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Performance largely in line; focus on new order inflows

* In 4QFY24, KNR Constructions (KNRC) received certain arbitration claims. For like-to-like comparison, we have adjusted the same in revenue, other income, other expenses, and total taxes for 4Q and FY24 and have shown that as an exceptional item.

* KNRC’s 4QFY24 revenue was flat YoY at ~INR11.8b (5% above our estimate). The execution was primarily driven by the implementation of the Road HAM projects. EBITDA stood at INR2b (in line with our estimate). EBITDA margin stood at 17.2% (-80bp YoY and +100bp QoQ) vs. our estimate of 17.4% for 4QFY24.

* In line with operational performance, APAT stood at INR1.3b, 9% above our estimate (+3% YoY and +55% QoQ). During FY24, revenue stood at INR39.6b (+5.7% YoY), EBITDA came in at INR6.9b (-4.4% YoY), EBITDA margin was 17.4%, and APAT stood at INR4.3b (+3.3% YoY).

* KNRC’s current order book stands at ~INR65b (incl. L1). The order pipeline looks promising, with expectations of INR50-60b in new project wins in FY25, of which, INR 20-30b is expected in 1HFY25.

* The performance in 4QFY24 has been largely in line with estimates. The tender pipeline remains robust with strong order flows expected post elections. The company is venturing into non-road segments such as metro and water projects to increase its addressable market. Execution is expected to flattish in FY25 with strong growth in FY26. We expect 11% CAGR in revenue over FY24-26. EBITDA margin is expected to be 17-18%. We largely maintain our estimates for FY26 and reiterate our BUY rating with a TP of INR350 (based on SoTP valuation). We value the EPC business at a P/E of 16x on FY26E EPS and BOT assets at 1x investment value.

Key takeaways from the management commentary

* The current order book stands at ~INR65b, with roads (HAM) making up 50%, roads (Others) at 18%, and irrigation and pipeline projects at 32%. KNRC has a portfolio of eight HAM projects in its current order book.

* The pace of awarding contracts by NHAI has been sluggish in FY24. However, the order pipeline is promising and KNRC anticipates winning new projects worth INR50-60b in FY25.

* Due to the slowdown in NHAI projects, KNR is exploring other avenues to maintain healthy order inflows. The company is also considering metro projects. Discussions are ongoing for MSRDC projects as a subcontractor. KNRC has also started partnering on BOT toll projects, where it will be a minor partner.

* Revenue growth in FY25 is expected to be flat YoY. FY26 is anticipated to be a strong year as many projects would be under execution. EBITDA Margins expected to be in the range of 17-18%.

* Irrigation receivables stood at INR8b at the end of Mar’24.

Valuation and view

* Given a robust order pipeline and a strategic focus on expanding into new segments and markets, KNR aims to significantly enhance its order book. Additionally, considering the slow pace of awarding contracts by NHAI, the company is exploring partnerships for BOT projects and diversification into nonroad segments.

* Due to lower order inflows in FY24, the company anticipates flattish execution in FY25, with substantial growth expected only from FY26 onwards. We largely retain our EPS estimates for FY26 and reiterate BUY with a SoTP-based TP of INR350.

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