knr constructions ltd. pcg... · knr constructions ltd. pick of the week april 16, 2018...

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KNR Constructions Ltd. PICK OF THE WEEK

April 16, 2018

Recommendation

Buy at CMP and Add on Dips

Add on dips to

Rs. 299-275

Target

Rs. 363-399

Time Horizon

6 Quarters

Industry

Constructions

CMP

Rs. 299

KNR Constructions Limited is a multi-domain infrastructure project development company. The Company

undertakes engineering, procurement and construction (EPC) contracts, as well as build-operate-transfer (BOT)

projects across various sectors, such as construction and maintenance of roads, highways, flyovers and bridges. Its

range of verticals also include irrigation projects, water management, agriculture and trading business.

It has completed approximately 6000 kms of projects across over 12 states in India. Its urban water infrastructure

management project is Challaghatta Main Valley Project, which involves the remodeling of primary and secondary

storm drains, bridges/culverts and related works in Challaghatta Main Valley in Bangalore City. The Company's

irrigation and water management projects include Shankara Samudram Balancing Reservoir, Eastern Kosi Canal

system, Reservoir across Mathadivagu and Budpur Balancing Reservoir.

Investments in the road sector will continue to drive stock performance. KNRC, with its strong execution

skills, is likely to benefit from the pick‐up in order activity. We recommend KNRC a BUY at CMP of Rs.

299 and Add on decline of Rs. 275 for the SOTP‐based target price of Rs 363/share and 2nd target of Rs.

399 in 6 Quarter’s Time Frame.

Investment Rationale:

Strong Road Focused EPC Player

KNR Construction with over 20 years of experience has emerged as a leading player in the EPC (Engineering,

Procurement and Construction) segment. It has completed around 46 projects in last 5 years and So far KNRC has

executed 6000 KM lane roads across 12 states. With over Rs. 1500 Cr revenue and Rs. 7832 Cr order book KNRC

has become one of the fastest growing infrastructure company in India.

Some of the esteemed clients of KNRC are NHAI (National Highways Authority of India), MoRTH (Ministry of Road

Transport and Highways), and various State Highway and Road development corporations

Recently completed major EPC Projects includes Andhra Pradesh / Karnataka Border to Avathi Village on NH-7-

Karnataka, Islam Nagar to Kadtal on NH-7- Andhra Pradesh, Madurai - Kanyakumari on NH 7 - Tamil Nadu, Nagaon

to Dharamtul on NH-37 & Nagaon Bypass on NH-37 – Assam, Nellore-Kavali on NH-5 - Andhra Pradesh, Surat -

Manor on NH-8 – Gujarat, Krishnagiri-Vaniyambadi ON NH-46 - Tamil Nadu and Bijapur - Hungund Section of NH -

13 – Karnataka.

FUNDAMENTAL ANALYST

Nisha Sankhala

[email protected]

HDFC Scrip Code KNRCON

BSE Code 532942

NSE Code KNRCON

Bloomberg KNRC IN

CMP as on 13 Apr 18 299

Equity Capital (Rs Cr) 28.12

Face Value (Rs) 2

Equity O/S (Cr) 14.06

Market Cap (Rs Cr) 4,208

Book Value (Rs) 80

Avg. 52 Week Vol 210278

52 Week High 349

52 Week Low 185

Shareholding Pattern (%)

Promoters 55.4

Institutions 31.9

Non Institutions 12.7

PCG Risk Rating* Yellow

* Refer Rating explanation

mailto:[email protected]

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April 16, 2018

Backward Integration Helps in Superior Margin and Timely Project Completion

KNR Construction has adopted backward integration strategy. Means it follows a model of owning the

required equipment and does not subcontract work. KNRC has a team of ~1000 qualified in-house

professionals. This in turn has helped company in managing sustain & superior profit margin of around 15-

17% and has also achieved track record of timely project completion. KNRC has many times received

bonuses for early projects completion.

Source: Company, HDFC sec Research

Huge Infra development spending provides immense order inflow visibility

One of the key focus area of the recent Government is Infrastructure development in the country. Since

last 2-3 years the whole land scape of the infra companies has changed. In FY18, NHAI has awarded 150

road projects of 7,400 km worth Rs 1.2 trillion. In last 5 years, the average length of road projects awarded

by NHAI was 2,860 km with 4,335 km awarded in the last financial year. Next year also we are expecting

a very good run rate for the same as Government of India in Budget of FY19 has plan outlay Rs. 1.21 trillion

for road sector and moreover Rs 71,000 Cr is allocated specially for development of national highways

across the country.

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KEY HIGHLIGHTS

KNR Constructions Limited is a

multi-domain infrastructure

project development company.

With over 20 years of experience

it has emerged as a leading

player in the EPC segment. It has

completed approximately 6000

kms of projects across over 12

states in India.

With over Rs. 1500 Cr revenue

and Rs. 7832 Cr order book

KNRC has become one of the

fastest growing infrastructure

company in India.

Backward Integration Helps in

Superior Margin and Timely

Project Completion.

Huge Infra Development in the

Country Provides Order inflow

visibility.

In this quarter company has won

4 HAM Projects worth Rs. 4500

Cr.

We recommend KNRC a BUY at

CMP of Rs. 299 and Add on

decline of Rs. 275 for the SOTP‐based target price of Rs

363/share and 2nd Target of Rs.

399 in 6 Quarter’s Time Frame.

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April 16, 2018

Robust order book provides strong revenue visibility

Order book as end of Dec 31, 2017 stood at Rs 3332.6 Cr comprising of Rs 2423.4 Cr in Roads sector, Rs

907.1 Cr in Irrigation and Rs 2.1 Cr in others.

In this quarter company has won 4 HAM (Hybrid Annuity Projects) projects worth Rs. 4500 Cr and now KNRC’s

FY18 order backlog stands at Rs 7832 Cr (4.3x FY18E revenues). This is much higher than KNRC own order

intake guidance of Rs 3000‐3500 Cr of new orders in road segments (HAM/EPC).

Currently, Irrigation order book comprises of two projects. Of these, one will get completed in June 2018 and

afterwards the company is expecting one more irrigation project. We expect 10.5% FY18‐20E order book

CAGR on back of strong NHAI & State EPC and HAM roads pipeline.

Update on recent HAM Project wins

In the last 1 month company has won four HAM (Hybrid Annuity Projects) projects worth ~Rs. 4500 Cr. Before

that company was only into EPC and BOT projects. Winning lowest bid for these HAM projects is a significant

achievement for the company.

1) KNRC bagged its first HAM Bid worth Rs. 1020 Cr from NHAI for the work of Four Laning of Trichy to

Kallagam Section of NH-227 under Bhartmala Pariyojana in the state of Tamil Nadu with a concession

period of 17 years including construction period of 2 Years from the appointed date.

2) KNRC bagged its second HAM Bid worth Rs. 482 Cr from NHAI for the work of Two Laning with Paved

Shoulder of Meensurutti to Chidambaram Section of s under Bhartmala Pariyojana, in the state of Tamil

Nadu with a concession period of 17 years including construction period of 2 Years from the appointed

date.

3) Six laning of NH-140 from Chittor to Mallavaram in the state of Andhra Pradesh under Bhartmala

Pariyojana The project is with a concession period of 17.5 years including construction period of 2.5

years from the appointed date, with a bid project cost of Rs1730 Cr.

4) Four laning of NH-161 from Ramsanpalle to Mangloor in the state of Telangana under Bharatmala

Pariyojana. The project is with a concession period of 17 years including construction period of 2 years

from the appointed date, with a bid project cost of Rs1234 Cr.

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April 16, 2018

Foray into New Businesses

Company has aim to add more business verticals to the organization in the fields of construction of Elevated

Metro Rail and Railway Projects. It has neither working project in this segment nor has submitted any bid so far.

Their experience in building flyovers is expected to benefit them in the elevated metro rail construction work.

Strong Financials KNR Construction has generated positive CFO in 9 out of last 10 years. EBIDTA margin has ranged between

14.6‐20% over FY08‐18E period. Revenue/APAT FY08‐18E CAGR is 14.3/21.3%. Total gross standalone debt is

Rs 2.3bn out of which promoter debt is Rs 2.1bn making KNR a net cash company (after considering banking

debt of Rs 0.2bn only). This has been possible because KNRC has always bid for the Projects with conservative

approach to ensure that orders bagged have better margins and all clearances in place.

Risk & Concerns:

Delay in execution: Project delays due to land acquisition or other regulatory bottlenecks could

adversely affect KNRC’s revenues going forward.

Concentration in roads: Majority of KNRC’s order book concentrated in roads segment, significant cost

competition and slowdown in orders could affect KNRC’s revenue and margin profile in the long term.

5 | P a g e


April 16, 2018

SOTP Valuation:

Particulars Segments Value (Rs mn) Value per share (Rs) Rationale

KNR Standalone Core construction business 43,077 306 At 10x FY-20 EV/EBITDA

Kerala BOT Roads toll 3,974 28 At 0.8x P/BV(x) of invested equity

Muzaffarpur Barauni BOT Roads toll 694 5 At 1x P/BV(x) of invested equity

Real Estate Land on Book 718 5 At book value in balance sheet

HAM Projects investment

Roads BOT 2,700 19 Expected investment over next 3yrs at book value in balance sheet

Total 51,163 363

View & Valuation: We value the (1) Standalone EPC business at Rs 306/share (10x Mar‐20 EV/EBITDA), (2) Kerala BOT at Rs

28/share (at 1x P/BV of equity invested), (3) Muzaffarpur Barauni BOT at Rs 5/share (at 1x P/BV of equity

invested), (4) Real estate at Rs 5/share (at 1x P/BV of amount invested) and (5) HAM Projects investment at

19/share (at 1x book value of investments in next three years).

Investments in the road sector will continue to drive stock performance. KNRC, with its strong execution skills,

is likely to benefit from the pick‐up in order activity. We recommend KNRC a BUY at CMP of Rs. 299 and Add on

decline of Rs. 275 for the SOTP‐based target price of Rs 363/share and 2nd Bullish Target of Rs. 399 in 5-6 Quarter’s Time Frame.

6 | P a g e


April 16, 2018

Revenue To Grow At 21% CAGR Over FY17-20E


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Net Revenues Growth (%)

EBITDA Margin to Remain One of the Best in Class


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EBIDTA EBIDTA (%)

Order Book Break Up


Road73%

Irrigation27%

KNRC’s Order Book Spread Across State/Central Projects


Central Gov.47%

International Order

7%

Others1%

State Gov.45%

Rs. mn Rs. mn

7 | P a g e


April 16, 2018

Income Statement (Standalone) Year ending March (Rs mn) FY16 FY17 FY18E FY19E FY20E

Net Revenues (post JV partner share) 9,025 15,411 18,070 23,134 27,630

Growth (%) 2.1 70.7 17.3 28 19.4

Material Expenses 6,805 12,281 13,096 17,884 21,496

Employee Expenses 431 552 685 877 1,050

Other Operating Expenses 260 281 667 762 829

EBIDTA 1,529 2,296 3,622 3,612 4,316

EBIDTA (%) 16.9 14.9 20 15.6 15.6

EBIDTA Growth (%) 13.8 50.1 57.8 -0.3 19.5

Depreciation 423 639 1,208 1,288 1,456

EBIT 1,106 1,657 2,415 2,324 2,859

Other Income (Incl. EO Items) 317 194 274 288 294

Interest 132 219 227 311 368

PBT 1,291 1,632 2,462 2,301 2,786

Tax -319 60 86 345 557

RPAT 1,611 1,573 2,376 1,956 2,228

EO items (net of tax) -165 -141 -246 -138 -279

APAT 1,445 1,432 2,129 1,818 1,950

APAT Growth (%) 97.9 -0.9 48.7 -14.6 7.3

EPS 10.3 10.2 15.1 12.9 13.9


Balance Sheet (Standalone) As at March (Rs mn) FY16 FY17 FY18E FY19E FY20E

SOURCES OF FUNDS

Share Capital 281 281 281 281 281

Reserves 7,096 8,674 10,980 12,903 15,099

Total Shareholders’ Funds 7,377 8,955 11,261 13,184 15,380

Long Term Debt 1,125 1,303 2,299 2,299 2,299

Short Term Debt - - - - -

Total Debt 1,125 1,303 2,299 2,299 2,299

Deferred Taxes -374 -432 -432 -432 -432

Other Non Current Liabilities 325 314 314 314 314

TOTAL SOURCES OF FUNDS 8,453 10,140 13,443 15,366 17,562

APPLICATION OF FUNDS

Net Block 1,762 2,607 3,599 3,511 3,254

CWIP 59 15 15 15 15

Investments, LT Loans & Advances 3,363 4,663 5,163 6,163 7,363

Other Non Current Assets 1,663 1,850 1,850 1,850 1,850

Total Non-current Assets 6,848 9,135 10,627 11,538 12,482

Inventories 353 574 979 1,560 1,890

Debtors 1,294 1,640 2,228 2,852 3,414

Cash & Equivalents 161 246 969 1,542 2,218

ST Loans & Advances, Others 3,555 4,153 4,933 5,892 6,917

Total Current Assets 5,364 6,612 9,109 11,846 14,439

Creditors 1,038 1,344 1,974 2,529 3,028

Other Current Liabilities & Provns 2,721 4,263 4,320 5,490 6,332

Total Current Liabilities 3,759 5,607 6,294 8,019 9,360

Net Current Assets 1,605 1,005 2,815 3,827 5,079

TOTAL APPLICATION OF FUNDS 8,454 10,140 13,443 15,366 17,562


8 | P a g e


April 16, 2018

Cash Flow Statement (Standalone)

Year ending March (Rs mn) FY16 FY17 FY18E FY19E FY20E

PBT 1,291 1,632 2,462 2,301 2,786

Non-operating & EO items -86 20 -37 0 0

Interest expenses 132 219 227 311 368

Depreciation 423 639 1,208 1,288 1,456

Working Capital Change 830 730 -1,088 -439 -576

Tax paid -56 -75 -86 -345 -557

OPERATING CASH FLOW ( a ) 2,534 3,165 2,686 3,117 3,477

Capex -595 -1,383 -2,200 -1,200 -1,200

Free cash flow (FCF) 1,939 1,782 486 1,917 2,277

Investments -1,944 -1,750 -500 -1,000 -1,200

INVESTING CASH FLOW ( b ) -2,538 -3,133 -2,700 -2,200 -2,400

Debt Issuance 204 273 996

Interest expenses -128 -220 -227 -311 -368

Dividend -68 - -33 -33 -33

FINANCING CASH FLOW ( c ) 9 53 737 -344 -401

NET CASH FLOW (a+b+c) 4 85 723 573 677

Opening cash balance 157 161 246 969 1,542

Closing Cash & Equivalents 161 246 969 1,542 2,218


Key Ratios FY16 FY17 FY18E FY19E FY20E

PROFITABILITY (%)

GPM 24.6 20.3 27.5 22.7 22.2

EBITDA Margin 16.9 14.9 20 15.6 15.6

EBIT Margin 12.3 10.8 13.4 10 10.3

APAT Margin 16 9.3 11.8 7.9 7.1

RoE 22.1 17.5 21.1 14.9 13.7

Core RoCE 28 30.5 31.9 25.8 28.7

RoCE 19 16.2 17.5 13.6 12.8

EFFICIENCY

Tax Rate (%) -24.7 3.7 3.5 15 20

Asset Turnover (x) 1.8 2.4 2.1 2.4 2.5

Inventory (days) 14 14 20 25 25

Debtors (days) 52 39 45 45 45

Payables (days) 42 32 40 40 40

Cash Conversion Cycle (days) 25 21 25 30 30

Net Working Capital Cycle (Days) 58 18 37 36 38

Debt/EBITDA (x) 0.7 0.6 0.6 0.6 0.5

Net D/E 0.13 0.12 0.12 0.1 0

Interest Coverage 8.4 7.6 10.6 7.5 7.8

PER SHARE DATA

EPS (Rs/sh) 10.3 10.2 15.1 12.9 13.9

CEPS (Rs/sh) 13.3 14.7 23.7 22.1 24.2

DPS (Rs/sh) 0.2 0.5 0.2 0.2 0.2

BV (Rs/sh) 52 64 80 94 109

VALUATION

P/E 29.0 29.3 19.8 23.2 21.5

P/BV 5.8 4.7 3.7 3.2 2.7

EV/EBITDA 28.7 19.1 12.2 12.1 10

Dividend Yield (%) 0.1 0.2 0.1 0.1 0.1


9 | P a g e


April 16, 2018

Rating Chart

R E T U R N

HIGH

MEDIUM

LOW

LOW MEDIUM HIGH

RISK

Ratings Explanation:

RATING Risk - Return BEAR CASE BASE CASE BULL CASE

BLUE LOW RISK - LOW RETURN STOCKS

IF RISKS MANIFEST PRICE CAN FALL 20% OR MORE

IF RISKS MANIFEST PRICE CAN FALL 15%

& IF INVESTMENT RATIONALE

FRUCTFIES PRICE CAN RISE BY 15%

IF INVESTMENT RATIONALE

FRUCTFIES PRICE CAN RISE BY 20% OR

MORE

YELLOW MEDIUM RISK - HIGH RETURN STOCKS






FRUCTFIES PRICE CAN RISE BY 35% OR

MORE

RED HIGH RISK - HIGH RETURN STOCKS







OR MORE

10 | P a g e


April 16, 2018

50.0

100.0

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350.0

Price Chart

Rating Definition:

Buy: Stock is expected to gain by 10% or more in the next 1 Year. Sell: Stock is expected to decline by 10% or more in the next 1 Year.

11 | P a g e


April 16, 2018

Disclosure: I, Nisha Sankhala, MBA, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or her relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. Any holding in stock –NO HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475. Disclaimer: This report has been prepared by HDFC Securities Ltd and is meant for sole use by the recipient and not for circulation. The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. This report is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity who is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject HSL or its affiliates to any registration or licensing requirement within such jurisdiction. If this report is inadvertently send or has reached any individual in such country, especially, USA, the same may be ignored and brought to the attention of the sender. This document may not be reproduced, distributed or published for any purposes without prior written approval of HSL. Foreign currencies denominated securities, wherever mentioned, are subject to exchange rate fluctuations, which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. HSL may from time to time solicit from, or perform broking, or other services for, any company mentioned in this mail and/or its attachments. HSL and its affiliated company(ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. HSL, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. HSL and other group companies, its directors, associates, employees may have various positions in any of the stocks, securities and financial instruments dealt in the report, or may make sell or purchase or other deals in these securities from time to time or may deal in other securities of the companies / organizations described in this report.

HSL or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. HSL or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from t date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction in the normal course of business. HSL or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither HSL nor Research Analysts have any material conflict of interest at the time of publication of this report. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. HSL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Research entity has not been engaged in market making activity for the subject company. Research analyst has not served as an officer, director or employee of the subject company. We have not received any compensation/benefits from the Subject Company or third party in connection with the Research Report. HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Compliance Officer: Binkle R. Oza Email: [email protected] Phone: (022) 3045 3600 HDFC Securities Limited, SEBI Reg. No.: NSE-INB/F/E 231109431, BSE-INB/F 011109437, AMFI Reg. No. ARN: 13549, PFRDA Reg. No. POP: 04102015, IRDA Corporate Agent License No.: HDF 2806925/HDF C000222657, SEBI Research Analyst Reg. No.: INH000002475, CIN - U67120MH2000PLC152193 Mutual Funds Investments are subject to market risk. Please read the offer and scheme related documents carefully before investing.

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knr constructions ltd. pcg... · knr constructions ltd. pick of the week april 16, 2018...

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