KNR Constructions soars 17% in 3 days; analysts see 21% upside in stk price

Analysts believe the company is well-placed to execute projects much better than its peers given its ability to win orders and maintain healthy margins

Shares of KNR Constructions extended their gains into third straight day, up 3.1 per cent to Rs 265.2 apiece, on the BSE on Thursday after the company reported healthy June quarter numbers. With today's gains, shares of the construction and engineering firm have advanced 17 per cent on the BSE in the past three days, as against 0.8 per cent gain in the benchmark S&P BSE Sensex. 

The stock, however, erased gains later and settled 1.7 per cent lower at Rs 252.75 per share on the BSE, as against 1 per cent decline in the benchmark S&P BSE Sensex. 

On Tuesday, the company reported consolidated net profit of Rs 46.68 crore for the recently concluded quarter, as against profit of Rs 42.89 crore in the year-ago period. Sequentially, the profit declined from Rs 84.82 crore reported in March quarter of FY20. The profit before tax stood at Rs 59.28 crore, while revenue from operation came in at Rs 522.52 crore.

"The Covid-19 pandemic has impacted business operations due to lockdown and other emergency measures imposed by the State and Central governments. Based on management's review of business operations, liquidity and financial position of the Group and current economic conditions, there is no material impact on its consolidated financial results and consolidated liquidity position as at June 30, 2020. The future assessment of Covid-19 is very uncertain due to nature and duration. The management of the Group will continue to monitor any material changes to the Business & future economic conditions," the company said in a statement.

The company further said that during FY20, it has entered into a Share Purchase Agreement (SPA) with CUBE Highways and Infrastructure for sale of its 100 per cent share holding in one of its subsidiary i.e. KNR Walayar Tollways (KWTPL) on 09-01-2020 for an Enterprise value of Rs 529.27 crores and accordingly the company has Impaired its investment for an amount of Rs 671.53 lakh.

Given this monetisation, order book, and the company's track record of project execution, analysts see up to 21 per cent upside in the stock price.

"KNR has signed a deal to sell Walayar project at equity value of Rs 390 crore (around 1x P/B) with Cube Highways. Howver, the deal is likely to see haircut in valuation and KNR is agreeable to same with reasonable limits. It is confident of closing the deal within 1-2 months... The proceeds will be used to partly repay promoter debt of Rs 180 crore and fund equity requirement for HAM (Hybrid Annuity Model) projects," noted analyst at Centrum Broking. 

The brokerage further said, "Partial unwinding of irrigation receivables and proceeds from monetisation f Walayar project should further strengthen the balance sheet. With a clear focus on adding more road projects, order backlog is likely to get more balanced". It has a 'Buy' rating on the stock with a target price of Rs 310.

Antique Broking, meanwhile, observed that KNR Constructions reported Rs 480 crore in revenue, up 3.2 per cent annually. "By the earlier assumption, the company should have booked Rs 300 crore in irrigation and Rs 150 crore in road revenue. With nearly Rs 900 crore in receivables and unbilled revenue, the company could claim only Rs 110 crore in revenue from irrigation, nearly double the base year performance. And thereby, road segment, which had 80 per cent of machining workers available-saved the day".

The analysts anticipate de-growth of 2 per cent in EBITDA/net profit with minor compression in EBITDA margin going forwards. "With Rs 7900 crore order backlog, 3.2x TTM revenue, company has enough leg-room to book Rs 2500 crore, at-the least for next three years. Even with worse-case of Covid-19, we anticipate an 2 per cent revenue CAGR till FY22E," they noted. The brokerage has 'Buy' call on the stock with a target price of Rs 289.

Spark Research, on the other hand, has upgraded the stock from 'Add' to 'Buy' with target price of Rs 290. "KNR Constructions, with its resilience to disruptions in Q1FY21, is well-placed to execute projects much better than its peers given its ability to win orders and maintain healthy margins even in these difficult times. With a healthy order book of Rs 7200 crore (incl. recently won irrigation orders), we expect company’s FY21 EPC revenue to record a robust growth of over 18 per cent," it said in a report dated August 20.

"With the Company concluding monetization of Walayar-Vadakkancherry BOT project and getting ADs for already won HAM projects to strengthen its balance sheet, we believe that Company would now have enhanced appetite to bid for upcoming HAM projects in the next 3-6 months (already applied and results awaited for 7 bids & another 10 bids in pipeline)... Clarity in strategy, geographical focus, averseness to BOT model, good capital allocation history and execution track record are positives for the company," it added. 

That apart, YES Securities and Motilal Oswal Financial Services have 'Buy' rating on the stock with respective target price of Rs 304 and Rs 295.  

Sector outlook

Emkay Global Financial Services, in a report dated August 18, noted that India does not have the fiscal space for a stimulus worth 5-15 per cent of GDP as the debt overhang is not transient and may haunt until FY25. Alternate funding options such as specialized domestic financial institutions to leverage funds and multilateral funding, it said, are still small and it expects infrastructure spending to stagnate from here.

"India’s capex/revenue has been structurally declining over the decades (from ~45% in 80s,~35% in 90s, 25% over 2000-10 and 22% over 2010-20). In fact, every crisis has structurally lowered the capex further as a share of government revenues... We estimate the combined infra spending by the Centre and States to decline to a 5.5 per cent CAGR over FY19-25E from 21 per cent over FY13-19," it noted.

As regards stock valuations, the brokerage opined that given foreseeable challenges, no easy reforms forthcoming and recent run-up, valuations of the stocks in the sector are no longer compelling.

Their top picks in the sector, determined by relative safety rather than absolute growth potential, include L&T, KNR Constructions, and Kalpataru Power.