KNR Constructions: Execution risks persist, says CRISIL

KNR’s Q2FY13 results were below CRISIL Research’s expectations. Revenues declined by 33% y-o-y (excluding Rs 150 mn on account of early completion bonus for the Bijapur-Hungund road project) to Rs 1,240 mn due to slow execution of the current order book. EBITDA margin (excluding the bonus) declined by 787 bps y-o-y to 10.3% as fixed costs were not fully absorbed due to the decline in revenues. Adjusted PAT decreased 95% y-o-y to Rs 6 mn. In July 2012, KNR exited from a project worth Rs 6.2 bn from GMR Infrastructure Ltd due to cost escalation issues. Further, in September 2012, due to land clearance issues in Sadbhav Engineering’s Chhindwara project, the scope of work changed from Rs 3.1 bn to Rs 1.5 bn. Post these adjustments, its current order book is Rs 22 bn (3.6x TTM standalone revenues). The Kerala-based road BOT project (worth Rs 7 bn), for which KNR is yet to sign the LOA and obtain financial closure (FC), has not been included in the current order book. Due to delay in achieving FC, work on orders from GVK Power & Infra (30% of the current order book) is yet to start. Given the more-than-anticipated delays in execution and shrinkage in order book, we lower our earnings estimates. We maintain our fundamental grade of 3/5 but timely execution of the current order book is a key monitorable.

Strong backlog but status quo on 30% of orders; slow progress on Kerala project’s FC
KNR has a strong order backlog of Rs 22 bn but a few projects face execution-related issues. It has two projects worth Rs 6.8 bn from GVK, which are yet to start due to delays in FC. We expect work on these projects to start from H1FY14; its timely execution is a key monitorable. There has been considerable delay in signing the LOA and achieving FC for the Kerala BOT road project; management expects it in Q4FY13. According to the management, land has been acquired and all the necessary approvals are in place for the Kerala project. We expect execution on the project to start in the next four-six months.

Received early completion bonus of Rs 150 mn during the quarter
During Q2FY13, KNR received an early completion bonus of Rs 150 mn (Rs 250 mn till H1FY13) for Sadbhav’s Bijapur-Hungad project. It is expected to receive another Rs 250 mn by FY13-end. We have considered extraordinary income of Rs 334 mn (net of taxes) on account of bonus in FY13.

Earnings estimates revised downwards; fair value revised to Rs 120 per share
Given the more-than-anticipated delays in execution of key projects and shrinkage in Sadbhav’s order, we have lowered our revenue estimates to Rs 6.5 bn from Rs 8.9 bn for FY13 and to Rs 10.1 bn from Rs 12.2 for FY14. EBITDA margin estimates are also lowered for FY13 and FY14 as we expect lower absorption of fixed costs due to lower revenues. Accordingly, earnings estimates are lowered by 64% and 19% for FY13 and FY14, respectively. We continue to use the sum-of-the-parts method to value KNR. In line with revision in earnings estimates, we lower our fair value to Rs 120 from Rs 148 per share. Execution of the GVK and Kerala projects remains a key monitorable. At the current market price of Rs 101, the valuation grade is 4/5.

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