BUY KNR Constructions: AnandRathi Institutional Research

KNR Constructions - Execution slippages to bounce back in FY17; with a target price of Rs 700

KNR Constructions posted a modest set of Q3 FY16 figures due to execution challenges (weather) and delays in obtaining clearances. We estimate a 21% and 24% CAGR in revenue and PAT, respectively, over FY15-18, helped by the huge orders bagged in Q1 FY16 and the strong bid pipeline. We have a Buy rating, with a price target of Rs. 700.

Modest revenue growth. KNR's revenue (Rs. 2bn) declined in Q3 FY16 (down 4.5% yoy) hit by delays in securing approvals/ clearances for the newly-bagged projects and by the unusual rains (and consequent flooding) in Tamil Nadu. EBITDA came at 15.5% (vs. 13.9% yoy, 16.4% qoq). We expect revenue to register a 21% CAGR over FY17-18 with margins in the range of ~15-16% as orders bagged in Q1 FY16 begin to contribute in FY17/18.

Strong order book. The order book at 31st Dec'15 was Rs. 34.7bn (4.1x TTM revenues) backed by inflows of Rs. 24bn in 9mFY16. In Q1 FY16, the company bagged orders of Rs. 23.3bn; work on most of these has begun but has been running slow due to the heavy rains and delay in obtaining clearances. The company has submitted bids for orders of Rs. 20bn in various areas in the road and irrigation segments.

Ahead of industry peers. It received an award from NHAI for Best Completed Project before time for the Kerala BOT project (final completion certificate received in Oct'15). It is one of the few construction companies with a low net gearing of 0.13x (FY15), low working-capital cycle, positive free-cash flow and a return ratio better than those of its competitors.

Valuation. We have cut our FY16/17/18 revenue estimates by 9.6% each; our PAT estimates have been lower 12.5, 14.2% and 13.1% respectively because of the bleak performance in Q3 FY16. At the CMP, the stock trades at a PE of 9x FY18e earnings. We retain our Buy, with a sum-of-parts-based target of Rs. 700: construction: Rs. 651, at a PE of 13x FY18e, and BOT projects: Rs. 49 at 1x Mar'15 BV. Risks: Delays in obtaining orders and execution hurdles.

Shares of KNR CONSTRUCTIONS LTD. was last trading in BSE at Rs.437.6 as compared to the previous close of Rs. 438.3. The total number of shares traded during the day was 739 in over 75 trades.

The stock hit an intraday high of Rs. 439.9 and intraday low of 427. The net turnover during the day was Rs. 320475.

Source : Equity Bulls

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