Given the company’s strong order book position (orderbook/revenue ratio: 3.1x) and superior execution capability, Motilal Oswal expects revenue CAGR of 18 percent over FY19-22.
Shares of KNR Constructions gained nearly 3 percent intraday on January 13 after Motilal Oswal maintained its bullish view on the stock citing potential of a strong balance sheet.
The stock rallied more than 21 percent in the last one month. It was quoting at Rs 279.90, up Rs 1.45, or 0.52 percent on the BSE at 1353 hours IST.
The brokerage said it maintained buy with a higher target price of Rs 374 based on SOTP – (a) EPC business at 15x Sep’21E EPS and (b) road assets at P/Inv of 1x.
"We lower our interest expense estimate and raise our revenue estimate by 2/3 percent for FY21/22 to factor in the asset sale. As a result, we increase our FY21/22 EPS estimate by 12/13 percent. Note that we have built cushion in our EBITDA margin assumption (200bp decline over FY20-22)," said the research firm.
Also, it estimated a strong CAGR (FY20-22) of 18 percent in profit before tax (PBT), but a lower 11 percent in PAT due to normalization of tax rates to 25.2 percent (KNR’s effective tax rate is lower as it has un-utilized MAT credit).
KNR has entered into a share purchase agreement with Cube Highways to sell its 100 percent stake in the Walayar road project. The 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 around 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 realized. Taking this into account, the deal value may surpass our valuation of the project," Motilal Oswal said.
"The transaction is likely to close in another 2-3 months. We factor in proceeds of Rs 390 crore by end of March 2020," it added.
KNR has already monetized three of its HAM projects.
Motilal Oswal expects the balance sheet to strengthen further with net cash position of more than Rs 200/500 crore by FY21/22. "The company has the best balance sheet position amongst midcap road EPC companies. This should support premium valuations for KNR, in our view."
Given the company’s strong order book position (orderbook/revenue ratio: 3.1x) and superior execution capability, the brokerage expects revenue CAGR of 18 percent 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-Q4FY20 with total awarding of 4,000km for FY20," it said.Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.