KNR Constructions’ (KNR) Q2FY19 top line grew 6% YoY as lack of sufficient executable orders (opening book-to-bill at 1x) took a toll. EBITDA margin remained high at 20%, but higher capital charges led to PAT declining 24% YoY. KNR needs to win substantial orders over the next few months to boost order book/revenue visibility. Commencement of work on existing hybrid annuity (HAM) projects and fresh order accretion will determine the stock’s trajectory, in our view. We remain bullish on KNR owing to its robust execution capabilities and strong balance sheet. Maintain ‘BUY’ with SOTP-based target price of INR286.
With KNR starting Q2FY19 with a book-to-bill of 1x, top-line growth was bound to be muted. EBITDA margin remained high at 20% due to greater revenue contribution from high margin irrigation projects; also, there was revision of cost estimates with certain projects nearing completion. Higher depreciation and interest expenses led to PAT declining 24% YoY to INR450mn (estimate INR346mn). The company ended the quarter with an order book of INR58bn (book-to-bill at 2.9x).
KNR has bagged five HAM projects with a bid project cost of ~INR56bn and EPC component of INR40bn. The firm expects work on two of these projects to start next month and on another two projects over January-February 2019. Management expects INR8.5-9.0bn execution during H2FY19 with INR2.0-2.5bn contribution from HAM projects. There has already been some slippage in the start of work on these projects (refer to, Hyderabad diaries: Opportun-ity in adversity); any further delay in commencement of work could advers-ely impact execution during H2FY19.
KNR’s robust execution capabilities and lean balance sheet (net D/E at 0.2x) are key positives. However, with the company’s old projects nearing completion (~INR18.3bn pending work), fresh order accretion (management targeting INR20-25bn order wins in FY19) is paramount to ensure sustenance of growth trajectory.