Buy KNR Constructions Ltd For Target Rs.300 by Motilal Oswal Financial Services Ltd
Miss on execution; focusing on new order inflows from the non-road segments
* In 3QFY25, KNR Constructions (KNRC) received certain arbitration claims. For a like-to-like comparison, we have adjusted the same in revenue, other income, other expenses, and total taxes for 3QFY25 and have shown them as exceptional items.
* KNRC’s 3Q revenue declined 22% YoY to ~INR7.1b (20% below our estimate). EBITDA declined 20% YoY to INR1.2b (our est. INR1.5b). EBITDA margin stood at 16.6% (+30bp YoY) vs. our estimate of 16.5%. The impact of weak execution was offset by higher other income and lower depreciation & interest expenses, which resulted in an APAT of INR903m (in line).
* During 9MFY25, revenue/EBITDA declined 14%/20% YoY, while APAT grew 8%. KNRC’s current order book stands at ~INR55b (incl. L1). The order pipeline looks promising, with expectations of INR80-100b in new project wins over the next 3-4 months.
* The operating performance for 3QFY25 was below our estimates due to muted execution. The tender pipeline remains robust, with strong order flows expected in FY26. The company is actively bidding for new projects across highways, irrigation, and urban infrastructure, with a strong presence in Tamil Nadu, Karnataka, Telangana, and Andhra Pradesh. KNR is also expanding into new segments like mine development and BOT toll projects in collaboration with Adani and Cube Highways.
* Factoring in weaker execution in 3QFY25 and a soft order book, we expect a 7% revenue CAGR over FY24-27. In line with lower EBITDA margin guidance by KNRC, we cut our EBITDA margin estimates to 16-17% over FY24-27 (from 17-18% earlier). Further, considering the sluggishness in order awarding by NHAI, we cut our revenue/EBITDA estimates by ~6% each for FY25. We also cut our revenue/EBITDA estimates for FY26 by 2%/11% and for FY27 by 6%/14%. We reiterate our BUY rating with a revised SoTP-based TP of INR300. We value the EPC business at a P/E of 14x on Sep’26E EPS and BOT assets at 1x investment value.
Key takeaways from the management commentary
* KNRC has a total order book of INR55.17b, with 46% in EPC and HAM road projects, 26% in irrigation, and 28% in pipeline projects. The company is actively bidding for new projects across highways, irrigation, and urban infrastructure, with a strong presence in Tamil Nadu, Karnataka, Telangana, and Andhra Pradesh.
* KNRC is also expanding into new segments like mine development and BOT toll projects in collaboration with Adani and Cube Highways.
* KNRC is awaiting INR5.8b in certified payments and INR4.0b in unbilled receivables from Telangana’s irrigation projects, for which legal action has been initiated.
* Due to a lower order book and payment delays, KNRC expects a revenue decline of 10-15% in FY25. However, it anticipates revenue to recover to INR35-40b in FY26, with further growth in FY27.
* KNRC aims to secure INR80-100b in new orders in the next 3-4 months and is likely to monetize four HAM assets, with the first expected to be sold by Jun’25 and the remaining by Dec’25.
Valuation and view
* With a strong order pipeline and a strategic focus on expanding into new segments and markets, KNRC aims to substantially grow its order book. Additionally, given the slow pace of contract awards by NHAI, KNRC is exploring partnerships for BOT projects and diversifying into non-road segments.
* Due to lower order inflows in 9MFY25, KNRC anticipates 10-15% decline in revenue in FY25, with revenue of INR34-40b in FY26.
* In line with the weakened outlook on execution and margins, we reduce our estimates. We cut our revenue/EBITDA estimates by ~6% each for FY25. We also cut our revenue/EBITDA estimates for FY26 by 2%/11% and for FY27 by 6%/14%. We reiterate our BUY rating with a revised SoTP-based TP of INR300. We value the EPC business at a P/E of 14x on Sep’26E EPS and BOT assets at 1x investment value.
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