KNR Constructions Ltd: Recent order inflows pump up order book – BUY
CMP: Rs506, 1-yr Target: Rs655, Upside: 30%
KNR Construction, incorporated in 1995, possesses strong expertise in executing EPC projects. KNR which is primarily focused on the roads and highways segment, has strong track record in timely and successful execution of projects across India and has secured repeat orders on continuous basis. It experienced a significant order inflow during FY16 and currently sits on an order book of ~Rs.3,500cr (whopping ~4x FY15 revenues), which is a threefold increase from the order book position during last year. KNR was always an EPC player, but it also took up select BOT projects to counter slowdown. The company now intends to focus purely on the asset light EPC space, which would help it maintain leverage. Further, the company would benefit from road awards during the next couple of years, especially considering that EPC route will likely dominate future road awards. KNR has generated one of the strongest operating margins on a consistent basis compared with peers, driven by strong execution capabilities, tight cost control, selective subcontracting, and strong fleet of equipment. KNR’s comfortable balance sheet position with leverage of ~0.2x would help it deliver robust earnings growth.
With highest ever order book and focus shifting back to EPC space, we believe topline is set to clock ~30% CAGR during FY16-18E. Despite strong growth prospects, KNR’s standalone EPC business is trading at attractive P/E of 13x FY18E EPS. We have valued the EPC business at 15x and the BOT toll projects based on book value to arrive at a SOTP target price of Rs.655, which implies an upside of 30%. We recommend BUY on the scrip.