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.
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