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Irrigation still an issue; raising to a Buy on better placed risk-reward

Recognizing the markedly greater balance-sheet exposure to Telangana irrigation orders, the pace of execution at such orders in KNR’s Q2 mostly tracked additional receipts. It continues to engage with state agencies and has been assured of gradual payment releases, with the possibility of a lump sum as well. Meanwhile, management expects Road orders to help deliver on its revenue guidance, and it banks on healthy prospects for inflows (but spoke of keener competition). Though near-term challenges persist, KNR has its priorities right. The risk-reward, too, appears to be better balanced now on the ytd correction. We, thus, raise our rating to a Buy with a higher TP of Rs328 (on rolling forward to FY25e).

Need orders, but not to compromise on margins. With no new order, the OB (incl. the yet-to-be appointed hybrid annuity) contracted ~Rs5bn q/q to ~Rs88bn. The OB is good for the short term, but as new orders take time to get moving, it looks to add Rs40bn-50bn in a year to keep growing. Its recent openness to explore regions other than the south, bids of ~Rs40bn placed and expected brisk awarding in H2 keep it sanguine. But it remains wary of keener competition, and does not wish to augment assurance at the cost of profitability.

Telangana exposure, update. Q2 revenue was subdued as KNR has changed from three shifts to one now. Nevertheless, exposure still rose ~Rs0.5bn q/q to ~Rs9bn. The agencies have assured release of Rs0.5bn-0.6bn a month towards projects to be funded from state budget (~Rs6.5bn exposure). Besides this, a lumpy release for the funded project (Kaleshwaram-IV) is a possibility, as lenders are expected to release from approved limits.

Net-debt rose. On more irrigation exposure and the general trend of a longer WC cycle in H1, net debt rose ~Rs0.8bn q/q to ~Rs1.6bn. Post-Q2, hybrid annuity monetisation proceeds (~Rs2.5bn) and an expected better payment cycle in H2 would help strengthen the balance sheet.

Valuation. We tweak our estimates for Q2’s early-completion bonus and arbitration claims, and the post-Q2 concluded asset monetisation. Adj. PAT is, thus, ~6% higher for FY23e and ~1% for FY24. At the CMP, the stock (excl. investments) trades at 10.2x FY25e EPS. Risk: Slower execution.

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