BUY on KNR Constructions - Another strong quarter, debtors overhang over - HDFC Securities

Mr. Parikshit D Kandpal, Institutional Research Analyst, HDFC Securities & Mr. Nilesh Ghuge, Institutional Research Analyst, HDFC Securities

KNR met expectations and delivered largely in-line numbers, with revenue/EBIDTA/APAT vs HSIE estimates at -6/-3/+4%. Roads/irrigation segment contributed 58/42% to the order book (OB). The OB is robust at Rs 82bn (vs. Rs 85.5bn QoQ, ~3.6x FY20), having won projects worth Rs 5.4bn in 3QFY21 (1 order), and Rs ~40bn in 9MFY21. The NHAI bid pipeline is strong with KNR targeting Rs ~30-40bn inflow for the rest of FY21. It has bid for 15 projects totalling Rs ~200bn, and will participate actively in upcoming NHAI bids. 4QFY21 is expected to be a very strong quarter in terms of awarding. KNR is gearing up to further diversify into water & urban infra projects. We maintain a BUY on KNR with an increased target price of Rs 281/sh. We have increased our multiple from 15x to 18x, and roll forward our valuation to Mar-23E.

Another strong quarter, largely in-line: Revenue: Rs 6.9bn (+23% YoY, -14% QoQ, 6% miss on estimates). EBITDA: Rs 1,353mn (+8.7% YoY, +9% QoQ, 3% miss). EBITDA margin came in at 19.7% (-259bps/-92bps YoY/QoQ, 61bps beat on est. 19.1%). Interest cost: Rs 184mn (+30%/+17% YoY/QoQ). Depreciation: Rs 373mn (-28%/+6% Yoy/QoQ). RPAT came in at Rs 776mn (+65%/+56% YoY/QoQ, 4% beat), driven by higher than envisaged other income and margins, despite revenue miss. Margins are expected to sustain at 18%+, with ~42% Irrigation's share in OB. Execution efficiency normalised to pre-COVID level during 3QFY21. Execution was driven by all 5 HAMs.

Balance sheet strengthens further with Telangana debtors realisation: Standalone debt reduced further to Rs 160mn (from Rs 640mn/2.3bn as on Sep-20/Mar-20). Debt/Equity is ~0.01x. With Rs 430mn of cash, KNR remains net cash. NWC moderated by 10 days vs Sep-20 to 54 days (53 days as on Mar-20). However, it was driven by Rs 3.33bn receivables from HAMs, as the company typically draws down debt at SPV level only when cash is needed at standalone level.

Irrigation debtors realised, no more an overhang: KNR has been repeatedly cross examined for the Telangana State government irrigation project receivables, which have been piling up since COVID-19 pandemic. The total debtors from Irrigation project have come down by Rs 5.4bn since the Nov- 20 level of Rs 6.8bn. Hence, Rs 1.4bn is left of the old liability. On top of that Rs 2.9bn is liability (billed + unbilled) for additional work done, taking the total to Rs 4.3bn. This removes the key overhang on the stock.

Multiple triggers for re-rating: The bid pipeline is strong with KNR targeting 3-4 order wins worth Rs ~30-40bn. 3 HAMs to be monetised will be completed in 1HFY21. Discussion for monetisation of 4th HAM is underway. Irrigation debtors overhang is now over. Margins remain best in class. KNR remains our top sectoral pick.

Shares of KNR CONSTRUCTIONS LTD. was last trading in BSE at Rs.218.85 as compared to the previous close of Rs. 222.05. The total number of shares traded during the day was 70532 in over 1713 trades.

The stock hit an intraday high of Rs. 227.8 and intraday low of 217.2. The net turnover during the day was Rs. 15715661.

Source : Equity Bulls

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