Buy KNR Constructions; target of Rs 305: Prabhudas Lilladher

Prabhudas Lilladher's research report on KNR Constructions

KNR Constructions posted strong results beating our & street estimates, despite Covid-19 pandemic impacting execution. Margins were better with rise in share of high margin irrigation segment (23% in the revenue mix). Current labour availability stands at 55-60% of required workforce which is expected to go up to 80-85% in next 1-2 months. WC cycle is elongated at 66days (vs 53days QoQ) as receivables from Telangana Govt. rose to Rs5.4bn (total irrigation receivables Rs6.8bn). With large disbursals (Rs4.4bn) expected from Telangana Govt. in next two weeks (payments halted since Feb’20 as funds diverted for Covid management) and conclusion of Cube deal, company would substantially improve its working capital cycle.

Outlook

KNRC has robust financials with (a) lean balance sheet (D:E of 0.14x), (b) strong execution capabilities (c) healthy operating margins (average ~18% over FY15-20) and (d) healthy working capital cycle (~90 days). It fits perfectly in our thesis of comfortable order book (Rs72.1bn as on 1QFY21) and lean balance sheet (lower risks of equity dilution). At CMP, the stock trades at a P/E of 25.4x/12.4x on FY21E/FY22E EPS and is trading at an EV of 9.9x/6.5x FY21E/FY22E EBITDA. We maintain BUY rating on the stock with an SOTP based TP of Rs305.

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