MOSL: KNR CONSTRUCTION (Buy)-Above-estimated performance driven by better-than-expected margin

​KNR Construction: Above-estimated performance driven by better-than-expected margin

(KNRC IN, Mkt Cap USD0.5b, CMP INR256, TP INR295, 15% Upside, Buy)

• Revenue growth muted, but operating profit grows robustly: Revenue grew by a muted 5.3% YoY, but operating profit increased 47% YoY, led by low sub-contracting cost (11.5% v/s 31.2% in 2QFY17) and cost reversal done by the company for projects like Madurai and Thirvananthpuram (where it has achieved 75% project completion). KNR expects margins to sustain in 2HFY18, given that contribution from the low-margin Hubli-Hospet order is expected to remain low. KNR estimates FY18 operating margin at 16-17%. PAT of INR591m (+34.5% YoY) was ahead of our estimate of INR375m.
  
• Order inflow at INR5b in 1H; expects INR20b orders to be finalized in 2H: Order inflow in 1HFY18 was muted at INR5b, given lower order finalizations from the NHAI. The INR5b order inflow is supported by an INR8.8b irrigation project in Telangana (KNR share: INR4.5b). Order backlog of INR35.9b provides revenue visibility of 2.3x its FY17 revenue. Of the total order book, 76% comes from road segment and balance from irrigation segment.
  
• BoT portfolio starts collecting 100% toll: KNR's both projects are 100% complete; toll collection for Kerala BoT stood at INR13.5 lac per day and for Muzzafarpur Baurani project at INR13.4 lac per day as of 2QFY18 (has now reached INR16.5lac per-day collection).