Anand Rathi says on KNR Construction’s sturdier balance sheet, ample assurance and proven execution capabilities, they raise their rating to a Buy, with a target price of Rs 320 (from Rs 293). The company's order book is at life-high, aided by a new order. Based on the recovery in execution efficiency and recent orders added, FY21 revenues are now expected at Rs 23.5 bn – 24 bn.

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With monetisation proceeds from its Walayar-Vadakancherry BOT-toll, KNR’s balance sheet is at its strongest in many years.  It could have been sturdier were it not for the protracted receivables cycle for Telangana irrigation orders. With these payments already started to flow in and the swifter than expected return of execution efficiency, KNR appears set to continue its industry-leading performance.

Walayar-Vadakancherry monetised, balance sheet strengthened:

The much awaited deal was consummated with an enterprise value of Rs 5.1 bn. Immediate receipt of Rs 3.1 bn (of Rs 3.8 bn total equity value) helped clear the entire Rs 2.1 bn promoter loans and bring net debt down Rs 2.9 bn qoq (to Rs 0.2 bn). The balance would be realised by FY23, based on milestones. 

Order Book at life-high, aided by a new order:

Two irrigation orders (of Rs 23 bn) in Q1 were followed by a Rs 10.3 bn (excl. GST) road EPC order in Q2. Besides, its fifth hybrid annuity project of EPC value Rs 6.4 bn formed part of the order book on attaining the appointed date. Consequently, the order book rose Rs 13.5 bn qoq to its life high of Rs 85.5 bn (book to bill at 3.7x). Rs 20-30 bn more is targeted in the short term to cover for three hybrid annuity projects due for completion in the next six months.

Revenue guidance firmed:

Based on the recovery in execution efficiency and recent orders added, FY21 revenues are now expected at Rs 23.5 bn – 24 bn. This is against the earlier guidance of flat revenues yoy but with potential. Margin guidance reiterated at 17-18%, but with potential based on the project mix.

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Valuation:

On a mix of raised revenue estimates, lowered depreciation charge and the Walayar-Vadakancherry monetisation, FY21e earnings have been raised 45% (and 22% for FY22). At the CMP, the stock (excl. investments) trades at 10.4x FY22e EPS. The target price assumes 13x PE, but scope exists for a better PE if the irrigation receivables cycle is checked. 

Risk:

Delays in irrigation receivables.