MOSL: KNR CONSTRUCTIONS (Buy)-Order inflow momentum to pick up from 4QFY18-Execution on track for major projects

​KNR CONSTRUCTIONS: Order inflow momentum to pick up from 4QFY18; Execution on track for major projects

(KNRC IN, Mkt Cap USD0.6b, CMP INR270, TP INR320, 19% Upside, Buy)

We met the management of KNR Constructions (KNRC). Our key takeaways:

• Order inflow to pick up in 4QFY18: KNRC expects order inflow to pick up in 4QFY18, as NHAI starts awarding projects. It expects incremental order inflow of INR22b-27b by the end of FY18. Key projects expected to be finalized, where KNRC is favorably placed include (a) KSHIP HAM project of INR12b, and (b) one of the four HAM projects it has bid for in the Kerala/Karnataka region (INR10b). KNRC expects order inflow of INR30b in FY18 and INR40b in FY19.
  
• Expect EPC revenue of INR18b and operating margin of 16% for FY18: KNRC has guided booking revenue of INR18b/20b/23b for FY18/19/20 and operating margin of 16% for FY18. Revenue booking for 2HFY18 would be driven by execution of projects like the Madurai project, the Thiruvanathpuram Bypass, Salem city flyovers, and the Hubli-Hospet project. Irrigation order book of INR8.5b is expected to be executed by FY19.
  
• BOT projects on self-sustaining mode: Both of KNRC’s BOT projects have received 100% COD and toll collection stands at INR1.4m per day for the Walayar project and at INR1.5m per day for the Muzzafarpur project. KNRC has also recently refinanced the Muzaffarpur project, which will help reduce the interest burden for the project by INR110m. Refinancing of the project, pickup in traffic growth, and reduction of debt by infusing equity into the project has led the projects to be self-sustaining. KNRC also intends to securitize the Kerala BoT project cash flows for INR1b, which will help it to meet the equity requirement for the upcoming HAM projects.
  
• Regulatory hurdles put off annuity project deal with Essel Infra: KNRC had entered into a deal with Essel Infra to sell its entire equity stake in two annuity projects (KNRC’s stake: 40%; Patel Engineering’s stake: 60%) to the Essel group for an EV of INR8.5b. However, the deal was subject to receiving NoC from the NHAI by November 2017, which did not materialize; hence, the deal has been put off. KNRC intends to monetize the assets post recovery of claims from NHAI. Together, the projects have a claim of INR3.2b.