KNR Constructions Ltd. share price target

KNR Constructions (KNR) has the rare distinction of being a wealth creator in India's beleaguered infrastructure sector.

KNR Constructions Ltd (KNR) is a leading EPC player largely focusing on national and state highway projects. KNR has successfully executed ~6,000 lane km road projects across 12 states in India. Q2FY19 revenue growth (6%) was tepid due to low carry forward orders & challenges in getting financial closure for HAM projects....

KNR constructions (KNR), one of best managed road constructer with light balance sheet, low working capital and one of the highest RoCE among peers, reported its Q2FY19 numbers.

YoY to INR4.2b, exceeding our estimate of INR3.8b, supported by smooth execution of projects in hand. Key projects contributing to revenue were KP Sagar Irrigation Project (INR1.2b; 30% of revenue), Pollachi (INR457m), Madurai (INR416m) and Hubli (INR582m). Operating profit of INR831m (+1% 13 November 2018 YoY), too, was above our estimate of INR596m, supported by better revenue mix. Operating margin declined 100bp YoY to 20.0%, however, it was ahead of our estimate of 15.5%. Better-than-estimated margins were on account of better revenue mix (30% revenue contribution from KP Sagar Irrigation project where margins are in excess of 20% +). PAT declined 24% YoY to INR450m, exceeding our estimate of INR263m. Tax rate stood at 0.6% v/s our estimate of 10%. September 2018, order backlog stood at INR58.1b (including EPC value of HAM project), providing revenue visibility of 3.

KNR's revenue grew 5.8% YoY in Q2FY19 to `4.2bn (18.1% above estimates) led by robust execution. EBITDA margin down 100 bps YoY to 20.0% (319 bps above estimates) due to higher other expenses and employee costs which was partially offset by lower construction costs by 67 bps YoY to 63.2% of revenue. Reported PAT down 23.8% YoY to `450 mn (122.2% above estimates) due to muted operating performance coupled with higher depreciation and higher interest expense which was partially offset by rise in other income....

We maintain BUY with an increased SOTP valuation of Rs 331/sh. KNR delivered Rev/EBIDTA/PAT beat of 3/18/9%. We continue to believe that KNR will deliver YoY muted growth revenue, guidance beat. 1HFY19 already achieved 50% revenue and with stronger 2HFY18 we are building in 5.6% revenue growth. 2QFY19 EBIDTA margin stood at 20%, we estimate sustainable margins to be around 16-17% and have upgraded our FY19/20E APAT by 21/10% to reflect the same.

Annual Report 2018: Four Decades of Engineering Excellence The annual report theme encompasses four decades of engineering excellence in the field of infrastructure such as roads, irrigation and water management works. KNR maintains its market position by continuously focusing on engineering excellence, improving and sharpening competencies, adapting latest construction technologies, deployment of sophisticated construction equipment and timely delivery. KNR reported revenue growth of 25.3% YoY in FY18. EBITDA...

YoY to INR5.6b, exceeding our estimate of INR4.9b, supported by smooth execution of projects in hand. Key projects contributing to revenue were KP Sagar Irrigation Project (INR1.7b; 30% of revenue), Yedula (INR500m), Madurai (INR540m) and Pollachi (INR450m). Operating profit of INR1.1b 14 August 2018 (+30% YoY), too, was above our estimate of INR0.74b, supported by better- than-expected execution. Operating margin expanded 210bp YoY to 19.7%, ahead of our estimate of 15.2%. PAT grew 10% YoY to INR740m, exceeding our estimate of INR417m. Tax rate stood at 12.3% v/s our estimate of 10%. 2018, order backlog stood at INR59.

We continue to maintainBUY with and increased SOTP of Rs 392/sh. KNRC continues to outperform its growth guidance and delivered strong 1QFY19 revenue at Rs 5.6bn which was 18.4% above estimates. EBITDA at Rs 1.1bn was 35.7% above our estimates, with EBITDA margins expanding to 19.7% (+215bps YoY, +42bps QoQ). We estimate sustainable margins to be around 16-17% and have revised our estimates to reflect the same. APAT beat stood at 57.5%.

2 August 2018 Infrastructure KNRC has received in principle financial sanctions for three of the four HAM projects the company has won from NHAI and the fourth project is expected to achieve financial closure by August 2018. Full financial closure should happen once KNRC has 80% land available on 3H basis to execute the projects. With financial sanctions in place for the three projects, focus will now be on NHAI making 80% of the land available, which will aid timely execution of the projects in hand. KNRC is in advanced-stage talks to rope in an equity partner in the four NHAI HAM projects it has won. The financial partner will infuse money by way of optionally- convertible bonds during the construction stage, the bonds will have 14% cost of borrowing, and on completion of the project, the bonds will be converted to equity. Total equity investment in the Muzzafarpur project stands at INR9b.