Management Speak: KNR Constructions (Unrated) - Poised for sustainable growth
We present key highlights of our management meet with KNR Constructions Ltd (KNRCL) and our site visit Dindigul–Bangalore road project.
Strong order inflows to support growth: KNRCL’s subdued order inflow of Rs5.6bn during 9MFY18 turned robust in Q4FY18 with the company winning 4 HAM projects worth Rs44.7bn (EPC value of Rs31bn). The projects translate into an EPC order backlog of ~Rs59bn as on Mar 2018, implying a book-to-bill ratio of 3.3x FY18E revenue (management guidance). The company is also L1 in a road project worth ~Rs11.7bn from KSHIP. Management has guided for Rs20bn/Rs30bn order inflows in FY19/FY20, respectively. Further, management has guided for Rs20bn-Rs21bn revenue in FY19 and ~Rs25bn in FY20.
Superior margins and strong balance sheet: KNRCL’s EBITDA margin at 15% in FY17 surpassed that of peers at 13% in the EPC space on several measures taken by the company 1) ownership of construction equipment, 2) sourcing materials from captive quarrying mines, 3) in-house team of engineers and 4) limited outsourcing. As a result, KNRCL has been able to execute projects in a timely manner and maintain high margins. Management has guided ~15% EBITDA margin for FY19 and FY20. Moreover, KNRCL’s strong balance sheet with net debt-equity of 0.1x (as on Sep 2017) is a result of the company’s lean working capital cycle of ~24 days (ex of cash and L&As to subs) as on Sep 2017 - among the best in the EPC space.
Operating BOT assets are self-sustaining: KNRCL has an asset portfolio of 8 projects, of which 4 are operational with annuity receipts of Rs1.5bn in FY18 and gross toll collection of Rs690m in 9MFY18. As on Dec 2017, KNRCL invested Rs5bn equity & sub-debt in operational road projects. The company’s operational BOT projects are self-sustaining, driven by pickup in traffic and project refinancing. KNRCL’s recently won 4 HAM projects require Rs3.8bn equity to be invested over the next couple of years and management is evaluating to finance the same through stake sale in SPVs to a financial partner (KNRCL’s stake likely at 51%) or by raising debt at the parent level (to infuse equity into SPVs).
Update on Dindigul–Bangalore road project: The project is ~55% complete and management expects to complete the pending work by Aug/Sep 2018 (scheduled completion Nov 2018). As a result, KNRCL expects to earn an early completion bonus of Rs120m on the project.
Unrated; sound financial metrics: KNRCL’s sound financial metrics of positive operating cash flows, lean working capital and low net D/E at 0.1x will aid the company in funding new HAM projects. Improved order wins and strong order backlog have substantially improved EPC revenue visibility for next 2-3 years. The stock trades at 21.8x/19.7x FY19/20 standalone consensus earnings without adjusting for value of BOT assets.
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