Buy KNR Constructions; target of Rs 336: Prabhudas Lilladher

Prabhudas Lilladher's research report on KNR Constructions

KNR Constructions posted a strong set of numbers with revenues (up 10% YoY) and margins above our and street estimates. Labour availability and operational efficiency across project sites have been recovering gradually, currently standing at ~80% pre-covid levels and is expected to reach 100% levels post festive season. With timely payments from NHAI and conclusion of Cube deal, WC levels have seen considerable improvement. Receivable days too, have been down to 58 days (vs 90 days QoQ), despite delays in payment from Telangana Govt (Rs7.4bn). With strong order inflows, labour availability picking up, large disbursals expected from Telangana Govt (Rs5bn) in Nov’20, company is poised for stronger execution with healthier working capital cycle in H2FY21E. KNRC has robust financials with (a) lean balance sheet (D:E of 0.01x), (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 (Rs85.5bn as on 2QFY21) and lean balance sheet (lower risks of equity dilution). On the back of strong margin performance, we have revised our earnings estimates upwards for FY21E/ 22E/ 23E by 56.2%/ 11.7%/ 11.5%. At CMP, the stock trades at a P/E of 16.2x/ 11x on FY21E/ FY22E EPS and is trading at an EV of 8x/ 6x FY21E/FY22E EBITDA.

Outlook

We maintain BUY rating on the stock with a revised SOTP based TP of Rs336 (earlier TP of Rs305).