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KNR constructions Ltd (KNR) reported weak results for 3QFY24 with 250bps YoY decline in EBITDA margins. While revenue growth of 9% YoY was largely in-line with estimates, lower margins resulted in PAT coming in 12.5% below our estimate. We believe the company’s current orderbook (Rs67.4bn including recently awarded projects) is critically low and despite company’s best efforts, new orders as well as diversification has failed to materialize. Execution in high margin irrigation orders is slow on account of change in government in Telangana and increasing receivables. Given the weak order inflow this year and uncertainty on irrigation execution, we have cut PAT numbers for FY24/FY25 by 3%/15% respectively. We are now building in only 6%/7% CAGR in revenue/PAT for FYF23-25. As a result, we downgrade the stock to Sell from Reduce with revised TP of Rs238 (Rs263 earlier).

3QFY24 result highlights

Revenue at Rs9bn increased by 9.1% YoY while it was down 3.8% QoQ. EBITDA came in at Rs1.4bn, down on YoY/QoQ basis by 5.6%/11.4. EBITDA margins at 16.3% contracted by 252bps YoY and 139bps QoQ. PAT came in at Rs855mn, flat YoY and down 14.3% QoQ. Margins were lower as most of the execution was related to HAM projects and contribution from irrigation orders came down. We believe irrigation segment poses greater uncertainty and risk of increasing the debtors given the status of Kaleshwaram lift irrigation project.

Executable orderbook at Rs49.6bn with 30% exposure to irrigation

Current OB stands at Rs49.6bnbn excluding recently awarded projects. 3 HAM projects which were awarded in 4Q23 with EPC value of Rs17.8bn, have received FC and are still awaiting AD. OB including these projects is Rs67.4bn translating to book to bill ratio of just 1.7x. If we adjust the irrigation orders from OB, the book to bill fall to 1.4x. The management is targeting inflows of Rs50+bn in FY25. The company is bidding for projects outside road segment like metros, renewable power, mining and railways but has not received any orders yet.

Margins expected to decline further

KNR has been able to maintain superior margins in the past due to strategic bidding, focus on the South region, and profitable irrigation orders. Execution in irrigation segment is expected to be lower this year (Rs5.7bn in 9MFY24 vs Rs12bn in FY23) and it can be even lower if the receivables from Telangana government doesn’t improve. As a result, margins are expected to contract by ~250bps this year. The management is targeting EPC projects across multiple segments as well as EPC of road projects wherein margins are expected to be lower.

Downgrade to Sell with revised TP of Rs238

We have reduced our order inflow and execution estimate for FY24 and also reduced execution rate as well as margin estimate for FY25/FY26. Substantial order accretion is required in near term to improve the revenue visibility. We expect the management to prioritise growth over margins and do not rule out further reduction in margins in FY25/FY26. We have cut our PAT estimates for FY24/FY25 by 3%/15% respectively. We value the stock based on SOTP method wherein we have valued EPC business at 13x Sep25E EPS (unchanged) and add the value of equity investment in BOT/HAM projects at 0.8-1x P/B. We downgrade our rating to Sell from Reduce. Key risk to our negative call include higher order inflows in FY25, recovery of debtors in irrigation segment and new orders from non-road segment.

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