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Irrigation exposure pruned, orders needed; retaining our Buy rating

On healthy recoveries from Telangana irrigation orders and as the monetisation of three hybrid annuities was consummated in entirety, KNR regained its net-cash status. Irrigation receipts mean execution stabilises at such orders, and the recent appointment of Chittor-Thatchur mean the project is set to start contributing. These augur well, but order additions remain an area of concern, and need to be addressed at the earliest. A general trend of year-end surge in awarding, and openness to explore new segments could work to KNR’s benefit, but it is not willing to compromise on margins. Though near-term challenges persist, KNR has its priorities right. We retain our Buy rating, with a slightly lower TP of Rs322 (from Rs328 earlier).

Need orders, to explore new segments. Though it did not have any orders in Q3, the inclusion of the recently appointed Chittor-Thatchur hybrid annuity in the OB upped the assurance ~Rs0.6bn q/q to ~Rs81bn (~2.3x TTM). It looks to add Rs40bn-50bn more in a year to keep growing, and has its eyes set on 10- 12 tenders in Feb’23, and 22 for Mar’23. Stiff competition in roads concerns KNR. It does not intend to add orders at the cost of profitability. Openness to explore Railways (scouting for a JV partner), and metro-rail orders augur well.

Telangana exposure, update.With ~Rs4.5bn of gross receipts subsequent to Q2 FY23, the balance sheet exposure is down to ~Rs6.5bn (from ~Rs9bn a quarter back). Management expects a healthy payment cycle for the funded order (Kaleshwaram Package-IV, lenders in place), and hopes for receipts of ~Rs0.5bn a month for the other three orders, funded from the state budget.

Net-cash status regained. Monetisation proceeds (~Rs2.2bn, net of taxes) and pruned irrigation exposure (~Rs2.5bn q/q) more than sufficed to cover the ~Rs1.2bn equity infused and ~Rs0.35bn capex, and also helped repay endQ2 gross debt of ~Rs2bn. At end-Q3, KNR was left with ~Rs1.25bn net cash.

Valuation. We prune FY23e inflows. We incorporate more-than-expected profits from asset monetisation and additional tax provisioning in Q3. Net income is, thus, ~0.4% down for FY23, ~3% for FY24 and ~1% for FY25. At the CMP, the stock (excl. investments) trades at 11.7x FY25e EPS. Risk: Delayed orders.

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