CRISIL assigns valuation grade of 5/5 to KNR Construction

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CRISIL assigns valuation grade of 5/5 to KNR Construction

CRISIL Research has come out with its initial coverage on KNR Construction. The research firm has maintained the fundamental grade of 3/5 to the company in its November 25, 2011 report.

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CRISIL Research has come out with its initial coverage on KNR Construction . The research firm has maintained the fundamental grade of 3/5 to the company in its November 25, 2011 report.

KNR Construction (KNR) is a Hyderabad-based company focussing on road infrastructure projects. It has a healthy order book of Rs 25.1 bn (2.4x TTM revenues), which provides sufficient revenue visibility. Though order flows are expected to be healthy given traction in project awards, the company's ability to bag new orders in a competitive scenario without compromising on margins will be a challenge. KNR also has one of the lowest gearing in the industry; as on FY11, KNR's net debt-equity ratio stood at 0.1x compared to peers' average of 2.5x. CRISIL Research assigns KNR a fundamental grade of 3/5, indicating that its fundamentals are good relative to other listed securities in India.

Proven execution track record in roads; entering into other segments
A mid-sized player, KNR has demonstrated good execution capabilities in the road segment and has so far constructed more than 4,000 km of roads. Of late, it has diversified into water, irrigation and urban infra projects. However, roads still comprise the major chunk (~90%) of its order book.

Order book stands at 2.4x TTM; provides sufficient revenue visibility
KNR's current order book is Rs 25.1 bn (2.4x TTM revenues) which provides revenue visibility for the next 24-30 months. The order book has been boosted by recent project awards worth Rs 11 bn including an EPC order from Sadbhav Engineering for Rs 5.8 bn. It also has L1 status for projects worth Rs 1 bn.

Forayed into asset ownership model
In FY08, KNR bagged two BOT projects in JV with Patel Engineering. Both these projects have been completed and the government has begun making the annuity payments. KNR has also securitised one of the projects for Rs 4 bn which will ease funding requirement for future projects.

Risk: Operating margins could decline due to increasing competition
KNR has higher operating margins due to benefits from backward integration of sourcing aggregates from its captive quarrying mines. However, we believe that going forward there is a risk of margin decline given the current competitive scenario, when it may have to bid aggressively for projects, resulting in lower margins.

Revenues and PAT to grow at a two-year CAGR of 19% and 4%
We expect revenues to grow at two-year CAGR of 19% to Rs 14.6 bn in FY13. PAT growth is expected to be lower at 4% to Rs 696 mn in FY13 compared to Rs 640 mn in FY11 due to high interest costs and initial losses in BOT projects.

Valuations - current market price has 'strong upside'
CRISIL Research has used the sum-of-the-parts method to value KNR. The contracting business has been valued based on the P/E method at Rs 142 per share and the BOT projects have been valued using the discounted cash flow method at Rs 15 per share. We initiate coverage on KNR with a fair value of Rs 157 per share and a valuation grade of 5/5.

To read the full report click on the attachment

Disclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report.  The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose.

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