INSTITUTIONAL EQUITY RESEARCH

KNR Construction (KNRC IN)

Strong results; Strong fundamentals – maintain BUY
21 May 2021
INDIA | INFRASTRUCTURE | Quarterly Update
KNR delivered strong Q4 result, ahead of estimates, continuing its trend of beating expectations. The
orderbook (at strong 4.2x book-to-sales) has been boosted by the recent road projects – also quite
Buy (Maintain)
diversified now (44% irrigation). In a pandemic impacted year, KNR grew its topline by 20% yoy – a
CMP RS 228
commendable achievement. Proceeds from sale of Walayar project have reduced the debt to zero,
TARGET RS 265 (+16%)
strengthening the balance sheet. While the Cube deal remains a minor concern, KNR is not desperate to
sell the projects, having a strong balance sheet. Overall, KNR appears to be all set to utilize its strong
balance sheet, and orderbook, to report strong numbers in FY22 and beyond. Maintain BUY. SEBI CATEGORY: SMALL CAP

Key takeaways from Q4FY21 COMPANY DATA

• Topline at Rs 9.4bn (+39% yoy, +36% qoq) - ahead of our and street estimates (Rs 8.1bn). O/S SHARES (MN) : 281
MARKET CAP (RSBN) : 61
• EBITDA margins at 19.5% (-227bps yoy, -24bps qoq) - inline with expectations of 19%.
MARKET CAP (USDBN) : 0.8
• EBITDA at Rs 1.8bn (+24% yoy, +35% qoq) - ahead of estimates of Rs 1.55bn. 52 - WK HI/LO (RS) : 242 / 93
• Interest and Depreciation was -77%/+4% qoq LIQUIDITY 3M (USDMN) : 3.0
• PAT Rs 770mn (+15% yoy, -1% qoq) – below estimates of Rs 837mn on account of higher taxes. PAR VALUE (RS) : 10
• Orderbook at Rs 114bn (incl L1 Rs 43.2bn) is strong at 4.2x book-to-sales.
SHARE HOLDING PATTERN, %
• Net WC days jumped to 82 (vs 54 in Q3) – debtor days at 117 (vs 76 in Q3)
Mar 21 Dec 20 Sep 20
• Standalone debt reduced to almost zero (vs Rs 2.3bn in FY20) Cash of Rs 430mn.
PROMOTERS 55.0 55.0 55.0
FY21 Performance DII 34.3 34.3 34.0
FII 1.5 1.5 1.6
• Topline of Rs27bn (+20% yoy).
OTHERS 9.2 9.1 9.3
• EBITDA margins at 19.8% (-190bps yoy). EBITDA at Rs5.4 bn (+10% yoy).
• PAT at Rs2.4bn (+8.4% yoy) KEY FINANCIALS
Rs mn FY21 FY22E FY23E
Conference call takeaways
Net Sales 27,026 31,080 37,296
• Due to the recent COVID spike, the labour availability has reduced to 60-65% and execution to
EBIDTA 5,358 6,216 7,459
55-65% levels . It continues to closely monitor the situation.
Net Profit 2,442 3,744 4,670
• Guidance: The management is targeting over Rs 30bn topline in FY22 (+11% yoy) – but is cautious EPS, Rs 8.7 13.3 16.6
due to the current pandemic situation and possible delays in getting ADs for recently won HAM PER, x 25.1 17.1 13.7
projects. It expects EBITDA margins in 15-16% range (due to higher RM prices) and capex of Rs 2- EV/EBIDTA, x 11.7 10.0 7.9
2.5bn in FY22. Order inflows are expected to be in range of Rs 30-40bn (Rs 84bn in FY21). PBV, x 3.4 2.9 2.4
• Of the Rs 8.6bn of receivables, Rs 3bn are from irrigation projects. Rs 5.2bn are from HAM ROE, % 14.6 18.2 18.9
projects, where the company continues to invest equity, without drawing the SPV debt (so as to Debt/Equity (x) 0.0 0.0 0.0
save on interest cost). The company expects it to come down as it will draw debt before PCoD.
CHANGE IN ESTIMATES
• The management expects PCoD for 3 HAM projects (Trichy Kallagam, Chittor Mallavaram &
__Revised Est. __ __% Revision__
Ramsanpalle Mangloor) in the next two months.
Rs mn FY22E FY23E FY22E FY23E
• The company is evaluating the Cube deal of selling 3 HAM projects, which are impacted by the
Revenue 31,080 37,296 1% 1%
negative carry, due to difference in interest rates. It is willing to walk away from the deal, if it
EBITDA 6,216 7,459 1% 1%
does not find the valuations compelling enough – having a strong zero debt balance sheet. Core PAT 3,744 4,670 9% 7%
• Out of Rs 6.2bn equity requirement for the 5 HAM projects, KNR has already invested Rs 3.7bn – EPS (Rs) 13.3 16.6 9% 7%
Rs 2.0bn/Rs 0.6bn to be invested in FY22/FY23. For 2 new HAMs, equity requirement is Rs 4.3bn.
Vibhor Singhal, Research Analyst
Outlook and valuation (+ 9122 6246 4109) [email protected]
KNR is currently trading at 13.5x FY23 PE (12.8x adjusted for HAMs). We upgrade our FY22/23
Deepika Bhandari, Research Associate
estimates (+9%/+7%), on lower debt and interest expense – topline/EBITDA estimates remain (+ 9122 6246 4138) [email protected]
unchanged. We maintain our target multiple to 15x FY23 PE – highest in our coverage universe. We
now value ALL HAM projects at 0.7x P/BV – waiting for the outcome of the negotiations of the deal
with Cube Highways. Our price target is Rs 265 (earlier Rs 255). We maintain BUY.

(Rs mn) Q4FY21 Q4FY20 yoy Q3FY21 qoq Vs Comments

growth % growth % expectation
Revenue 9,358 6,756 39% 6,863 36% 15% Ahead of our and street estimates. (Rs 8.1 bn)
EBITDA 1,822 1,469 24% 1,353 35% 17% Ahead of estimates of Rs 1.55bn.
EBITDA Margins 19.5% 21.7% -227bps 19.7% -24bps Margins inline with expectations of 19%.
Interest Expense (43) (145) -70% (184) -77%
PAT 770 672 15% 727 6% -8% PAT below estimates of Rs 837mn on account of higher taxes.
EPS 5.5 4.8 15% 5.2 6% 24%
Orderbook 71,179 52,297 36% 76,637 -7% Orderbook (incl L1) at 4.2x book-to-sales
Page | 1 | PHILLIPCAPITAL INDIA RESEARCH
Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker-dealer unregistered in the USA. PHILLIPCAP research
is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by
Rosenblatt Securities Inc, an SEC registered and FINRA-member broker-dealer.
 KNR CONSTRUCTION LTD QUARTERLY UPDATE

Quarterly performance
Particulars (Rs mn) 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21
Total income 6,756 4,794 6,012 6,863 9,358
YoY growth -5.6 3.2 10.1 23.0 38.5
Expenditure
Cost of Raw material 2,200 1,899 1,905 2,141 3,321
% of sales 32.6 39.6 31.7 31.2 35.5
Employee charges 315 278 293 402 348
% of sales 4.7 5.8 4.9 5.9 3.7
Spreading & Assortment Exp 1,773 842 1,722 1,761 1,887
% of sales 26.2 17.6 28.6 25.7 20.2
Other Expenditure 999 832 853 1,206 1,980
% of sales 14.8 17.4 14.2 17.6 21.2
TOTAL EXPENDITURE 5,287 3,850 4,772 5,510 7,536
% of net sales 78.3 80.3 79.4 80.3 80.5
YoY growth -2.0 -0.4 3.1 3.3 2.9
EBITDA 1,469 943 1,240 1,353 1,822
YoY growth 1.9 4.8 -1.4 8.7 24.0
EBITDA Margin (%) 21.7% 19.7% 20.6% 19.7% 19.5%
Other income 73 61 76 266 94
Interest 145 102 158 184 43
Depreciation 538 331 352 373 388
PBT 859 571 694 1,061 1,485
YoY growth -16.6 -3.0 -22.9 80.4 72.8
Tax 187 173 196 285 715
Tax rate 22% 30% 28% 27% 48%
PAT 672 398 498 776 770
YoY growth -26.5 -16.6 -28.9 92.9 14.5
EPS 4.78 2.83 3.54 5.52 5.47
Source: PhillipCapital India Research Estimates

KNR has stable revenue and margin profile ... ... and the orderbook keeps improving

Revenue EBITDA Margins Orderbook Book-to-Sales

4.2
10.0 26% 140 4.5
9.0 22.3% 24% 3.7 4.0
21.7% 120
8.0 20.6% 3.2
Orderbook (Rs bn)

3.1
Operating Margins (%)

19.7% 22% 3.5

19.7% 19.5% 100
7.0
Revenue (Rs bn)

20% 2.6 3.0

6.0 2.3
18% 80

Book to Sales
2.5
5.0
16% 2.0
4.0 60
3.0 14% 1.5
40
2.0 12% 1.0
1.0 10% 20 0.5
5.6 6.8 4.8 6.0 6.9 9.4
52 72 86 77 71 114
- 8%
- -
3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

Incl L1 etc

Source: PhillipCapital India Research Estimates

SoTP valuation
Business division FY23 EPS Book Value Multiple Valuation Per share
Rs Rs mn Rs mn Rs
EPC Business 16.6 15.0x 70,054 249
3 HAM Projects (divested) 4,218 0.7x 2,953 10
2 HAM Projects 2,026 0.7x 1,418 5
Total Valuation 74,424 265
Source: Company, PhillipCapital India Research
Note: We do not yet value the recently won HAM projects – awaiting their FC/AD.

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 KNR CONSTRUCTION LTD QUARTERLY UPDATE

Financials (Standalone)

Income Statement Cash Flow

Y/E Mar, Rs mn FY20 FY21E FY22E FY23E Y/E Mar, Rs mn FY20 FY21E FY22E FY23E
Net sales 22,442 27,026 31,080 37,296 Pre-tax profit 2,937 3,811 4,991 6,227
Growth, % 5 20 15 20 Depreciation 1,918 1,444 1,546 1,711
Total income 22,442 27,026 31,080 37,296 Chg in working capital -507 -2,173 -561 -1,165
Employee expenses -1,252 -1,321 -1,519 -1,823 Total tax paid -554 -1,245 -1,248 -1,557
Other Operating expenses -8,787 -11,082 -12,691 -15,229 Cash flow from operating activities 3,794 1,838 4,728 5,216
EBITDA (Core) 4,871 5,358 6,216 7,459 Capital expenditure -2,148 -940 -2,000 -1,000
Growth, % 14.1 10.0 16.0 20.0 Chg in investments -949 2,250 -2,000 -596
Margin, % 21.7 19.8 20.0 20.0 Cash flow from investing activities -3,096 1,310 -4,000 -1,596
Depreciation -1,918 -1,444 -1,546 -1,711 Free cash flow 698 3,148 728 3,620
EBIT 2,952 3,915 4,670 5,748 Equity raised/(repaid) 0 281 0 0
Growth, % 14.0 32.6 19.3 23.1 Debt raised/(repaid) -344 -2,290 0 0
Margin, % 13.2 14.5 15.0 15.4 Dividend (incl. tax) -82 -70 -70 -70
Interest paid -474 -487 -200 -100 Cash flow from financing activities -498 -2,305 -70 -70
Other Non-Operating Income 566 496 521 579 Net chg in cash 200 843 658 3,550
Pre-tax profit 2,937 3,811 4,991 6,227
Tax provided -684 -1,370 -1,248 -1,557
Profit after tax 2,253 2,442 3,744 4,670
Net Profit 2,253 2,442 3,744 4,670 Valuation Ratios
Growth, % (11.2) 8.2 46.6 24.8 FY20 FY21E FY22E FY23E
Net Profit (adjusted) 2,253 2,442 3,744 4,670 Per Share data
Unadj. shares (m) 281 281 281 281 EPS (INR) 8.0 8.7 13.3 16.6
Wtd avg shares (m) 281 281 281 281 Growth, % (11.2) 8.2 46.6 24.8
Book NAV/share (INR) 57.7 66.4 79.5 95.8
FDEPS (INR) 8.4 9.1 13.3 16.6
Orderbook
CEPS (INR) 15.6 14.6 18.8 22.7
Y/E Mar, Rs bn FY20 FY21E FY22E FY23E CFPS (INR) 11.5 4.8 15.0 16.5
Orderbook 52.3 71.2 120.1 142.8 Return ratios
Growth YoY (%) 30% 36% 69% 19% Return on assets (%) 10.2 9.7 12.4 13.2
Book-to-Sales (x) 2.3 2.6 3.9 3.8 Return on equity (%) 15.5 14.6 18.2 18.9
Order Inflow 34.6 45.9 80.0 60.0 Return on capital employed (%) 14.4 14.7 18.8 19.2
Turnover ratios
Asset turnover (x) 2.5 2.6 2.7 3.0
Receivable days 77.4 116.6 110.0 105.0
Balance Sheet Inventory days 20.0 20.0 20.0 20.0
Y/E Mar, Rs mn FY20 FY21E FY22E FY23E Payable days 174.7 171.4 154.9 135.9
Cash & bank 330 1,173 1,831 5,381 Working capital days 79.4 95.3 89.4 85.9
Debtors 4,761 8,632 9,367 10,729 Liquidity ratios
Inventory 1,232 1,480 1,703 2,044 Current ratio (x) 1.6 1.8 1.9 2.2
Loans & advances 57 105 85 102 Quick ratio (x) 1.5 1.6 1.7 2.1
Total current assets 13,854 18,749 20,344 25,614 Interest cover (x) 6.2 8.0 23.4 57.5
Investments 7,149 4,898 6,898 7,494 Total debt/Equity (x) 0.1 0.0 0.0 0.0
Gross fixed assets 12,671 13,713 15,713 16,713 Net debt/Equity (x) 0.1 (0.1) (0.1) (0.2)
Less: Depreciation -8,233 -9,677 -11,222 -12,933 Valuation
Add: Capital WIP 128 38 38 38 PER (x) 27.2 25.1 17.1 13.7
Net fixed assets 4,566 4,075 4,529 3,818 PEG (x) - y-o-y growth (2.4) 3.1 0.4 0.6
Total assets 27,178 29,207 33,256 38,411 Price/Book (x) 3.9 3.4 2.9 2.4
EV/Net sales (x) 2.9 2.3 2.0 1.6
Current liabilities 8,642 10,521 10,897 11,452 EV/EBITDA (x) 13.6 11.7 10.0 7.9
Total current liabilities 8,642 10,521 10,897 11,452 EV/EBIT (x) 22.4 16.1 13.3 10.2
Non-current liabilities 2,297 7 7 7
Total liabilities 10,939 10,529 10,905 11,459
Paid-up capital 281 562 562 562
Reserves & surplus 15,958 18,116 21,789 26,389
Shareholders’ equity 16,239 18,679 22,352 26,952
Total equity & liabilities 27,178 29,207 33,256 38,411

Source: Company, PhillipCapital India Research Estimates

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 KNR CONSTRUCTION LTD QUARTERLY UPDATE

Stock Price, Price Target and Rating History

250

B (TP 255)

200

150
N (TP 285) N (TP 300)
B (TP 365)
B (TP 335)
B (TP 315)B (TP 320) B (TP 310)
N (TP 255)
100 N (TP 220) B (TP 250)
N (TP 215)

50

0
A-18 J-18 J-18 S-18 O-18 D-18 J-19 F-19 A-19 M- J-19 A-19 O-19 N-19 J-20 F-20 A-20 M- J-20 B (TP S-20 N-20 D-20 F-21 M-
19 20 310) 21

Rating Methodology
We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one
year. We have different threshold for large market capitalisation stock and Mid/small market capitalisation
stock. The categorisation of stock based on market capitalisation is as per the SEBI requirement.

Large cap stocks

Rating Criteria Definition
BUY >= +10% Target price is equal to or more than 10% of current market price
NEUTRAL -10% > to < +10% Target price is less than +10% but more than -10%
SELL <= -10% Target price is less than or equal to -10%.

Mid cap and Small cap stocks

Rating Criteria Definition
BUY >= +15% Target price is equal to or more than 15% of current market price
NEUTRAL -15% > to < +15% Target price is less than +15% but more than -15%
SELL <= -15% Target price is less than or equal to -15%.

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 KNR CONSTRUCTION LTD QUARTERLY UPDATE

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 KNR CONSTRUCTION LTD QUARTERLY UPDATE

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