ICIC
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September 26, 2019
CMP: | 232 Target: | 300 (29%) Target Period: 12-18 months
KNR Constructions (KNRCON)
BUY
Prudent play in EPC space...
KNR Constructions (KNR) is a leading road focused EPC player with over two
decades of experience and a reputation for completing projects on
time/ahead of schedule. With a strong orderbook of | 6,519 crore and rapid
execution of captive hybrid annuity model (HAM) projects and large ticket
irrigation projects, it is well on track to achieve 19% CAGR in revenues to
| 3,031.1 crore in FY19-21E. We also like KNR’s focus on monetising its
under construction HAM projects (Cube Highway deal for four HAM projects
at 1.8x P/BV). Considering strong execution and better EBITDA margins with
best in class WC cycle and healthy balance sheet, we initiate coverage on
KNR with a BUY rating on the stock and SoTP target price of | 300/share.
Order book at | 6,519 crore; adds big ticket irrigation orders
KNR’s order book (OB) was at a strong | 6,518.8 crore (including the recently
won HAM project and Karnataka State Highways Improvement Project
(KSHIP) HAM project), implying order book-to-bill ratio of 3.2x (on TTM
basis). The OB consists of | 5,544.6 crore from roads division and | 972.8
crore from irrigation. On new orders front, it won Mallanna Sagar irrigation
project worth | 850 crore in September, 2019. KNR is targeting another HAM
order worth | 1,000-1,500 crore in FY20E. With this, we expect revenues to
grow at 19% CAGR to | 3,031.1 crore in FY19-21E.
EBITDA margin to remain at higher band of 17-18% guidance
KNR enjoyed better EBITDA margins than its peers due to: i) large fleet of
own equipment and quarrying mine, ii) lower subcontracting expenses (9%
in FY19) and iii) receipt of early completion bonuses/escalation claims.
Going ahead, we expect EBITDA margin of 18.3%, 18.0% (higher band of
guidance of 17-18%) in FY20E, FY21E, respectively, on the back of higher
revenue contribution from high margin irrigation projects, lower level of
subcontracting expenses and receipts of some portion claims from various
authorities worth | 545 crore (| 53 crore already received in July, 2019).
Focus on monetising BOT/HAM projects
We also like its focus on monetising its BOT/HAM projects. KNR is one of
the few companies in the sector that managed to close a deal for four under
construction HAM projects with Cube Highways at significant higher
valuation (1.8x P/BV). With the deal, it eventually converted its HAM projects
to EPC. Beside this, it is looking to monetise its Kerala BOT project by FY20E.
The freed up capital could be used as growth capital for future bidding.
Valuation & Outlook
Considering strong execution, best in class WC, healthy balance sheet and
strong return ratios, we initiate coverage on the stock with a BUY
recommendation and an SoTP target price of | 300/share.
Key Financial Summary
| crore FY17 FY18 FY19 FY20E FY21E CAGR FY19-21E
Net Sales 1,541.1 1,931.7 2,137.3 2,506.6 3,031.1 19.1%
EBITDA 229.6 386.1 427.0 458.7 545.6 13.0%
EBITDA Margin (%) 14.9 20.0 20.0 18.3 18.0
PAT 157.2 272.1 263.3 238.8 266.7 0.6%
EPS (|) 11.2 19.4 18.7 17.0 19.0
P/E (x) 20.7 12.0 12.4 13.7 12.2
EV/EBITDA (x) 14.5 8.9 8.2 7.5 6.1
RoNW (%) 17.6 23.5 18.6 14.5 14.0
RoCE (%) 18.3 20.5 19.0 16.2 17.8
Source: ICICI Direct Research, Company
Particulars
Particular Amount (| crore)
Market Capitalization 3,261.9
Total Debt 264.1
Cash 13.0
EV 3,513.1
52 week H/L (|) 303/ 163
Equity capital 28.1
Face value 2.0
FII Holding (%) 3.2
DII Holding (%) 30.2
Key Highlights
OB at | 6,518.8 crore, 3.2x on TTM
basis
To sell entire stake in four HAM to
Cube Highways at 1.8x P/BV
EBITDA margins expected at 18.3%,
18.0% in FY20E, FY21E, respectively
Initiate coverage with BUY rating and
target price of | 300/share
Price Chart
Research Analyst
Deepak Purswani, CFA
Harsh Pathak
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ICICI Securities | Retail Research 2
ICICI Direct Research
Initiating Coverage | KNR Constructions
Company Background
Established in 1995, KNR Constructions (KNR) is a leading road focused EPC
player with over two decades of experience. The company has robust
project execution capabilities in road transportation engineering projects viz.
construction & maintenance of roads, highways, flyovers and bridges.
Besides this, KNR is also actively involved in the construction of irrigation
and urban water infrastructure management.
Road projects
In the last 20 years, KNR has successfully executed road projects of more
than ~6,000 km across 12 states in India. Its roads portfolio consists of six
hybrid annuity model (HAM) and four build operate transfer (BOT) projects
as of Q1FY20. Road vertical contribute | 5,544.6 crore out of KNR’s total EPC
order book worth | 6,518.8 crore as of Q1FY20.
HAM projects: KNR has six HAM projects in its kitty of which three have
received appointed dates and are currently under execution while financial
closure for the fourth project has been achieved. Furthermore, the financial
closure documents for its fifth project – KSHIP HAM project has been
submitted to the authority. KNR recently entered into a share purchase
agreement (SPA) with Cube Highways wherein the former will sell its entire
51% stake in four of its HAM projects in a phased manner.
BOT projects: The company has four BOT projects in its portfolio. Of these,
two are annuity based and two are toll based projects. These four projects
are spread across 778 lane km in Telangana, Karnataka, Kerala and Bihar.
Irrigation projects
KNR has completed few Irrigation and water management projects on EPC
basis viz. Reservoir across Mathadivagu in Adilabad district (Package- 9)
worth | 37.8 crore and Budpur Balancing Reservoir (Package-20) worth
| 37.0 crore. Currently, the company has two major irrigation orders for
Kaleshwaram and Palamuru Rangareddy lift irrigation projects worth total
~| 1,700 crore in its portfolio.
Exhibit 1: Timeline of KNR Constructions
Source: Company, ICICI Direct Research
Walayar toll project
Under construction Salem flyover
Palamuru lift irrigation project
ICICI Securities | Retail Research 3
ICICI Direct Research
Initiating Coverage | KNR Constructions
In the past five years, KNR has executed projects across 11 states in India,
which provides good geographic diversification to the company. Even while
its current order book consists of projects across various states in India, the
company is looking to maintain its geographic diversity by focusing on Tamil
Nadu, Karnataka, Maharashtra and Uttar Pradesh for new orders. KNR also
has a healthy track record of working with reputed governments as well as
private clients viz. NHAI, MoRTH, EIL, Sadbhav Engineering, GMR, etc.
Exhibit 2: Projects executed in last five years pan India
Source: Company, ICICI Direct Research
Exhibit 3: Reputed clientele base
Source: Company, ICICI Direct Research
ICICI Securities | Retail Research 4
ICICI Direct Research
Initiating Coverage | KNR Constructions
Investment rationale
Known for consistent on time/early project completions
KNR is a road focused EPC player with over two decades of experience. The
company has successfully executed more than ~6000 km road projects
across 12 states in India over the last 20 years. KNR enjoys a reputation of
completing projects on time/ahead of schedule as its bidding strategy is
focused on the following parameters:
Project selection: It bids for projects funded by central government.
In case of state government projects, it ensures these projects have
funding support from a multilateral agency viz. ADB and World Bank
Resources ownership: It focuses on owning resources for timely
raw material availability. KNR possesses a higher fleet of equipment
than its peers and it also has its own quarrying mines at more than
90% of the project sites.
Project proximity: For efficient mobilisation of equipment, KNR
focuses on bidding projects that are in proximity to areas where the
company’s ongoing projects are getting completed
Focus on profitability of project and
Limited number of projects: Focus on limited but large ticket size
projects for conscious and close monitoring on each project under
execution
The bidding strategy along with its strong execution capabilities has led the
company to complete several projects ahead of schedule. This consistent
track record of completing projects on time/ahead of schedule is a key
proposition that differentiates KNR from its peer group and makes it a unique
player in the road construction space. There are a number of projects, which
are reflective of this strong performance over the years. For instance, the
Bijapur-Hungund project (97.2 km) was completed 11 months ahead of
schedule, which is considered a record in early completion in the history of
Indian highway construction work of this magnitude. Completion of projects
ahead of schedule entitles KNR to early completion bonus, which is also one
of the key factors that results in the company commanding much better
EBITDA margin than its peers.
Exhibit 4: Receives bonus for completion of construction ahead of schedule
910 1440 450 365 365365 910 730582 1219 343 364 364 364 880 609
0
400
800
1200
1600
Bijapur-H
ungund
Hyderabad-
Ram
agundam
Karim
nagar-
Kam
areddy
Hyderabad-C
handa
Siric
illa
-S
iddip
et
Narsapur-
Asw
araopet
Wala
yar-
Vadakkancherry
Penchala
kona-
Yerpedu
Scheduled Completion (Days) Actual Completion (Days)
Source: Company, ICICI Direct Research
KNR enjoys reputation of on time/ early completion
since its bidding strategy is focused on project
selection, resource ownership, project proximity,
profitability and concentrating on limited number of
projects
ICICI Securities | Retail Research 5
ICICI Direct Research
Initiating Coverage | KNR Constructions
OB at strong | 6,519 crore; fast-track orders to boost execution
KNR’s order book (OB) was at a strong | 6,518.8 crore (including
Oddanchatram-Madathukulam and KSHIP HAM projects), implying an order
book-to-bill ratio of 3.2x. The current order book lends us comfort for strong
execution, going ahead. The current order book consists of | 5,544.6 crore
(~85% of the orderbook) from roads division, and | 972.8 crore (~15% of
the orderbook) from irrigation.
In road projects, orders worth | 4,387 crore (~67% of the orderbook) are
captive orders while orders aggregating | 1,158.5 crore (~18% of order
book) are non-captive. Among captive orders, in orders worth | 2,502.3
crore (~38% of orderbook), the company has already achieved financial
closure and received appointed date. Also, construction work has already
started in these projects. On the irrigation projects front, KNR secured the
| 847.3 crore order for Palamuru Rangareddy Lift Irrigation project from
Navyuga Engineering Company (Hyderabad) in Q1FY20. With this, the
irrigation vertical now accounts for 15% of the orderbook. Beside this, it
recently won another | 850 crore irrigation project from Megha Engineering
& Infrastructures (Hyderabad) for Mallanna Sagar project in September,
2019.
Exhibit 5: Order book as of Q1FY20
Source: Company, ICICI Direct Research
Exhibit 6: Order book as of Q1FY20
18%
15%38%
29%
67%
Roads - Non captive Irrigation
Roads - Captive Under execution Roads - Captive yet to commence
Source: Company, ICICI Direct Research
KNR is targeting another | 1000-1500 crore HAM projects in the remainder
of FY20E. In terms of execution, captive HAM projects and large ticket
irrigation projects are expected to keep KNR’s execution strong. Hence, we
expect revenues to grow at 19.1% CAGR to | 3,031.1 crore in FY19-21E.
Exhibit 7: Order book trend
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
-2000
0
2000
4000
6000
8000
10000
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E
(x
)
(| crore)
Net Order inflows Revenues Closing orderbook Order book-to-bill (x)
Source: Company, ICICI Direct Research
Projects | crore
Chittor to Mallavarm Project (HAM) 986.7
Ramsanpalle to Mangloor Project (HAM) 808.0
Trichy to Kallagam Project (HAM) 721.2
Hubli – Hospet Section of NH - 63 341.7
Flyover at Ramanthapuram and Sungam Junction 201.5
Top 5 Road Projects 3059.1
Other Road Projects 600.5
Irrigation Projects 972.8
Not included in OB yet# 1885.0
Other Projects 1.4
Total 6518.8
ICICI Securities | Retail Research 6
ICICI Direct Research
Initiating Coverage | KNR Constructions
Has historically exceeded initial revenue guidance
We also highlight that KNR has always been prudent in giving its annual
guidance and historically exceeded its guidance. Based on historical
experience, the company could exceed its revenues guidance of | 2500
crore in FY20E as well.
Exhibit 8: Revenues guided by company vs. actually achieved
(| crore) FY15 FY16 FY17 FY18 FY19 FY20E
Revenues guided at beginning of the year (| crore)800-850 ~800 1200+ 1700-1800 ~1900 ~2500
Revenues achieved at the end of year 876.1 902.5 1541.1 1931.7 2137.3
Exceeded Variation 3.1% 12.8% 28.4% 7.3% 12.5%
Source: Company, ICICI Direct Research
Telangana budget cuts not to impact KNR’s execution
The Telangana government cut the state’s FY20E total expenditure to | 1.46
lakh crore (| 17,274 crore capex) vs. | 1.82 lakh crore projected earlier in its
recent Budget on the back of lower grants from the central government and
weaker-than-expected tax collections. The irrigation sector witnessed sharp
cuts in expenditure by 64% to ~| 6,286 crore for FY20E. However, the state
government has accorded highest priority to key irrigation projects viz.
Kaleshwaram & Palamuru lift irrigation project. They clarified that these
projects will continue and their funding will be met through external
borrowings. In that regard, media reports indicate that Power Finance
Corporation (PFC) will provide a total loan of | 30,000 crore for these projects
(| 18,000 crore for Palamuru and | 12,000 crore for Kaleshwaram). Hence,
we do not expect any delay in execution of KNR’s recently won two irrigation
projects worth ~| 1700 crore, going ahead.
We do not expect any significant delay on the
execution of recently won irrigation project despite
the Telangana government’s cut in state Budget as
Kaleshwaram and Palamuru Lift Irrigation projects
are given high priority and are expected to be
completed with funding support from external
borrowings from entities like PFC
ICICI Securities | Retail Research 7
ICICI Direct Research
Initiating Coverage | KNR Constructions
Enjoys better EBITDA margins than its peers
KNR enjoys better margins than its peers mainly due to: i) focus on
execution through its own fleet of equipment & quarrying mines, ii) lower
level of subcontracting expense and iii) early completion bonus & escalation
claims.
Exhibit 9: EBITDA margin comparison with peers
Source: Company, ICICI Direct Research
Execution through own fleet of equipment, quarrying mine
KNR executes most of its projects through own plants & machinery and
quarrying mines compared to its peers. This is reflected in its relatively low
asset turnover. The ownership of a high fleet of equipment along with
owned quarrying mine not only provides them timely available raw material
but also enables it to enjoy much better margin than its peers. Gross block
as on FY19 was | 1012.5 crore implying gross block to turnover of 2.1x vs.
3.5x-6.6x by its peers.
Exhibit 10: Gross block turnover, EBITDA margin compared to peers
Company Particulars FY15 FY16 FY17 FY18 FY19
Gross Block Turnover 1.6 1.8 2.4 2.4 2.1
EBITDA margin 14.4 16.9 14.9 20.0 20.0
Gross Block Turnover 4.0 4.6 3.8 3.2 3.5
EBITDA margin 13.9 13.2 13.1 17.2 14.8
Gross Block Turnover 3.5 4.7 4.9 4.8 4.4
EBITDA margin 10.1 10.2 10.7 11.8 12.1
Gross Block Turnover 6.1 10.6 8.0 7.0 6.6
EBITDA margin 12.7 12.9 12.1 12.0 13.5
KNR
PNC
Sadbhav
Ashoka Buildcon
Source: Company, ICICI Direct Research
Lower subcontracting expenses also adds up in margin
In recent years, lower subcontracting expenses also contributed to a sharp
improvement in EBITDA margins as illustrated in Exhibit 11. The company’s
subcontracting levels (as percentage of revenues) peaked out at 35% in
FY17. Since then, they have consistently declined to 8% in FY19.
Subcontract levels were at ~9% in Q1FY20. The management aims to
maintain it at sub 10% levels vis-à-vis increasing the execution through own
equipment/machineries, going ahead. We believe this would help the
company deliver better EBITDA margins, going ahead, as well.
Exhibit 11: Subcontracting trend vs. EBITDA margin movement
EBITDA Margins (%) FY15 FY16 FY17 FY18 FY19
KNR Construction 14.4 16.9 14.9 20.0 20.0
Ashoka Buildcon 12.7 12.9 12.1 12 13.5
Sadbhav Engineering 10.1 10.2 10.7 11.8 12.1
PNC Infratech 13.9 13.2 13.1 17.2 14.8
3937
12
29
26
18
19
35
21
815.7
17.2
17.8
16.8
15.1
14.4
16.9
14.9
20.0 20.0
12
13
14
15
16
17
18
19
20
21
0
5
10
15
20
25
30
35
40
45
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
(%
)
Subcontracting as a % of revenues (LHS) EBITDA margin (RHS)
In-house construction equipment
Sr. No. Name of machinery Quantity
1 Tippers & Tankers 1038
2 Excavators 309
3 Generators 194
4 Concrete Mixers & Pumps 127
5 Compactors 124
6 Loaders 71
7 Drillers & Breakers 64
8 Graders 58
9 Cranes 49
10 Pavers 40
11 Batching Plants 40
12 Tractors 35
13 Weigh Bridges 34
14 Rollers 31
15 Crushers 27
16 Light Sources 24
17 Trailers 23
18 Dozers 27
19 Compressors 23
20 Transformers 18
21 Wet Mix Plants 12
22 Hot Mix Plants 12
23 Curblaying Machine 8
24 Sweeping Machines 7
25 Drum Mix Plants 6
26 Sprayers 6
1012.5
Plant & Machinery gross block
(| crore)
ICICI Securities | Retail Research 8
ICICI Direct Research
Initiating Coverage | KNR Constructions
Early completion bonus/escalation claims also contribute to margins
KNR has a notable track record of completing projects ahead of schedule,
which entitles the company to early completion bonuses. For instance, one
of its key milestones was completion of Bijapur-Hungund (worth | 825.0
crore) 11 months ahead of schedule in 2012. The project was at that time
the single biggest road project with KNR for which it received | 50 crore
early completion bonus. Another significant milestone was completion of
the Hyderabad-Ramagundam project seven months ahead of schedule.
Bonuses on early completion along with escalation claims also contribute to
margins. Going ahead, we believe a recovery of favourable old claims from
various authorities aggregating | 545 crore over the next few years would
also enable it to achieve higher band of its EBITDA margin guidance of 17-
18%. For instance, it has received claims worth | 53 crore related to
irrigation projects in July, 2019. This will support EBITDA margins in
Q2FY20E.
Increasing contribution from irrigation projects
KNR recently won two large irrigation projects worth | 1,697.3 crore in its
portfolio: a) Palamuru Rangareddy Lift Irrigation project worth | 847.3 crore
in July, 2019; b) Mallanna Sagar project worth | 850 crore in September,
2019. Including these projects, irrigation contributes to ~25% of the overall
order book of KNR and have shorter execution timelines of ~15-18 months.
Hence, irrigation projects are expected to contribute 25-35% of revenues in
FY20-21. Higher revenue contribution from high margin irrigation projects is
also expected to support better EBITDA margins, going ahead.
Focus on monetising BOT/ HAM projects
KNR has four operational BOT assets and six HAM projects. The company
has already made equity investment of | 671 crore out of KNR’s share of
equity commitment of | 685 crore in all these project put together. The
company’s focus continues to remain on an asset light model. KNR is
looking to monetise these assets. On the BOT front, the company is looking
to sell Walayar Tollway by end of FY20E, which could free up | 370-380
crore. On the HAM project portfolio, KNR has already entered into a deal
with Cube Highway in four out of six projects, where the deal is arranged in
two phases. In phase one, Cube Highway is expected to take 49% stake.
Eventually, it will take 100% stake post mandatory lock in period after
achieving commercial operation date (COD). We highlight that KNR is one of
the very few companies that have managed to bring PE players at the under
construction level of HAM projects. The deal also implies attractive implied
P/BV multiple of 1.8x for KNR.
Looking to monetise one operational BOT projects
KNR has two operational BOT toll projects in its portfolio – Walayar project
(100% stake) and Muzaffarpur-Barauni project (51% stake), which witnessed
toll collection of | 19 lakh/day and | 27 lakh/day, respectively, and toll
revenues worth | 17.1 crore and | 25.5 crore, respectively, as of Q1FY20.
Out of two BOT projects, KNR is currently looking to monetise the Walayar
BOT projects by end of FY20E. It has invested | 397.4 crore as of Q1FY20
and expects to realise | 370-380 crore by selling off this project.
Additionally, the company also has two BOT annuity projects in which it has
40% stake each. Patel KNR Infrastructures Ltd securitised its project loan
through issuance of non-convertible debentures (NCDs) to LIC and raised |
409.0 crore in April 2010, while Patel KNR Heavy Infra Ltd securitised its
project loan through issuance of NCDs to L&T Infrastructures Finance
Company and raised | 400.0 crore in September 2013. The said proceeds
were used to retire the existing high cost project loan and unsecured loans
of promoters and to meet the issue expenses.
Including the recently won order Mallana Sagar
project worth | 850 crore, total contribution of
irrigation projects stands at 25% to the overall order
book
KNR is one of the fewer companies that have
managed to close deal for under construction HAM
projects
ICICI Securities | Retail Research 9
ICICI Direct Research
Initiating Coverage | KNR Constructions
Exhibit 12: BOT projects in KNR's portfolio as of Q1FY20
Project Stake State
Toll
Revenue
per day in
Q1FY20
(| lakh/day)
Concession
Start Date
Concession
Period (yrs)
Scheduled COD Actual COD
Project
Cost (|
crore)
Equity as
of Q1FY20
(| crore)
Debt as of
Q1FY20
(| crore)
BOT toll projects
KNR Walayar Tollways 100% Kerala 19 May 18, 2013 20 November 15, 2015 July 9, 2014 900.5 397.4 152.1
KNR Muzaffarpur Barauni Tollway 51% Bihar 27 July 8, 2012 21 October 31, 2015 June 3, 2016 458.9 177.2 306.3
BOT annuity projects SecuritizedSemi Annuity - 36
installments
Patel KNR Infrastructures Ltd 40% Karnataka Yes Mar 26, 2007 20 32.9 Dec 21, 2009 442.0 37.0 239.6
Patel KNR Heavy Infra Ltd 40% Telangana Yes Mar 2, 2008 20 44.4 June 11, 2010 592.0 64.9 387.0
Source: Company, ICICI Direct Research
Three out of six HAM projects are under execution
KNR has six HAM projects in its kitty. Out of this, the company has already
received appointed date for three projects - Trichy-Kallagam, Chittoor-
Mallavaram and Ramsanpalle-Mangloor. The execution of these project has
already started and is expected to pick up in full swing in H2FY20E post
monsoons. On the fourth HAM project - Meensurutti-Chidambaram, it has
already achieved financial closure in September, 2018. However, there was
a delay in appointed date due to a delay in land acquisition (63-64% land is
acquired) while the project could get terminated due to a delay in land
acquisition and associated escalated cost. The equity requirement for all six
HAM projects is estimated to be | 586.3 crore (| 541 crore – ex Meensurutti-
Chidambaram). With closure of deal with Cube Highway on four HAM
projects, KNR’s share of equity investment would be | 395.6 (| 372.4 crore
– ex Meensurutti-Chidambaram). Out of this, it has already invested | 183.3
crore as of Q1FY20. We highlight that KNR could enter in stake sale
arrangements with private equity players for balance HAM projects. As and
when such deal happens, KNR’s share of equity requirement would further
fall below | 395.6 crore.
Exhibit 13: HAM projects in KNR’s portfolio as of Q1FY20
Project Stake StatusConcession
Period (yrs)
Bid
Project
Cost (|
crore)
Total
Project
Cost (|
crore)
GrantEst. equity
(| crore)
Est. debt
(| crore)
Equity
Invested
(| crore)
Trichy to Kallagam 100%* AD received 17 1020.6 910.0 431.8 96.2 382.0 48.1
Meensurutti to Chidambaram# 100%* FC achieved 17 482.0 431.6 204.1 45.5 182.0 8.4
Chittor to Mallavaram 100%* AD received 17.5 1730.1 1455.5 739.3 143.3 573.0 72.5
Ramsanpalle to Mangloor 100%* AD received 17 1234.0 1045.6 524.5 104.2 416.9 52.1
Magadi to Somwarpeth 100% FC documents submitted 9 1144.5 1127.6 748.5 122.1 257.0 2.6
Oddanchatram to Madathukulam 100% LOA received in March, 2019 17 920.0 - - - - 0.1
Source: Company, ICICI Direct Research
* Share Purchase Agreement signed with Cube Highways and Infrastructure III Pte. Ltd.
# likely to get terminated due to land acquisition related issues and associated higher cost
AD = Appointed date; FC = Financial closure
KNR has made equity investment of | 183.3 crore
out of ~| 198.5 crore among its four HAM projects
where it entered into a deal with Cube Highway
ICICI Securities | Retail Research 10
ICICI Direct Research
Initiating Coverage | KNR Constructions
To sell four HAM projects to Cube at 1.8x KNR’s invested equity
KNR is one of the few companies in the sector that has managed to close
the deal with private equity investors like Cube Highway for its under
construction HAM projects. This means that the company eventually
converted these HAM projects into EPC projects. These HAM projects are
expected to free up KNR’s capital, which could be used as growth capital,
going ahead. The company entered into a share purchase agreement (SPA)
with Cube Highway in February–August, 2019 for four projects. As per the
deal, KNR will initially hold 51% stake while Cube Highway will hold 49%
stake. Eventually, in a phased manner, KNR will sell its entire shareholding
in the SPVs to the investor. This will be subject to shareholding transfer
restrictions set out in the concession agreement executed between NHAI
and the SPV while being subject to various regulatory and lender approvals.
The transaction is contemplated to be completed in two stages, with the first
stage scheduled to be completed after achievement of the commercial
operation date (COD) as per concession agreement and the second stage
scheduled to be completed after expiry of mandatory lock-in period as per
the concession agreement.
Exhibit 14: Details of share purchase agreement with Cube
Project SPV Name Type
Total equity
investment
(| crore)
Cube's stake
(49%)
KNR's stake
(51%)
Conisderation for
KNR's 51% stake
Price:Equity
Trichy to Kallagam KNR Srirangam Infra Pvt Ltd HAM 96.2 47.2 49.1 73.6 1.50
Meensurutti to Chidambaram# KNR Chidambaram Infra Pvt Ltd HAM 45.5 22.3 23.2 36.5 1.57
Chittor to Mallavaram KNR Tirumala Infra Pvt Ltd HAM 143.3 70.2 73.1 152.1 2.08
Ramsanpalle to Mangloor KNR Shankarampet Infra Pvt Ltd HAM 104.2 51.1 53.2 95.8 1.80
Total 389.2 190.7 198.5 357.9 1.80
Source: Company, ICICI Direct Research
# likely to get terminated due to land acquisition related issues and associated higher cost
During the construction period, KNR is required to infuse equity worth
| 198.5 crore against its 51% stake among these four projects. Against this,
the company has already invested | 183.3 crore in these projects. Post
achieving COD, sale of this entire stake to Cube in a phased manner will
fetch the company an aggregate of | 357.9 crore, implying pretty decent
1.80x P/B multiple for KNR. Cube will start investing the balance 49% equity
commitment during the construction phase once 90% right of way (RoW) is
available at the projects. Hence, major portion of equity infusion by Cube
Highway would be done six to seven months ahead of COD. This implies
equity infusion by Cube Highway only from FY21E onwards. Till then, the
company will meet its funding through grants from NHAI and debt.
Additionally, KNR is required to pay interest to Cube Highway for the fund
received during the construction period till CoD, which could be to the extent
of ~| 15 crore. Even adjusting for this interest component, P/BV for the deal
is expected to be ~1.7x P/BV.
Best-in-class WC; one of the lowest debt positions in industry
KNR enjoys best in class working capital (WC) cycle. Its NWC days were at
36 days in FY19. This slipped by six days QoQ to 42 days in Q1FY20 primarily
on account of a sharp increase in debtors by | 200 crore pertaining to
unbilled work of HAM project whose appointed date was received in
Q1FY20. The management expects NWC days back to FY19 levels. Best in
class WC along with superior execution and EBITDA margins has led KNR
to enjoy RoCE at 19.0% in FY19, better than its peers.
In the four HAM projects in which KNR has entered
into stake sake arrangement with Cube, the
company is required to infuse | 198.5 crore equity
against 51% stake. Once CoD is achieved, the 51%
stake sale to Cube Highways in a phased manner
will fetch | 357.9 crore to KNR, which implies 1.80x
P/BV multiple
ICICI Securities | Retail Research 11
ICICI Direct Research
Initiating Coverage | KNR Constructions
Exhibit 15: Net working capital
15 15 14 14 1620
74 53 39 45 40 5820 17 12 19 20 36
69
52
41 4036
42
0
20
40
60
80
0
20
40
60
80
FY15 FY16 FY17 FY18 FY19 Q1FY20
Inventory Debtors Creditors Net Working Capital
Source: Company, ICICI Direct Research
Exhibit 16: Lowest NWC compared to peers
52
33 3439
48
98
109
131
113
76
168
158
168
141146
140
162
114
20
60
100
140
180
FY15 FY16 FY17 FY18 FY19
(days)
KNR PNC Infra Sadbhav Engg NCC
Source: Company, ICICI Direct Research; * we have considered other current assets, other
liabilities and provisions in our calculation
Exhibit 17: RoCE, RoE comparison with peers
FY15 FY16 FY17 FY18 FY19
RoE (%) 12.8 15.9 17.6 23.5 18.6
RoCE (%) 11.8 16.2 18.3 20.5 19.0
RoE (%) 14.0 11.3 9.7 13.9 14.4
RoCE (%) 21.0 18.7 13.2 13.7 15.6
RoE (%) 8.4 9.0 11.3 11.8 9.2
RoCE (%) 11.5 13.0 10.8 9.9 10.5
RoE (%) 3.5 7.0 6.6 6.8 11.9
RoCE (%) 13.9 16.0 14.6 15.9 21.2
KNR
PNC Infra
Sadbhav Engg
NCC
Source: Company, ICICI Direct Research
On the debt front, KNR’s standalone debt was at | 342 crore (including
promoter debt of | 205 crore) as of Q1FY20, implying net D/E of 0.19x, which
is among the lowest in industry. The company is looking to sell Walayar BOT
project. Cash proceeds from sale of this asset would be used to repay
promoter debt. Besides this, it has already completed infusion of equity in
three of its under construction HAM projects where it has done a deal with
Cube Highways. Hence, we do not expect any significant rise in debt level
from FY19 level, going ahead.
Exhibit 18: Debt comparison with peers
FY15 FY16 FY17 FY18 FY19
Debt (| crore) 104.9 116.7 153.3 240.3 264.1
Net D/E (x) 0.14 0.07 0.08 0.15 0.16
Debt (| crore) 353.0 11.7 147.3 128.6 375.4
Net D/E (x) 0.49 0.01 0.09 0.07 0.18
Debt (| crore) 1096.4 1062.9 1518.3 1484.7 1484.7
Net D/E (x) 0.78 0.70 0.90 0.79 0.70
Debt (| crore) 1995.1 1883.6 1576.7 1300.0 1993.3
Net D/E (x) 0.59 0.49 0.43 0.29 0.36
KNR
PNC Infra
NCC
Sadbhav Engg
Source: Company, ICICI Direct Research
Exhibit 19: Total debt, net D/E trend for KNR
153.3
240.3
264.1
277.2
297.2
0.08
0.15
0.16
0.10
0.11
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
0.16
0.18
0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
FY17 FY18 FY19 FY20E FY21E
(x
)
(| crore)
Debt (| crore) Net D/E (x)
Source: Company, ICICI Direct Research
ICICI Securities | Retail Research 12
ICICI Direct Research
Initiating Coverage | KNR Constructions
Government plans massive infrastructure spending
Government’s big infrastructure push
In Union Budget 2019-20, the government plans to spend | 100 lakh crore
on infrastructure by 2024. This intended outlay is a massive 2.7x jump from
| 37.2 lakh crore spent towards infrastructure development in FY13-17.
Media reports also indicate the FM has set up a task force recently to draw
up a national infrastructure project pipeline to implement its ambitious plan.
Improving road connectivity: Prime focus area for government
The government aims to construct ~60,000-km length national highways at
a total spend of ~| 15 lakh crore in the next five years. By FY24E, NHAI is
expected to award 32,300 km, out of which 60% is expected to be EPC, 30%
HAM and 10% BOT orders. The Ministry of Road Transport & Highway
awarded 17,055 km in FY18, the highest ever. However, in FY19, the
awarding plunged to 5,470 km due to central government elections, change
in land acquisition policy and bank aversion to fund HAM projects.
Nonetheless, with the government making efforts to sort out issues like
speeding up land acquisition and setting up dedicated financing arm for
NHAI projects, we expect road awarding to revive, going ahead.
Exhibit 20: NHAI & MoRTH awarding
14353067 4344 4355
7396
2222
3169
7972
10098
15948 17055
5470
0
5000
10000
15000
20000
25000
30000
FY14 FY15 FY16 FY17 FY18 FY19
Km
s
NHAI Other Agencies
Source: ICICIdirect.com Research
Exhibit 21: NHAI & MoRTH construction activity
1901 1501 1988 2628 3071 3320
4260 44106061
8231
982910855
0
5000
10000
15000
20000
25000
FY14 FY15 FY16 FY17 FY18 FY19
Km
s
NHAI Other Agencies
Source: ICICIdirect.com Research
Bharatmala Pariyojana - key driver for road investment
Under Bharatmala Pariyojana Phase-I, total 34,800 km at an estimated cost
of | 5,35,000 crore has been considered (~24,800 km are in Phase I in
addition to ~10,000 km of balance road works under NHDP). Bharatmala
Phase-I is proposed to be implemented over a five-year period i.e. 2017-18
to 2021-22. So far, 225 projects with aggregate length of ~9,613 km have
been appraised and approved under Bharatmala Pariyojana Phase-I at a total
capital cost of | 2,43,415 crore. Bharatmala phase is expected to be funded
through i) Cess Road Fund - | 1.4 lakh crore, ii) National Highway
monetisation - | 0.35 lakh crore, iii) PBF-toll collection of NHAI - | 0.46 lakh
crore, iv) market borrowing - | 2.1 lakh crore and v) PPP - | 1.06 lakh crore.
Bharatmala Pariyojana phase I could get delayed by few years due to land
acquisition related and funding related issues.
Sources of funding Bharatmala phase I
26%
6%
9%39%
20%
Cess Road Fund NH monetization
PBF - Toll Colelctions Market Borrowings
Source: MoRTH, ICICI Direct Research
ICICI Securities | Retail Research 13
ICICI Direct Research
Initiating Coverage | KNR Constructions
Exhibit 22: Bharatmala phase I estimated cost
Components
Length to be
awarded (km)
Estimated
outlay
(| crore)
Estimated cost
per km
(| crore)
Awarded
length
(km)
Total capital
cost
(| crore)
Actual csot per
km
(| crore)
Economic Corridors development 9000 120000 13 1548 42675 28
Inter-corridor and Feeder routes 6000 80000 13 194 3883 20
National Corridors Efficiency improvements 5000 100000 20 1073 31782 30
Border & International connectivity roads 2000 25000 13 973 4563 5
Coastal and port connectivity roads 2000 20000 10 90 1351 15
Expressways 800 40000 50 124 11304 91
Total Bharatmala Pariyojana 24800 385000 16 4003 95558 24
Balance road works under NHDP 10000 150000 15 1755 40304 23
Grand Total 34800 535000 15 5758 135862 24
Source: NHAI, ICICI Direct Research
Asset monetisation by NHAI critical for future awarding of Bharatmala
NHAI’s borrowing has increased sharply from ~| 0.25 lakh crore to ~| 1.78
lakh crore in FY19 on account of increased construction activity and sharp
rise in land acquisition cost. NHAI’s land acquisition cost has risen ~4x to
| 3.4 crore/hectare in FY14-18 resulting in sharp outgo towards land
acquisition. Hence, we believe NHAI has to increase monetisation of existing
assets for future awarding of Bharatmala Pariyojana. In that regard, media
reports indicate that NHAI is set to raise more than | 85,000 crore by FY25
through the toll operate transfer (ToT) model and InvITs by FY25E. Besides
this, the government is also looking to set up a dedicated financing arm for
NHAI projects. While the fine print is awaited, it could help sort out financing
related issues, going ahead.
Exhibit 23: NHAI financial performance
Parameters (| crore) FY15 FY16 FY17 FY18
Sources of Fund
Receipt of Cess 6885.9 15420.0 2326.5 12429.5
Toll Plough Back 5448.0 6500.0 7500.0 8462.1
Additional Budgetary Support 600.0 370.3 5649.0 4150.0
Capital Grant (JICA & WB) 0.0 0.0 0.0 186.0
Capital Gain Tax Exemption Bonds 3343.4 4281.2 5572.7 6657.4
Taxable bonds 0.0 19000.0 27545.0 20875.0
Decrease in cash 6197.5 0.0 0.0 0.0
Rupee denominated Offshore (Masala) Bonds 0.0 0.0 0.0 3000.0
Loans from National Small Savings Fund 0.0 0.0 0.0 20000.0
Other Sources/Working Capital changes 1315.0 1186.5 1900.3 3145.2
Total 23789.7 46757.9 50493.5 78905.2
Application of Funds
Land Acquisition 9097.9 21933.9 17823.2 32142.6
Project Expenditure 7885.4 12573.2 20843.2 30647.9
Repayment of Loans and Interest thereon 4292.4 5129.8 7010.3 8946.2
Increase in Cash 0.0 4068.5 1636.0 0.0
Other Outflow 2514.1 3052.7 3180.9 7168.6
Total 23789.7 46757.9 50493.5 78905.2
Source: NHAI, ICICI Direct Research
NHAI borrowing
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
FY15 FY16 FY17 FY18 FY19*
| la
kh c
rore
Source: NHAI, ICICI Direct Research
*as per media reports
ICICI Securities | Retail Research 14
ICICI Direct Research
Initiating Coverage | KNR Constructions
Exhibit 24: NHAI land acquisition
0
2000
4000
6000
8000
10000
FY15 FY16 FY17 FY18
(hectares)
Source: NHAI, ICICI Direct Research
Exhibit 25: NHAI’s land cost per Hectare
0.9
1.4
2.4 2.4
3.4
0.0
1.0
2.0
3.0
4.0
FY14 FY15 FY16 FY17 FY18
(| crore p
er hectare)
Source: NHAI, ICICI Direct Research
Pradhan Mantri Gram Sadak Yojana
Total 5,99,090 km road length has been constructed under the scheme since
inception till April, 2019. Further to give a strong impetus to rural road
connectivity across the country, the government, in the recent Union
Budget, approved the launch of PMSGY-III in July, 2019. Under the PMGSY-
III Scheme, it is proposed to consolidate 1,25,000 km road length in the
states at an estimated cost of | 80250 crore (central government’s share -
| 53,800 crore, state government share- | 26,450 crore). The implementation
period of PMSGY-III is 2019-20 to 2024-25.
River interlinking projects
The river interlinking programme has gained national importance while the
government has taken it up on a high priority. The interlink project has been
split into three parts: i) Northern Himalayan river interlink component, ii)
southern peninsular component and iii) intrastate river-linking component.
The government is planning to speed up the ambitious | 5.5 lakh crore river
interlinking plan, which aims to link rivers through a network of reservoirs
and canals across India. A separate Ministry of Jal Shakti has been formed
to give greater impetus to irrigation, drinking water and waterways. Tenders
related to Jal Shakti Abhiyan are expected to start coming up from Q3FY20E.
This could throw up a huge set of opportunities for EPC players like KNR.
In the recent Union Budget, the government
approved the launch of PMSGY-III in July, 2019.
Under the PMGSY-III Scheme, it is proposed to
consolidate 1,25,000 km road length in the states at
an estimated cost of | 80250 crore. Also, the
government is planning to speed up its ambitious |
5.5 lakh crore river interlinking plan
ICICI Securities | Retail Research 15
ICICI Direct Research
Initiating Coverage | KNR Constructions
Financials
Revenues expected to grow at 19.1% CAGR in FY19-21E
KNR has six HAM projects, of which it has already received appointment
date while work has already started on this project. These three projects
together are contributing ~| 2,500 crore out of the total orderbook worth
~| 6500 crore. Beside this, it recently bagged two irrigation projects worth
~| 1700 crore, which are expected to be completed over the next 12-16
months. Hence, we believe KNR’s execution would remain strong in the
coming years. Overall, we expect revenues to grow at 19.1% CAGR to
| 3,031.1 crore in FY19-21E.
Exhibit 26: Revenues expected to grow at 19.1% CAGR in FY19-21E
1541.1
1931.7
2137.3
2506.6
3031.1
0.0
500.0
1000.0
1500.0
2000.0
2500.0
3000.0
3500.0
FY17 FY18 FY19 FY20E FY21E
(| crore)
Source: Company, ICICI Direct Research
EBITDA margin to remain at higher band of 17-18% guidance
EBITDA margins expanded 510 bps to 20.0% in FY17-19. Higher EBITDA
margins were on account of several factors playing out such as declining
subcontract levels, increasing share of high margin irrigation projects and
receipt of early completion bonus/escalation at several projects. Going
ahead, we expect KNR to achieve higher band of 17-18% EBITDA margin
guidance on the back of higher revenue contribution from high margin
irrigation projects, lower level of subcontracting expenses and receipts of
some portion claims from various authorities worth | 545 crore. Out of this,
it has already received | 53 crore from NHAI in July, 2019, which is expected
to flow in Q2FY20E. Hence, we build in EBITDA margin at 18.3% and 18.0%
in FY20E and FY21E, respectively.
Exhibit 27: EBITDA margins expected to remain high
229.6 386.1 427.0 458.7 545.6
14.9
20.0 20.0
18.3 18.0
0.0
5.0
10.0
15.0
20.0
25.0
0.0
100.0
200.0
300.0
400.0
500.0
600.0
FY17 FY18 FY19 FY20E FY21E
(%
)
(| crore)
EBITDA EBITDA Margin (%)
Source: Company, ICICI Direct Research
We expect KNR’s revenues to grow 19.1% CAGR to
| 3,031.1 crore in FY19-21E
CAGR: 19.1%
ICICI Securities | Retail Research 16
ICICI Direct Research
Initiating Coverage | KNR Constructions
PAT to remain flattish on higher tax outgo
We expect PAT to remain flattish in FY19-21E despite strong execution
mainly on account of higher tax outgo. As the benefits of various projects
under section 80-IA are getting completed, we anticipate its effective tax rate
would increase from 9.4% in FY19 to 25.0% in FY21E. The flattish bottomline
is also on account of higher depreciation charges following higher capex &
moderation in EBITDA margins,
Exhibit 28: PAT to grow at 14.1% CAGR in FY17-21E
157.2 272.1 263.3 238.8 266.7
0.0
50.0
100.0
150.0
200.0
250.0
300.0
FY17 FY18 FY19 FY20E FY21E
(| crore)
Source: Company, ICICI Direct Research
Return ratios expected to remain healthy ahead
We expect KNR’s RoCE to remain in the range of 16-18% in FY20-21E on the
back of strong execution. The RoCE is expected to marginally get impacted
as we build in sustainable EBITDA margin of 18.3%, 18.0% in FY20, FY21E,
respectively vs. ~20% seen in the last three years.
Exhibit 29: RoE, RoCE trend
17.6
23.5
18.6
14.514.0
18.320.5
19.0
16.217.8
10
12
14
16
18
20
22
24
26
FY17 FY18 FY19 FY20E FY21E
(%
)
RoE RoCE
Source: Company, ICICI Direct Research
CAGR: 14.1%
ICICI Securities | Retail Research 17
ICICI Direct Research
Initiating Coverage | KNR Constructions
Risks & Concerns
Lower awarding by the authorities…
Based on the current order book, we are comfortable on KNR’s execution till
FY21E. In order to keep up with strong execution beyond FY21E, it is crucial
for KNR to keep securing new orders especially from government entities
like NHAI. If the company is unable to win new projects possibly on account
of delay in awarding from NHAI or higher competitive intensity, it could
impact its revenues growth and profitability beyond FY21E.
Delay in pick up in execution…
KNR has three HAM projects that are yet to commence execution. Delay in
receipt of appointed date for these projects could impact our revenue
estimates. For instance, Chidambaram-Meensurutti HAM project (BPC: |
482.0 crore) whose financial closure was achieved in September, 2018 may
get terminated as only 63-64% land is available as of Q1FY20. Secondly, the
company has couple of large ticket irrigation projects in Telangana, where
the state government has cut its budgeted expenditure for FY20E.
Nonetheless, we are given the understanding that both the KNR’s irrigation
projects are part of schemes wherein the government has given highest
priority and their funding will be met through external borrowings from
agencies like PFC. However, any slippage in securing timely funding could
stretch working capital cycle of the company and could delay execution at
these projects which could impact our revenue estimates.
Maintaining higher margins in newer geographies…
KNR may expand its presence in geographies such as Maharashtra and Uttar
Pradesh. In such case, the company could find difficulties in owning
quarrying mine, procuring raw material and manpower availability at desired
lower rates and on time. This could impact its margins and timely execution
of projects in these geographies.
Rise in raw material prices could put pressure on margins…
Raw materials make up ~40% of the overall cost. KNR’s key raw materials
include aggregates, steel and cement. While KNR enters into long-term
arrangements with its suppliers for these materials, any sharp decrease in
prices of these raw materials could put the company on a disadvantageous
position.
External factors could impact working capital cycle of the company…
KNR’s execution may get impacted due to external factors such as delay in
land acquisition by client such as NHAI, political landscape at state level or
delay in securing receivables. This could lead to stretch in WC as well and
consequent debt level, which may impact its profitability & liquidity position,
going ahead.
ICICI Securities | Retail Research 18
ICICI Direct Research
Initiating Coverage | KNR Constructions
Valuation & Outlook
At the CMP, KNR is trading at attractive valuations of 5.6x FY21E EV/EBITDA
and 11.8x FY21E EPS. The company is a focused road based EPC player that
enjoys a strong execution track record with the reputation of completing
projects on time/ahead of the schedule. KNR also enjoys best in class WC
cycle with very healthy balance sheet and strong return ratio (RoCE: 19.0%
& RoE: 18.6%). Revenues and PAT have grown at a CAGR of 20.7% and
34.0%, respectively, in FY14-19.
Going ahead, with a healthy orderbook, and strong execution on captive as
well as shorter duration irrigation projects, we expect KNR’s execution to
pick up and expect its revenues to grow at 19.1% CAGR in FY19-21E. Hence,
we initiate coverage on KNR Construction with a BUY recommendation and
an SoTP based target price of | 300/ share. We value its core EPC business
at | 272/share (7x FY21E EV/EBITDA, implying 15.8x FY21 fully tax adjusted
EPS). We also value its equity investment in BOT & HAM business at
| 38/share (0.8x P/BV).
Exhibit 30: SOTP valuation
Value (| crore) Per Share (| ) Comment
EPC Business (A) 3819 272 7.0x FY21E EV/EBITDA
BOT toll Investment (B = C+D) 390 28
Walayar tollway (C) 318 23 0.8x P/BV
Muzaffarpur tollway (D) 72 5 0.8x P/BV
HAM Projects Investment (E) 147 10 0.8x P/BV
Total Equity Investment (F=B+E) 537 38
Less: Net Debt (G) 83 6 FY21E Net Debt
SoTP Value (A+F-G) 4274 304
Rounded-off target price 300
Source: Company, ICICI Direct Research
Considering strong execution, best in class WC and healthy balance sheet,
KNR is better placed than its peers on the RoCE and EV/EBITDA matrix. It is
currently trading at 5.6x FY21E EV/EBITDA vs. 4-8x compared to its peers.
Even, it is attractively placed based on RoE and PE matrix.
Exhibit 31: Peer comparison on FY21E RoCE vs. EV/EBITDA
0
5
10
15
20
25
0 2 4 6 8 10
RoC
E (%
)
EV/EBITDA (x)
KNR NCC PNC Sadbhav
Source: Company, ICICI Direct Research
Exhibit 32: Peer comparison on FY21E RoE vs. P/E
0
2
4
6
8
10
12
14
16
18
0 5 10 15 20
RoE (%
)
P/E (x)
PNC NCC KNR Sadbhav
Source: Company, ICICI Direct Research
Size of the bubble represent revenues (| crore) Size of the bubble represents PAT (| crore)
ICICI Securities | Retail Research 19
ICICI Direct Research
Initiating Coverage | KNR Constructions
KNR has historically traded at an average one-year forward EV/EBITDA of
7.8x in the last five years. Currently, the company is trading at an attractive
valuation of 5.6x FY21E EV/EBITDA. We believe the company should
command better multiples given its execution focused approach with
reputation of on time/ahead of completion schedule, best in class WC,
superior return ratios and strong opportunities arising in this space ahead.
Exhibit 33: One-year forward EV/EBITDA
500
1,500
2,500
3,500
4,500
5,500
Jan-15
May-15
Sep-1
5
Jan-16
May-16
Sep-1
6
Jan-17
May-17
Sep-1
7
Jan-18
May-18
Sep-1
8
Jan-19
May-19
Sep-1
9
|
EV 12x 10x 8x 6x
Source: Bloomberg, ICICI Direct Research
Exhibit 34: Average one-year forward EV/EBITDA
3.0
6.0
9.0
12.0
Jan-15
May-15
Sep-1
5
Jan-16
May-16
Sep-1
6
Jan-17
May-17
Sep-1
7
Jan-18
May-18
Sep-1
8
Jan-19
May-19
Sep-1
9
(x)
EV/EBITDA Multiple Average EV/EBITDA
1+ STD 1- STD
Source: Bloomberg NHAI, ICICI Direct Research
In terms of full tax adjusted P/E multiple, KNR has historically traded at an
average one-year forward P/E of 16.8x in the last five years. Currently, the
company is trading at an attractive valuation of 15.4x FY21E fully tax
adjusted P/E multiple. We believe KNR should command better multiples
given its execution focused approach with reputation of on time/ahead of
completion schedule, best in class WC, superior return ratios and strong
opportunities arising in this space ahead.
Exhibit 35: One year forward P/E band
30
110
190
270
350
Jan-15
May-15
Sep-1
5
Jan-16
May-16
Sep-1
6
Jan-17
May-17
Sep-1
7
Jan-18
May-18
Sep-1
8
Jan-19
May-19
Sep-1
9
|
Price 25x 20x 15x 10x
Source: Bloomberg, ICICI Direct Research
Exhibit 36: Average one-year forward P/E band
10.0
15.0
20.0
25.0
Jan-15
May-15
Sep-1
5
Jan-16
May-16
Sep-1
6
Jan-17
May-17
Sep-1
7
Jan-18
May-18
Sep-1
8
Jan-19
May-19
Sep-1
9
(x)
P/E Multiple Average P/E 1+ STD 1- STD
Source: Bloomberg NHAI, ICICI Direct Research
Exhibit 37: Peer group comparison
Sector / Company CMP M Cap
(|) TP(|) Rating (| Cr) FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21E
KNR Constructions (KNRCON) 231 320 Buy 3,248 18.7 17.1 18.8 12.3 13.0 11.8 8.1 7.1 5.6 2.3 1.9 1.6 18.6 14.6 13.9
IRB Infra (IRBINF) 96 100 Hold 3,191 25.6 22.8 18.2 3.8 4.2 5.3 5.6 5.4 6.4 0.5 0.5 0.4 13.8 10.8 8.1
PNC Infratech (PNCINF) 204 255 Buy 5,233 11.9 12.4 13.6 17.2 16.4 15.0 11.6 9.4 8.4 2.5 2.2 1.9 14.4 13.3 12.8
Sadbhav Engg. (SADENG) 127 140 Hold 2,178 10.9 9.8 11.6 11.7 13.0 11.0 8.4 8.1 7.3 1.0 1.0 0.9 9.2 7.7 8.5
Ashoka Buildcon (ASHBUI) 118 150 Buy 3,312 -1.4 -1.7 0.4 NA NA 307.1 6.5 5.9 5.2 NA NA 13.9 NA NA 4.5
RoE (%)EPS (|) P/E (x) EV/EBITDA (x) P/B (x)
Source: Company, ICICI Direct Research
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Financial summary
Exhibit 38: Profit and loss statement | crore
(| Crore) FY18 FY19 FY20E FY21E
Net Sales 1,931.7 2,137.3 2,506.6 3,031.1
Other operating income - - - -
Total Revenues 1,931.7 2,137.3 2,506.6 3,031.1
Raw Material Expense 505.5 643.2 744.5 909.3
Other Construction Expenses 929.8 744.9 914.9 1,106.4
Employee benefit expenses 72.1 92.9 112.8 136.4
Other Expenses 38.1 229.3 275.7 333.4
Total Operating Expenditure 1,545.5 1,710.3 2,047.9 2,485.5
EBITDA 386.1 427.0 458.7 545.6
Other Income 39.3 63.4 36.7 41.4
Interest 23.1 29.1 32.6 33.7
Depreciation 134.1 168.1 181.8 197.7
PBT 268.2 290.6 281.0 355.6
Total Tax (3.9) 27.3 42.1 88.9
Reported PAT 272.1 263.3 238.8 266.7
Adjusted PAT 272.1 263.3 238.8 266.7
EPS (Diluted) 19.4 18.7 17.0 19.0
Source: Company, ICICI Direct Research
Exhibit 39: Cash flow statement | crore
| crore FY18 FY19 FY20E FY21E
Profit before Tax 268.2 290.6 281.0 355.6
Depreciation 134.1 168.1 181.8 197.7
Interest Paid 23.1 29.1 32.6 33.7
Cash Flow before WC changes 413.5 453.1 458.7 545.6
Net Increase in Current Assets (240.8) (168.5) (215.7) (239.1)
Net Increase in Current Liabilities 7.8 17.9 101.5 144.1
Net CF from Operating Activities 156.8 247.5 302.3 361.7
(Purchase)/Sale of Fixed Assets (200.9) (203.4) (200.0) (200.0)
Purchase of Investment (2.3) (108.3) (44.2) (48.1)
Interest Income (8.5) (4.5) (36.7) (41.4)
Net CF from Investing Activities (183.1) (285.4) (207.6) (206.7)
Proceeds from share capital - - - -
Interest Paid 23.1 29.1 32.6 33.7
Net CF from Financing Activities 51.2 7.2 (39.8) (41.7)
Net Cash flow 24.9 (30.7) 55.0 113.3
Opening Cash/ Cash Equivalent 16.4 37.1 13.0 68.0
Closing Cash/ Cash Equivalent 41.3 6.4 68.0 181.3
Source: Company, ICICI Direct Research
Exhibit 40: Balance sheet | crore
(| Crore) FY18 FY19 FY20E FY21E
Liabilities
Share Capital 28.1 28.1 28.1 28.1
Reserves & Surplus 1,129.7 1,386.1 1,617.8 1,876.4
Total Shareholders funds 1,157.8 1,414.2 1,645.9 1,904.5
Secured Loan - 33.6 59.5 59.5
Unsecured Loan 240.3 230.6 204.6 204.6
Total Debt 240.3 264.1 264.1 264.1
Deferred Tax Liability - - - -
Liability side total 1,427 1,696 1,930 2,192
Assets
Gross Block 817.6 1,012.4 1,212.4 1,412.4
Net Block 331.6 371.1 389.3 391.6
Capital WIP 0.0 0.0 0.0 0.0
Non-current Investments 572.0 683.0 727.3 775.3
Current Assets
Inventories 71.2 95.0 137.3 166.1
Sundry Debtors 232.0 234.4 309.0 373.7
Loans and Advances 27.9 9.1 9.8 10.7
Other Current Assets 428.4 533.9 626.1 757.1
Cash 43.8 13.0 68.0 181.3
Total Current Assets 759.5 872.3 1,082.3 1,307.6
Creditors 218.4 223.6 262.2 317.1
Provisions 14.2 11.8 13.8 16.7
Other Current Liabilities 314.9 338.4 396.9 480.0
Other Long Term Liabilities 13.2 13.3 15.5 18.8
Total Current Liabilities 547.5 573.8 673.0 813.8
Net Current Assets 288.1 331.1 496.9 694.7
Assets side total 1,427 1,696 1,930 2,192
Source: Company, ICICI Direct Research
Exhibit 41: Key ratios
(Year-end March) FY18 FY19 FY20E FY21E
Per Share Data
EPS (Fully Diluted) 19.4 18.7 17.0 19.0
Cash EPS 28.9 30.7 29.9 33.0
BV 82.3 100.6 117.1 135.5
-
Operating Ratios
EBITDA / Net Sales 20.0 20.0 18.3 18.0
PAT / Net Sales 14.1 12.3 9.5 8.8
Inventory Days 13 16 20 20
Debtor Days 44 40 45 45
Creditor Days 41 38 38 38
Return Ratios
RoE 23.5 18.6 14.5 14.0
RoCE 20.5 19.0 16.2 17.8
RoIC 32.4 26.5 24.9 28.7
Valuation Ratios
EV / EBITDA 8.9 8.2 7.5 6.1
P/E 12.0 12.4 13.7 12.2
EV / Net Sales 1.8 1.6 1.4 1.1
Market Cap / Sales 1.7 1.5 1.3 1.1
Price to Book Value 2.8 2.3 2.0 1.7
Turnover Ratios
Asset turnover 1.4 1.3 1.3 1.4
Gross Block Turnover 2.4 2.1 2.1 2.1
Solvency Ratios
Debt / Equity 0.2 0.2 0.2 0.1
Current Ratio 1.4 1.5 1.6 1.6
Debt / EBITDA 0.6 0.6 0.6 0.5
Quick Ratio 1.3 1.4 1.4 1.4
Source: Company, ICICI Direct Research
ICICI Securities | Retail Research 21
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RATING RATIONALE
ICICI Direct endeavors to provide objective opinions and recommendations. ICICI Direct assigns ratings to its
stocks according to their notional target price vs. current market price and then categorizes them as Buy, Hold,
Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined
as the analysts' valuation for a stock
Buy: >15%
Hold: -5% to 15%;
Reduce: -15% to -5%;
Sell: <-15%
Pankaj Pandey Head – Research [email protected]
ICICI Direct Research Desk,
ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
ICICI Securities | Retail Research 22
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Initiating Coverage | KNR Constructions
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