KNR Constructions - Execution slips; hope for recovery in 2HFY13; Buy - Anand Rathi

Since the bulk of orders which came in during 2HFY12 have not yet reached revenue recognition stage, KNR's 1QFY13 revenue fell 36% yoy. EBITDA margin improved due to bonus received for early completion of the Bijapur-Hungund road project. KNR is L1 in orders of Rs.8bn, and has order book of Rs.32bn. We retain Buy, with a target of Rs.197.

- 1QFY13 revenue slips. KNR's revenue fell 36% yoy in 1QFY13 as the bulk of orders which came in during 2HFY12 have not yet reached the revenue recognition stage. Execution, too, has been slow due to pending clearances from certain clients. Management is confident of recovering the lost revenue from 2HFY13.

- EBITDA margin improvement. EBITDA margin improved to 16.4% (vs 12.7% qoq, 17.1% yoy) and was above our expectations as the company received a bonus of Rs.96m for early completion of the Bijapur-Hungund toll-road. No major cost was associated with this, leading to the better EBITDA margin. KNR will continue to get Rs.1.6m-a-day bonus for the next three quarters.

- Order book rises. KNR is L1 in orders of Rs.8bn, taking its order book to Rs.32bn (4.1x TTM revenue), with over 95% of it coming from the roads sector. The L1 order is the four-laning of the Walayar -Vadakkancherry road in Kerala on a BOT (toll) basis. The order includes a Rs.2.65bn grant from the NHAI with a concession period of 20 years and would be funded through debt-equity of 3:1. The company aims to bag orders of ~Rs.20bn in FY13.

- Valuation. Our sum-of-parts-based target is based on 7x FY13e earnings, a 20% discount to other midcap construction companies (Rs.187) and 1x book value of investments (Rs.10). Risks: Slowdown in road awards, high raw-material costs, rise in working-capital requirements.

Source : Equity Bulls

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