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

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

(KNRC IN, Mkt Cap USD0.6b, CMP INR325, TP INR375, 15% Upside, Buy)

 

• Revenue growth in-line; operating profit meaningfully ahead of estimate: 3QFY18 revenue grew 13.3% YoY to INR4.3b (est. of INR4.3b). Operating profit increased 71% YoY to INR984m, significantly ahead of our estimate of INR680m, led by low sub-contracting cost (20.3% v/s 39.3% in 3QFY17) and cost reversal by KNRC for projects like Madurai and Thirvananthpuram (where it has achieved 85% project completion). Operating margin of 22.7% (+760bp YoY; est. of 15.8%) was at a multi-year high, and KNR expects to sustain this level in FY18, as contribution from the low-margin Hubli-Hospet order is expected to remain low. PAT of INR657m (+58.1% YoY) was meaningfully ahead of our estimate of INR369m.
• YTD order inflow at INR5b; expects orders worth INR20b to be finalized in 4Q: 9MFY18 order inflow 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 INR33.3b provides revenue visibility of 1.9x its TTM revenue. KNR is L1 in KSHIP order worth INR11.6b, which it expects to be finalized in 4QFY17. Of the total order book, 73% comes from the road segment and balance from the irrigation segment.
• BoT portfolio stabilizes with both projects now fully commissioned: KNR’s both projects are 100% complete. Toll collection was INR1.4m/day for Kerala BoT and INR1.35m/day for Muzzafarpur Baurani project as of 3QFY18.