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Stellar performance...

KNR Constructions Ltd (KNR) is a leading EPC player largely focusing on national and state highway projects. KNR has successfully executed ~6,000 lane km road projects across 12 states in India.

* Q4FY21 revenue grew by 39% YoY driven by strong execution in HAM projects and normalisation of workforce to pre-Covid level.

* Order book grew by 36% YoY aided by Rs8,400cr of inflows in FY21, provides revenue visibility for the coming years.

* EBITDA margin declined by 227bps YoY to 19.5% due to higher material cost and sub-contracting expenses.

* Q1FY22 execution is likely to impact due to the second wave of Covid and reduction in workforce efficiency to 60%-70%.

* Govt’s strong thrust on infra and NHAI’s strong order pipeline to support growth prospects in the long term.

* We value core business at a P/E of 16x on FY23E EPS and BOT/ HAM projects at 1xP/B to arrive at SOTP target price of Rs281 and maintain Buy rating.

Strong execution...

Q4FY21 revenue grew by 39% YoY to Rs936cr supported by strong execution in HAM projects and normalization in workforce to pre-Covid level. The management would be targeting a revenue of over Rs3,000cr for FY22 and remain cautious due to second wave of Covid & drop in work efficiency to 60%-70%. The work efficiency in Tamil Nadu declined to 45% (TN constitute 33% of order book) and expects situation to get normalized from June 2021. The revenue growth also depends on availability of land and commencement of execution of newly bagged project from Q4FY22. We expect top-line to grow at a CAGR of 24% over FY21-FY23E on account of pick up in execution.

Order book provides visibility...

The order book is strong at Rs11,441cr (including L1 orders of Rs.4 323cr) which is 4.2x TTM revenue supported by Rs8,400cr of order inflows in FY21. KNR is targeting an order inflow of Rs4,000cr in FY22 despite strong NHAI’s order pipeline of Rs. 2.25lahk cr. We expects Govt’s strong thrust on infra and NHAI’s strong order pipeline supports growth prospects in the long term. Proceeds from sale of Kerala (Walayar) BOT project have reduced the debt to almost zero which further strengthened KNR’s balance sheet. The deal with Cube for monetizing 3 HAM projects remains a minor concern due to interest rate differential on account of current low interest rates. The company expects to conclude the deal in three to four months.

High material price impacted margin…

EBITDA margin declined by 227bps YoY to 19.7% due to higher subcontracting expenses (710% YoY), RM cost (51% YoY) and other expenses (13% YoY). Margin pressure is likely to continue in the near term due to higher commodity prices and cost overrun on account of pandemic situation. Benefiting from lower interest cost (-70% YoY) and higher other income (29% YoY) PAT grew by 15% YoY to Rs77cr, partially offset by higher tax rate of 48.2% (vs 21.8% in Q4FY20).

Valuations

Debt free status and strong revenue visibility over the next three to four years on account of healthy order book will support valuation. We value standalone business at a P/E of 15x FY23E EPS and BOT/HAM projects at 1xP/B to arrive at SOTP target price Rs281 and maintain Buy rating.

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