Buy KNR Constructions; target of Rs 325: Karvy

Karvy Stock Broking's report on KNR Constructions

"KNRC has Rs13bn of order backlog which is 1.4x FY15E revenues and hence future growth is contingent on new order intake. We expect Road ordering activity to pick up from 2HFY15E and owing to strong execution capability KNRC stands to benefit from own/third party wins as EPC contract may get outsourced to it. We have modeled for 56% EPS CAGR for FY15-17E.   Strong cash flow generation and high promoter holding give comfort on future growth. Low D/E levels (0.1x) in comparison to its peer group, strong customer advances and high margins have resulted in strong cash flows. KNRC owns 40% stake in two annuity BOTs viz. KNT-1 & AP-7. These projects have been already securitized and proceeds invested in Kerala BOT project (Rs1,360mn equity share). Going into FY15E, we expect KNRC to win road BOTs worth ~Rs15bn.   KNRC stands out as a leader on the competitive mapping of the EPC players. Superior execution, low debt/equity, positive cash flows along with the low infra asset exposure are the contributing factors."

"KNR Constructions has come out relatively unscathed from the last two down cycles which saw bigger competitors taking a deep dive into bankruptcy bed. Whilst the infra sector is waking to brighter days, KNRC continues to rely on past learning’s of being patient. The focus remains on (i) execution (ii) taking higher margins projects & (iii) avoid excessive investment largesse on diversification. Although part of re-rating is already in price, going into the cyclical recovery later next year, we expect re-rating tailwinds to further continue on back of superior execution, low debt/equity and minimal incremental project equity requirement. We maintain BUY stance with increased target price of Rs 325/share," says Karvy Stock Broking research report.

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