IGI Logo

Execution below estimate; focus on new order inflows via diversification

* In 1QFY25, 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 1QFY25 and have shown that the company as an exceptional item.

* KNRC’s 1QFY25 revenue declined 12% YoY at ~INR8.2b (12% above our estimate). The execution was primarily driven by the implementation of the road HAM projects. EBITDA stood at INR1.4b (vs. our estimate of INR1.6b) registering a 22% YoY decline. EBITDA margin stood at 16.6% (-210bp YoY) vs. our estimate of 17.4% for 1QFY25. In line with weak operating performance and higher tax outgo, APAT for the quarter de-grew 27% YoY to INR 807m against our estimate of INR946m. KNRC’s current order book stands at ~INR61b (incl. L1). The order pipeline looks promising, with expectations of INR60-70b in new project wins in FY25.

* The performance in 1QFY25 was below our estimates. The tender pipeline remains robust, with strong order flows expected in FY25. KNRC is venturing into non-road segments such as metro and water projects to increase its addressable market. Execution is likely to remain flattish in FY25, with growth picking-up in FY26. We expect a 9% revenue CAGR over FY24-26. EBITDA margin is anticipated to be 17-18%. In line with weak operating performance and sluggishness in order awarding by NHAI, we cut our revenue/EBITDA/APAT for FY26 by ~5%/5%/6%. We reiterate our BUY rating with a revised SoTP-based TP of INR390. We value the EPC business at a P/E of 18x on FY26E EPS and BOT assets at 1x investment value.

Key takeaways from the management commentary

* The current order book stands at ~INR61b, with roads (HAM) making up 49%, roads (Others) at 17%, and irrigation and pipeline projects at 34%. KNRC has a portfolio of eight HAM projects in its current order book.

* The pace of awarding contracts by NHAI has been sluggish in YTDFY25. However, the order pipeline is promising, and KNRC anticipates winning new projects worth INR60-70b in FY25.

* While NHAI awarding has been soft so far, awards are likely to pick up from Sep’24. KNR expects to secure some HAM projects and is also targeting projects in Maharashtra. Further, it is examining mining contracts due to good margins and is keen on entering the mining segment with a JV partner.

* KNR expects 2QFY25 to be disappointing due to heavy rains affecting projects in Kerala. Revenue is expected to be flat in FY25, with management expecting 5-10% revenue growth in FY26.

* Irrigation receivables stood at INR9b at the end of Jun’24

Valuation and view

* Given a robust order pipeline and focus on expanding into new segments and markets, KNRC aims to significantly enhance its order book. Further, considering the slow pace of awarding contracts by NHAI, KNRC is exploring partnerships for BOT projects and diversification into non-road segments.

* Due to lower order inflows in FY24 and 1QFY25, KNRC anticipates flattish execution in FY25, with 5-10% revenue growth likely from FY26 onwards.

* In line with weak operating performance in 1Q and sluggishness in order awarding by NHAI, we cut our revenue/EBITDA/APAT for FY26E by ~5%/5%/ 6%. We reiterate our BUY rating with a revised TP of INR390 (based on SoTP valuation). We value the EPC business at a P/E of 18x on FY26E EPS and BOT assets at 1x investment value.

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412