Maintain BUY on KNR Constructions - Strong performance - HDFC Securities

Mr. Parikshit D Kandpal, Institutional Research Analyst, HDFC Securities.

KNR Constructions (Q4FY20): Strong performance. Maintain BUY
(TP Rs 279, CMP Rs 196, MCap Rs 28bn)

We maintain BUY on KNR Constructions with revised TP of Rs 279/sh (12x Mar-22E EPS). KNR delivered another strong quarter beating our earnings estimate by 49% despite weak Mar-20 2nd half. Despite sectoral consensus on weak 1HFY21 execution, KNR is well placed to achieve 1HFY20 Rev run rate for 1HFY21 of Rs 10bn and better performance in 2HFY21. Labour availability is 30-40% but execution run rate has reached 50-65% across various sites. We revise our FY21E EPS by +47% as we believe strong orderbook of Rs 78.8bn (including Rs 23.1bn orders won in 1QFY21) could help recover execution in 2HFY21. We raise our TP to Rs 279/sh (vs 278/sh earlier).

Strong execution and margin expansion led to earnings beat: KNR reported Rev/EBIDTA/APAT of Rs 6.8/1.5/0.7bn beating our estimates by 16/25/49%. EBITDA margin expanded by 162bps YoY given higher share of better margin irrigation segment in revenue mix. While cost escalations are pass through in irrigation works, company expects recovery of any cost overrun due to Covid-19 at 60-70%, which could impact margins. We expect margins to contract by 200bps in FY21E and normalize by FY22E.

Labor shortage to mar 1H; strong OB may lead to 2HFY21 execution recovery: KNR is currently working with 30-40% of regular labor force with efficiency ranging between 50-65%. Management has been making efforts to bring back migrant labors but expects labor shortage to persist throughout 1HFY21E. Nonetheless, company has already booked Rs 2.5bn of revenue from irrigation projects in 1QFY21 (expects to clock overall Rs 4.5bn including roads vs. Rs 4.6bn Rev in 1QFY20). With strong order book of Rs 78.8bn, we expect KNR to recover some of the lost ground in 2HFY21. Having won Rs 23.1bn of orders in irrigation segment, KNR focus is on replenishing road orders. KNR intends to submit bids for 6 HAM projects with value of Rs 60-70bn and expects to win Rs 30bn+ of NH orders.

Balance sheet position comfortable despite rise in NWC days: NWC days rose to 61 days (vs 50 days at FY19 end) as receivables more than doubled in FY20 (Rs 4.8bn vs Rs 2.3bn in FY19) due to delay in collections. Of this, Rs 2bn is from 2 irrigation projects and rest is from 3 road SPVs. With Rs 2.5bn of revenue booking, irrigation outstanding has further swelled to Rs 5bn. We believe with standalone Net D/E at 0.11x, KNR has sufficient headroom to maneuver through this crisis. Besides, proceeds from Walayar asset (Rs 3.9bn), which is expected to completed by Sep-20, would help in cashflow management. KNR has not availed loan moratorium but plans to apply for release of retention money from NHAI. Due to uncertainty in bank rate, KNR may not avail Cube OCDs for under construction HAMs. Kerala BOT may get renegotiated, NHAI NOC in principle approved.

Shares of KNR CONSTRUCTIONS LTD. was last trading in BSE at Rs.196 as compared to the previous close of Rs. 201.7. The total number of shares traded during the day was 22398 in over 1052 trades.

The stock hit an intraday high of Rs. 198.35 and intraday low of 190. The net turnover during the day was Rs. 4384257.

Source : Equity Bulls

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