Given the company’s strong order book position (OB/Rev: 3.1x) and superior execution capability, we expect revenue CAGR of 18% over FY19-22.
KNR Construction has entered into a share purchase agreement with Cube Highways to sell its 100% stake in the Walayar road project. Total enterprise value of the deal stands at Rs 530 crore. As of September 2019, debt on the project was at Rs 140 crore. Thus, the equity value of the deal is estimated at ~Rs 390 crore or P/Inv of ~1x. This is in line with our valuation of the project. There are further NHAI claims and other governmental instrumentalities, which are a pass-through to KNR as and when realised. Taking this into account, the deal value may surpass our valuation of the project.
The transaction is likely to close in another two-three months. We factor in proceeds of Rs 390 crore billion by March end 2020. KNR has already monetised three of its HAM projects. We expect the balance sheet to strengthen further with net cash position of >Rs 200 crore/500 crore by FY21/22. The company has the best balance sheet position among mid-cap road EPC companies. This should support premium valuations for KNR, in our view.
Given the company’s strong order book position (OB/Rev: 3.1x) and superior execution capability, we expect revenue CAGR of 18% over FY19-22. Thanks to the strong balance sheet position, KNR is well positioned to bid for new projects as and when bidding commences in the road sector. We expect NHAI awarding to pick up by end-4QFY20 with total awarding of 4,000 km for FY20.
We lower our interest expense estimate and raise our revenue estimate by 2/3% for FY21/22 to factor in the asset sale. As a result, we increase our FY21/22 EPS estimate by 12%/13%. Note that we have built cushion in our Ebitda margin assumption (200bp decline over FY20-22). Also, we estimate a strong CAGR (FY20-22) of 18% in PBT but a lower 11% in PAT due to normalisation of tax rates to 25.2% (KNR’s effective tax rate is lower as it has unutilised MAT credit). At CMP, the stock trades at FY21/22E P/E of 11.7x/9.7x (adjusted for valuation of the road assets portfolio). We maintain ‘buy’ with a higher target price of Rs 374 based on SOTP–EPC business at 15x Sep’21E EPS and road assets at P/Inv of 1x.