KNR Constructions: Order wins critical now

26 Sep 2023 , 11:53 AM

Recommendation: Add; Target Price: Rs 302

 

KNRC’s lack of order wins amidst intense competition means that the current Rs80.5bn order book would support only ~9% revenue growth in FY24. Fruition of the targeted Rs40-50bn order wins in FY24 will be critical for the growth in FY25; but ideally, OI ask to support growth is higher given that election are around the corner as well. Margins should trend down, given the focus on growth and diversification into other states and sectors. Healthy balance sheet is a key positive. Analysts of IIFL Capital Services have cut EPS estimates by 7-10% for FY24-25. Analysts of IIFL Capital Services downgrade to ADD. 

Existing OB to support subdued growth in near term: 

Sluggish order wins amidst intense competition in the Roads sector has meant that KNRC ended Q1FY24 with an order book (OB) of Rs80.5bn – just 2.1x trailing 12mn revenue. 20% of this is for irrigation projects where payments have been slow, even as execution has progressed (receivables of Rs6.9bn as at end Q1). Another Rs17.8bn is for three new HAM projects that will get AD only by 4QFY24. Hence, revenue growth will be sluggish at ~9% in FY24. 

Boosting OB key to growth beyond FY24: 

Management has indicated target order inflow of Rs40-50bn; which is low in analysts of IIFL Capital Services view considering the Rs40bn of revenue guidance for FY24. OI pipeline includes: (i) Irrigation projects in MP (river linking) and Rajasthan, as well as in home state Telangana. (ii) Highway project where awards have seen postponements, but there is a significant pipeline and a large stated target award. (iii) Tunnelling projects in the North East (in partnership with Patel Eng., SEW, etc.) and (iv) Metro rail projects. 

Margins should moderate; balance sheet comfortable: 

SA Ebitda margins have moderated due to lower contribution from irrigation projects (sluggish payment cycle). Analysts of IIFL Capital Services expect margins to moderate further, given the need to bolster OB amid high competition. Expansion into northern states for irrigation projects and sharing of margins for PQs in tunnelling, will also hurt margins. Balance sheet will remain comfortable, even assuming irrigation receivables remain elevated. HAM SPVs too have spare debt drawing capacity.