Cut FY21/22F EPS by 27%/10% to reflect Covid-19-linked headwinds; despite strong ramp-up in execution, realisation of payments from Telangana state is a key watchable; we turn ‘neutral’ with a lower TP of Rs285. KNR Construction reported strong execution in Q1FY21 with revenue growing 3% YoY to Rs 4.8billion (vs our estimate of Rs 4.3billion), and ebitda margin of 19.7% was significantly higher than our estimate of ~16%. However, despite execution strength, our risk perception of the stock has increased leading to our cautious stance.
Telangana state revenues have been adversely impacted by the Covid-19-linked lockdowns, with further funds being devoted to combat the pandemic. This has constrained infrastructure spending from the state budget. Furthermore, unlike other state projects, irrigation projects are fully state funded (unlike in Karnataka where certain state roads are multi-lateral funded), and until bank funding is available, making payments may be challenging for the state. Already, KNR’s debt levels have risen by Rs1.2 billion vs FY20, with receivables from Telangana alone standing at Rs1.26 billion, with another Rs4.41billion of unbilled revenue.
Management has highlighted receipts of Rs1.85 billion in payments from road projects in July. These collections will provide near-term relief on working capital build. However, until financial tie-ups with banks happen for state irrigation projects, working capital can continue to be under pressure.
A strong NHAI tender pipeline of Rs500 billion provides order inflow visibility. If payments are made on time, then FY21F sales would be stronger than FY20, as expected by the management.
We value KNR at 10.5x (vs 12.0x earlier on our reduced ROE estimate) FY22F EPS of Rs 23.6 (rolled to June-22), and add the book value of investments of BOT/HAM assets to arrive at a TP of Rs 285. With ~11% implied upside, we downgrade KNR to ‘neutral’, and prefer KEC (KECI IN, Buy) instead.
