerns on BS and execution. Whilst the execution from these projects will drive earnings upside. KNR remains our top sectoral pick.

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