KNR Constructions - Q2 FY21 Result Update - YES Securities

KNR Constructions (Q2FY21) - BUY (Target Rs304, Upside 19%)

Comfortably placed: Q2 FY21 Call Highlights

- The industry has witnessed an improvement in the labour availability which is now at pre-covid levels. NHAI has awarded 1330 km of highways till now which is 1.6x FY20 and 3.5x FY19 levels. For the awarded projects, NHAI has already completed at least 80% to 90% of the land acquisition. The NHAI has set a target of awarding 4,500 kilometers of projects during FY21. NHAI has plans to award contracts worth Rs.2 trn in the 2H.

- NHAI has also used digital banking to disburse about Rs.100 bn to contractors. It has also set up a Dispute Resolution Board to encourage resolution while the projects are still in progress. The share of HAM projects has fallen to 28% in FY20 vs 55% in FY17, on account of delays achieving financial closure, which have led to delays in project execution.

- The government has changed few changes in Concession agreement to benefit the HAM developers like 1) interest rates linked to MCLR of top 5 scheduled commercial banks +1.5% 2) Govt has proposed to release the funds in 10 tranches vs 5 tranches earlier. This will lead to better liquidity. NHAI and MORTH have started paying timely payment as and when bills are raised. The toll collection has sharply recovered in Q2. Toll revenue in September was the highest in this year with Rs.19.4 bn collection. Fastags forms 70% of toll collection.

- The Company is currently operating with utilization levels of 80% and expects the workforce to reach pre-covid levels after Diwali. The company expects Rs.6 bn of revenues during Q3 and ~Rs.7 bn revenue in Q4. Margins are expected to stay at 17-18% on sustainable basis.

- The orderbook for the company stands at Rs.85.54 bn of which irrigation forms 45% (Rs.38.6 bn), HAM Road projects at 31% (Rs.26.87 bn) and others Road projects at 24% (Rs.20 bn). The company targets to bid 10+ projects by FY21 and expects to receive further order inflow of Rs.25-30 bn. It will continue to focus on HAM segment. The company will start new irrigation projects from January while on going projects will continue.

- It has received order for Construction of Elevated Highway along Avinashi Road in Coimbatore City worth Rs.11 bn from Government of Tamil Nadu and will receive the appointment date soon. It has also received a date for KNR Palani HAM project.

- The company has transferred 100% stake in KNR Walayar Tollways Private Limited ("SPV") to Cube Highways. The transaction was completed in September 2020. The company has received Rs.3.1 bn proceeds of which Rs. 2.1 bn has been paid used to repay promoter loan. The company has made provision of Rs.60 mn towards this project in Q2 FY21 (Rs.120 mn total write off taken).

- During the quarter, the execution was primarily driven by Trichy-Kallagam, Chittor-Mallavaram and Ramsanpalle-Mangloor road projects and Malanasagar irrigation projects. The company has incremental equity requirement of Rs.2.4 bn in 1H FY21 and will invest Rs.1 bn in FY22, Rs.500 mn in FY23. Capex for FY21 will be Rs.1-1.2 bn.

- Execution progress and timeline: Magadi to Somwarpeth Project (KSHIP HAM): 14%; Ramsanpalle to Mangloor Project (HAM) : 56%, (march completion , expects 2 months bonus); Chittor to Mallavarm Project (HAM) : 64%, (on time completion in February, can get bonus); Trichy to Kallagam Project (HAM) : 50% (5km land not given thus 14km bypass cannot open as in between portions not complete. Expects 2-3 months delay). Malanasagar project will get complete by next 6-8 months and o/s amount stands at Rs. 7.4bn after receiving Rs.1.5 bn in 1st tranche.

- The company has invoked force majeure clause and are under discussion with NHAI for compensation for toll collection of Bihar project.

- Overall, working capital days have declined to 44 days in Q2 FY21 vs 53 days in FY20. Receivable from Telangana stand at Rs.7.4 bn and expects to receive the entire payment by Q4 FY21. Standalone debt stood at Rs.640 mn vs Rs.2.34 bn in FY20 while consol debt stood at Rs.8 bn vs Rs.8.4 bn in FY20. Mobilization advance stands at Rs.680 mn and retention money at Rs. 1.1 bn.

Our view

With better labor availability and with Monsoon largely behind, execution momentum is likely to continue through H2 FY21. Operating margin is expected to remain healthy at ~17-18% levels driven by the high margin irrigation projects. The order book is in a comfortable position with ~4x FY20 revenues. Recent order inflows, continued focus on asset monetization and comfortable balance sheet position provide comfort. We retain our estimates for FY21/22 and maintain our BUY rating for target of Rs304 (based on SOTP valuation). Significant presence in high growth Roads and Water segment would augur well for KNR.

KNR Construction Q2 FY21 result summary

- KNR Constructions reported topline growth of 10% yoy (at Rs.6.0 bn), marginally ahead of our estimate of Rs.5.7 bn topline.

- Operating margin remained at an elevated levels of ~20.6% (-239bps yoy/ +96bps qoq).

- During the quarter, Company booked an exceptional expense of Rs.112 mn. This is related to the KNR Wallayar Tollway sale to Cube Highways. Certain Investment and Advance portion has been written off/provisioned against the withheld amounts.

- Adjusted PAT declined 17% yoy to Rs.613 mn and was in line with our estimate of Rs.621 mn.

Shares of KNR CONSTRUCTIONS LTD. was last trading in BSE at Rs.256.8 as compared to the previous close of Rs. 254.7. The total number of shares traded during the day was 725 in over 75 trades.

The stock hit an intraday high of Rs. 258.2 and intraday low of 254.6. The net turnover during the day was Rs. 185828.

Source : Equity Bulls

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