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* KNR Constructions (KNRC) currently has an unexecuted order book of ~INR80b (2x of FY23 revenue). The company is expecting new order inflows of INR40-50b in FY24, which should improve its growth visibility beyond FY25. The order pipeline of INR450b is robust, and management is confident of achieving sizeable order inflows in FY24E despite the upcoming busy election schedule.

* KNRC is actively exploring opportunities for project bidding in various states and is also contemplating potential expansion into other infra sectors. While there have been challenges in the execution of irrigation projects, KNRC foresees a possible improvement in project execution in the upcoming months.

* Management is expecting improved execution during 2HFY24 driven by the Road segment. KNRC is targeting to clock a revenue of INR40b in FY24E with margins in the range of 18-19%.

* While order inflows have been muted, the robust tender pipeline in the Roads sector has the potential to translate into healthy order inflows in the coming months. This would offer a better growth outlook beyond FY25. The diversification into other regions and in select other infra verticals could also help order inflows. Based on the existing order book of INR80b, we expect KNRC to achieve a revenue CAGR of 11% over FY23-25, with an EBITDA margin ranging between 18% and 19%. We reiterate our BUY rating on the stock with an SoTP-based TP of INR315.

Order inflows muted so far; outlook bright with diversification and strong tender pipeline

* Steep competition in the NHAI projects by new and inexperienced players has hurt order inflows for large players. However, the competitive intensity has eased to some extent, and KNRC is looking to bag some orders now.

* Additionally, KNRC is planning to tap into the urban infra development opportunities in the Railways and the Metro segments. KNRC is also looking to diversify geographically and is actively bidding in the Western and the Central regions, such as Maharashtra and Madhya Pradesh.

Sound balance sheet provides confidence in project execution; focus remains on asset monetization

* KNRC has adhered to a financially prudent strategy, prioritizing an asset-light business model and efficient working capital management.

* As of Jun’23, KNRC maintained a net cash position of INR0.9b. Through the proceeds from the Cube deal (KNRC received INR5.2b from the sale of its three HAM projects) and enhanced irrigation collection, the company has successfully paid off its debt in full. The gross debt was nil, and the net debtto-equity stood at 0.03x as of Jun’23.

* Looking ahead, KNRC has an overall equity requirement of INR7.3b for its HAM projects. Until 1QFY24, INR4b has already been invested, leaving INR1.5b earmarked for the remainder of FY24. INR1.6b has been allocated for FY25E, and the remaining funds have been scheduled for FY26.

* KNRC would continue to sell HAM assets as opportunities arise.

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