Neutral KNR Constructions Ltd for the Target Rs 140 by Motilal Oswal Financial Services Ltd
Weak execution; recovery expected in FY28
* KNR Constructions’ (KNRC) 1QFY27 revenue declined 9% YoY to ~INR4.3b (13% below our estimate).
* Reported EBITDA margin expanded 210bp YoY to 15% (vs our estimate of 10%), with EBITDA rising ~6% YoY to INR655m (vs our estimate of INR503m). However, underlying EBITDA margin stood at just 5.5%, as the reported EBITDA included a one-time income of INR400m.
* APAT declined ~13% YoY to INR378m (against our estimate of INR309m).
* The current order book stands at ~INR115b, including a mining project worth INR35.5b. ? During 1QFY27, the company transferred 100% equity share capital in two of its subsidiary companies, i.e KNR Palani Infra Private Ltd and KNR Ramagiri Infra Private Ltd, to Indus Infra Trust for a consideration of INR4.3b against the invested amount of INR1.5b (in the form of Equity and Subordinated Debt). The resultant gain of INR2.8b was recognized as an exceptional item in P&L, with INR0.4b of tax incurred on the gain.
* KNRC delivered another weak performance in 1QFY27, missing our estimate on execution due to a thin executable order book. Management expects performance to improve in 2HFY27, supported by the ramp-up of mining projects. We expect revenue growth to pick up from FY28 as recently won orders enter the execution phase. We cut our FY27 earnings estimate by 13%, while raising FY28 earnings marginally on expectations of healthy execution and margin expansion. We estimate revenue and EBITDA CAGR of 22% and 48%, respectively, over FY26-28. We reiterate our Neutral rating on the stock with our SoTP-based TP of INR140.
Key takeaways from the management commentary
* The company’s EBITDA margin stood at 5.5% rather than the reported 15%, as EBITDA included a one-time income of INR400m, which inflated the reported margin. Management expects the underlying margin to remain around the current level in 2QFY27, with an expansion expected in 3Q and 4QFY27.
* Road awarding remained muted in 1QFY27, with slower award conversion by MoRTH and NHAI. However, the medium-term outlook remains positive, supported by FY27 allocation of ~INR3.1t to the road sector and ~8% YoY growth in road sector capex. NHAI’s ~2,442km project pipeline worth ~INR1.8t across 13 states provides visibility for a pick-up in awarding activity over the coming quarters, although the timing remains uncertain.
* Management has guided for order inflows of INR80-100b and revenue of ~INR22-23b in FY27, and expects EBITDA margin to remain in the range of 8- 9% based on the current executable order book.
Valuation and view
* KNRC delivered another weak performance in 1QFY27, missing our estimates on execution due to a thin executable order book. Management expects performance to improve in 2HFY27, supported by the ramp-up of mining projects. We expect revenue growth to pick up from FY28 as recently won orders enter the execution phase. We cut our FY27 earnings estimate by 13%, while raising FY28 earnings by 5% on expectations of healthy execution and margin expansion. We estimate revenue and EBITDA CAGR of 22% and 48%, respectively, over FY26-28.
* We reiterate our Neutral rating on the stock with our SoTP-based TP of INR140.
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