Yes Securities upgrades KNR Constructions to buy, target price Rs 293

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After the recent correction in stock price, Yes Securities has upgraded the KNR Constructions stock to a buy for target price of Rs 293 (based on SOTP valuation). The stock is currently trading at 13.9x FY21E P/E. The stock traded 1.49% higher at Rs 366.85 on Monday whike the Sensex was almost 50 points up at 37400.
Company Financials
KNR Constructions Ltd reported subdued performance during Q1 FY20 largely impacted by delays in receipt of appointed dates for certain Hybrid Annuity (HAM) projects. During the quarter, topline degrew ~17% yoy to Rs.4.6 bn. Operating margin remained at elevated levels of ~19.5% aided by certain projects nearing completion. Weak operating performance and higher interest costs impacted bottomline performance.
The company’s order book as at end of Jun’19 continues to remain healthy at ~Rs.65bn (including EPC value of 6 HAM projects). The Company is targeting order inflow to the tune of ~Rs.15 bn during the remaining period of FY20. With projects coming under-execution, we expect company to clock ~17% yoy topline CAGR during FY19-21E. Earnings growth is likely remain healthy backed by high margin order book in hand. Also, Share Purchase Agreement (SPA) with Cube Highways to sell its entire stake in 4 HAM projects in a phased manner will allow KNR to focus on its core expertise of EPC. Operating margin during Q1 FY20 remained at an elevated levels of ~19.5% as certain projects are nearing completion. Going forward, margin is likely to normalize at ~15-16%.
Investment RationaleKNR is currently sitting on the robust order book of ~Rs.65bn (~3x FY19 revenues) with majority of contribution from Roads (85%) segment. However, the company has able to commence execution only in 3 HAM projects, while awaiting appointed dates in balance 3 projects – mainly impacted by financial closure delays and land acquision problems. Earnings growth is likely remain healthy backed by high margin order book in hand. The receipts of appointed date, therefore, remains key for robust revenue performance. Yes Securities expects 17% revenue CAGR during FY19-21E.

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