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Order book provides visibility...

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.

* Order book grew by 30% YoY aided by ~Rs4,000cr of inflows in 9MFY21 and with strong order pipeline KNR is targeting for ~Rs 4,000cr of new orders in Q4FY21.

* Q3FY21 revenue grew by 23% YoY as execution efficiency normalised to pre-Covid level.

* EBITDA margin declined by 259bps YoY to 19.7% due to higher sub-contracting and employee cost.

* We expect execution to improve in the coming quarters due to increasing order book and labour availability.

* KNR is diversifying its operation to water and urban infra projects. The road and irrigation projects now constitutes 55:45 of order book.

* We maintain our BUY rating and value core business at a P/E of 15x on FY23E EPS and BOT/HAM projects at 1xP/B to arrive at SOTP target price of Rs259.

Strong order pipeline...

The order book is strong at Rs7,664cr which is 3x TTM revenue supported by Rs4,000cr of order inflows in 9MFY21. The order visibility improved as the NHAI bid pipe line is strong and KNR is targeting to get Rs3,000 to Rs4,000cr of fresh orders in Q4FY21. Most of these orders are from the states of AP, Karnataka, Kerala and Punjab, where the company has a geographical advantage. Currently, irrigation works constitute 45% of the order book, provides better margin visibility. Most of its under construction road projects would be finished by Q2FY22 and KNR is also looking for diversifying its order book to water and urban infra projects. Govt’s strong thrust on infra and NHAI’s strong order pipeline supports growth prospects in the long term.

Execution back to pre-Covid level...

Q3FY21 revenue grew by 23% YoY to Rs683cr as execution efficiency normalized to pre-Covid level. The management expects FY21E/FY22E topline of Rs 2,500 and Rs 2,800cr. KNR has bid for 15 projects, totaling of Rs20,000cr and expects to get 2 to 3 HAM projects. KNR has collected receivables of Rs540cr from Telangana irrigation projects and balance of Rs200cr is left of the old liability. We expect top-line to grow at a CAGR of 26% over FY21E-FY23E on account of pick up in execution.

Margins declined…

EBITDA margin declined by 259bps YoY to 19.7% due to higher subcontracting expenses (134% YoY), employee cost (33% YoY) and other expenses (24% YoY). While higher other income (281% YoY) supported by interest income received from old projects and lower tax rate of 26.9% (vs 31.6% in Q3FY20) led to 66% YoY growth in Adj.PAT to Rs78cr.

Valuations

Healthy balance sheet, strong execution capability with better operational margin to support valuation. While increasing execution efficiency and pick up in order inflow improved the outlook for FY22. 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 Rs259 & maintain Buy rating.

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