Recent order inflows provide revenue growth visibility: KNR Constructions (KNR) is
a specialist Roads & Highways EPC player. Over the last 4 months, KNR has
reported Rs2,591cr of order wins (excludes Rs555cr of Chittagong order win), which
is significantly higher than Rs950cr of order inflows in FY2015. Management has
guided for another Rs750cr of order wins for remaining part of FY2016E. These
order wins from the road vertical, take the 1QFY2016 unexecuted order book to
Rs3,356cr. This would result in order book / last twelve month (LTM) sales ratio at
1QFY2016 to be at 3.8x, which is higher than order book / LTM ratio of 1.2x at
4QFY2015-end. With award momentum in road vertical to continue, we expect
KNR to report 5.4x growth in its order book to Rs5,450cr by FY2017E. Taking into
account its past execution track record and average execution cycle of 24-36
months, we expect KNR to report strong top-line growth over FY2015-17E.
New orders won amidst low competition: KNR has impressed us by prudently
selecting projects, mainly in southern India, where it has strong foothold. Notably,
recent order wins by KNR have come amidst low competition (2-3 bidders for
each project), when compared to higher competition witnessed across other NHAI
bids (5 to 8 bidders for each project). Recent order wins have been entirely from
southern India (except the M.P. order which was won in Jul-2015), where KNR has
aggregate mines as well as majority of its idly lying construction equipments. This
in our view would enable KNR to attain synergy in its operations and continue to
post higher EBITDA margins.
Comfortable Balance Sheet: KNR is one of the few Road EPC players with low D/E
ratio of 0.2x (FY2015), whereas peers are having D/E ratio of over 1.0x.
Valuation: Improved order book outlook, strong earnings growth potential, and
comfortable Balance Sheet, strengthen our view that KNR would continue to trade
at rich valuations. Announcement of recent order wins, have supported the KNR’s
stock price run up, which is up 30% in last 3 months. On valuing the standalone
entity at 14.0x our FY2017E EPS of Rs37, and adding up free cash flow to equity
shareholders value for its Kerala based BOT project, we arrive at FY2017E sumof-
the-parts (SoTP) based price target of Rs582/share, implying that the KNR stock
is close to its fair value. We initiate coverage on KNR Constructions with a Neutral
rating, given that all the positives have been captured in the stock price.

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