PICK OF THE WEEK

KNR Constructions Ltd. April 16, 2018

Industry CMP Recommendation Add on dips to Target Time Horizon

Constructions Rs. 299 Buy at CMP and Add on Dips Rs. 299-275 Rs. 363-399 6 Quarters

KNR Constructions Limited is a multi-domain infrastructure project development company. The Company
undertakes engineering, procurement and construction (EPC) contracts, as well as build-operate-transfer (BOT)
projects across various sectors, such as construction and maintenance of roads, highways, flyovers and bridges. Its
range of verticals also include irrigation projects, water management, agriculture and trading business.
HDFC Scrip Code KNRCON It has completed approximately 6000 kms of projects across over 12 states in India. Its urban water infrastructure
BSE Code 532942 management project is Challaghatta Main Valley Project, which involves the remodeling of primary and secondary
NSE Code KNRCON storm drains, bridges/culverts and related works in Challaghatta Main Valley in Bangalore City. The Company's
irrigation and water management projects include Shankara Samudram Balancing Reservoir, Eastern Kosi Canal
Bloomberg KNRC IN
system, Reservoir across Mathadivagu and Budpur Balancing Reservoir.
CMP as on 13 Apr 18 299
Equity Capital (Rs Cr) 28.12
Investments in the road sector will continue to drive stock performance. KNRC, with its strong execution
Face Value (Rs) 2 skills, is likely to benefit from the pick‐up in order activity. We recommend KNRC a BUY at CMP of Rs.
Equity O/S (Cr) 14.06 299 and Add on decline of Rs. 275 for the SOTP‐based target price of Rs 363/share and 2nd target of Rs.
399 in 6 Quarter’s Time Frame.
Market Cap (Rs Cr) 4,208
Book Value (Rs) 80
Avg. 52 Week Vol 210278 Investment Rationale:
52 Week High 349
52 Week Low 185
Strong Road Focused EPC Player

KNR Construction with over 20 years of experience has emerged as a leading player in the EPC (Engineering,
Shareholding Pattern (%) Procurement and Construction) segment. It has completed around 46 projects in last 5 years and So far KNRC has
Promoters 55.4 executed 6000 KM lane roads across 12 states. With over Rs. 1500 Cr revenue and Rs. 7832 Cr order book KNRC
Institutions 31.9 has become one of the fastest growing infrastructure company in India.
Non Institutions 12.7
Some of the esteemed clients of KNRC are NHAI (National Highways Authority of India), MoRTH (Ministry of Road
Transport and Highways), and various State Highway and Road development corporations
PCG Risk Rating* Yellow
* Refer Rating explanation Recently completed major EPC Projects includes Andhra Pradesh / Karnataka Border to Avathi Village on NH-7-
Karnataka, Islam Nagar to Kadtal on NH-7- Andhra Pradesh, Madurai - Kanyakumari on NH 7 - Tamil Nadu, Nagaon
to Dharamtul on NH-37 & Nagaon Bypass on NH-37 – Assam, Nellore-Kavali on NH-5 - Andhra Pradesh, Surat -
FUNDAMENTAL ANALYST
Manor on NH-8 – Gujarat, Krishnagiri-Vaniyambadi ON NH-46 - Tamil Nadu and Bijapur - Hungund Section of NH -
Nisha Sankhala 13 – Karnataka.
nishaben.shankhala@hdfcsec.com

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 PICK OF THE WEEK
KNR Constructions Ltd. April 16, 2018

Backward Integration Helps in Superior Margin and Timely Project Completion

KEY HIGHLIGHTS
KNR Construction has adopted backward integration strategy. Means it follows a model of owning the
required equipment and does not subcontract work. KNRC has a team of ~1000 qualified in-house
 KNR Constructions Limited is a professionals. This in turn has helped company in managing sustain & superior profit margin of around 15-
multi-domain infrastructure 17% and has also achieved track record of timely project completion. KNRC has many times received
project development company. bonuses for early projects completion.

 With over 20 years of experience

it has emerged as a leading
Scheduled Completion (Days) Actual Completion (Days)
player in the EPC segment. It has

1440
completed approximately 6000
kms of projects across over 12

1,219
states in India.

910

910
880

730
 With over Rs. 1500 Cr revenue

609
582
and Rs. 7832 Cr order book

450

365

365
365

364
343

364

364
KNRC has become one of the
fastest growing infrastructure
company in India.
Bijapur Hungund

Vadakkancherry
Hyderabad Chanda

Sircilla Siddipet

Penchalakona Yerpedu
Ramagundam

Karimnagar Kamareddy

Narsapur Aswaraopet
Hyderabad

Walayar
 Backward Integration Helps in
Superior Margin and Timely
Project Completion.

 Huge Infra Development in the

Country Provides Order inflow
visibility. Source: Company, HDFC sec Research

 In this quarter company has won

4 HAM Projects worth Rs. 4500
Cr.
 We recommend KNRC a BUY at
CMP of Rs. 299 and Add on
decline of Rs. 275 for the SOTP‐
based target price of Rs
363/share and 2nd Target of Rs.
399 in 6 Quarter’s Time Frame.
Huge Infra development spending provides immense order inflow visibility
One of the key focus area of the recent Government is Infrastructure development in the country. Since
last 2-3 years the whole land scape of the infra companies has changed. In FY18, NHAI has awarded 150
road projects of 7,400 km worth Rs 1.2 trillion. In last 5 years, the average length of road projects awarded
by NHAI was 2,860 km with 4,335 km awarded in the last financial year. Next year also we are expecting
a very good run rate for the same as Government of India in Budget of FY19 has plan outlay Rs. 1.21 trillion
for road sector and moreover Rs 71,000 Cr is allocated specially for development of national highways
across the country.

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 PICK OF THE WEEK
KNR Constructions Ltd. April 16, 2018

Robust order book provides strong revenue visibility

Order book as end of Dec 31, 2017 stood at Rs 3332.6 Cr comprising of Rs 2423.4 Cr in Roads sector, Rs
907.1 Cr in Irrigation and Rs 2.1 Cr in others.

In this quarter company has won 4 HAM (Hybrid Annuity Projects) projects worth Rs. 4500 Cr and now KNRC’s
FY18 order backlog stands at Rs 7832 Cr (4.3x FY18E revenues). This is much higher than KNRC own order
intake guidance of Rs 3000‐3500 Cr of new orders in road segments (HAM/EPC).

Currently, Irrigation order book comprises of two projects. Of these, one will get completed in June 2018 and
afterwards the company is expecting one more irrigation project. We expect 10.5% FY18‐20E order book
CAGR on back of strong NHAI & State EPC and HAM roads pipeline.

Update on recent HAM Project wins

In the last 1 month company has won four HAM (Hybrid Annuity Projects) projects worth ~Rs. 4500 Cr. Before
that company was only into EPC and BOT projects. Winning lowest bid for these HAM projects is a significant
achievement for the company.

1) KNRC bagged its first HAM Bid worth Rs. 1020 Cr from NHAI for the work of Four Laning of Trichy to
Kallagam Section of NH-227 under Bhartmala Pariyojana in the state of Tamil Nadu with a concession
period of 17 years including construction period of 2 Years from the appointed date.

2) KNRC bagged its second HAM Bid worth Rs. 482 Cr from NHAI for the work of Two Laning with Paved
Shoulder of Meensurutti to Chidambaram Section of s under Bhartmala Pariyojana, in the state of Tamil
Nadu with a concession period of 17 years including construction period of 2 Years from the appointed
date.

3) Six laning of NH-140 from Chittor to Mallavaram in the state of Andhra Pradesh under Bhartmala
Pariyojana The project is with a concession period of 17.5 years including construction period of 2.5
years from the appointed date, with a bid project cost of Rs1730 Cr.

4) Four laning of NH-161 from Ramsanpalle to Mangloor in the state of Telangana under Bharatmala
Pariyojana. The project is with a concession period of 17 years including construction period of 2 years
from the appointed date, with a bid project cost of Rs1234 Cr.

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 PICK OF THE WEEK
KNR Constructions Ltd. April 16, 2018

Foray into New Businesses

Company has aim to add more business verticals to the organization in the fields of construction of Elevated
Metro Rail and Railway Projects. It has neither working project in this segment nor has submitted any bid so far.
Their experience in building flyovers is expected to benefit them in the elevated metro rail construction work.

Strong Financials

KNR Construction has generated positive CFO in 9 out of last 10 years. EBIDTA margin has ranged between
14.6‐20% over FY08‐18E period. Revenue/APAT FY08‐18E CAGR is 14.3/21.3%. Total gross standalone debt is
Rs 2.3bn out of which promoter debt is Rs 2.1bn making KNR a net cash company (after considering banking
debt of Rs 0.2bn only). This has been possible because KNRC has always bid for the Projects with conservative
approach to ensure that orders bagged have better margins and all clearances in place.

Risk & Concerns:

 Delay in execution: Project delays due to land acquisition or other regulatory bottlenecks could
adversely affect KNRC’s revenues going forward.

 Concentration in roads: Majority of KNRC’s order book concentrated in roads segment, significant cost
competition and slowdown in orders could affect KNRC’s revenue and margin profile in the long term.

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 PICK OF THE WEEK
KNR Constructions Ltd. April 16, 2018

View & Valuation:

We value the (1) Standalone EPC business at Rs 306/share (10x Mar‐20 EV/EBITDA), (2) Kerala BOT at Rs
28/share (at 1x P/BV of equity invested), (3) Muzaffarpur Barauni BOT at Rs 5/share (at 1x P/BV of equity
invested), (4) Real estate at Rs 5/share (at 1x P/BV of amount invested) and (5) HAM Projects investment at
19/share (at 1x book value of investments in next three years).

Investments in the road sector will continue to drive stock performance. KNRC, with its strong execution skills,
is likely to benefit from the pick‐up in order activity. We recommend KNRC a BUY at CMP of Rs. 299 and Add on
decline of Rs. 275 for the SOTP‐based target price of Rs 363/share and 2nd Bullish Target of Rs. 399 in 5-6
Quarter’s Time Frame.

SOTP Valuation:
Value per
Particulars Segments Value (Rs mn) share (Rs) Rationale
Core construction
KNR Standalone business 43,077 306 At 10x FY-20 EV/EBITDA
Kerala BOT Roads toll 3,974 28 At 0.8x P/BV(x) of invested equity
Muzaffarpur Barauni
BOT Roads toll 694 5 At 1x P/BV(x) of invested equity
Real Estate Land on Book 718 5 At book value in balance sheet
HAM Projects Expected investment over next 3yrs at
Roads BOT 2,700 19
investment book value in balance sheet
Total 51,163 363

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 PICK OF THE WEEK
KNR Constructions Ltd. April 16, 2018

Revenue To Grow At 21% CAGR Over FY17-20E EBITDA Margin to Remain One of the Best in Class
30,000 80 5,000 22
Rs. mn
25,000 4,000
Rs. mn 20
60
20,000 18
3,000
15,000 40 16
2,000
10,000 14
20 1,000
5,000 12
0 0 0 10
FY16 FY17 FY18 FY19E FY20E FY16 FY17 FY18 FY19E FY20E

Net Revenues Growth (%) EBIDTA EBIDTA (%)

Source: Company, HDFC sec Research

Source: Company, HDFC sec Research

KNRC’s Order Book Spread Across State/Central Order Book Break Up

Projects

Central
Gov. International
47% Order Road
7% 73%

Others
1%
Irrigation
27%
State Gov.
45%

Source: Company, HDFC sec Research Source: Company, HDFC sec Research

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 PICK OF THE WEEK
KNR Constructions Ltd. April 16, 2018

Income Statement (Standalone) Balance Sheet (Standalone)

Year ending March (Rs mn) FY16 FY17 FY18E FY19E FY20E As at March (Rs mn) FY16 FY17 FY18E FY19E FY20E
Net Revenues (post JV partner share) 9,025 15,411 18,070 23,134 27,630 SOURCES OF FUNDS
Growth (%) 2.1 70.7 17.3 28 19.4 Share Capital 281 281 281 281 281
Material Expenses 6,805 12,281 13,096 17,884 21,496 Reserves 7,096 8,674 10,980 12,903 15,099
Employee Expenses 431 552 685 877 1,050 Total Shareholders’ Funds 7,377 8,955 11,261 13,184 15,380
Other Operating Expenses 260 281 667 762 829 Long Term Debt 1,125 1,303 2,299 2,299 2,299
EBIDTA 1,529 2,296 3,622 3,612 4,316 Short Term Debt - - - - -
EBIDTA (%) 16.9 14.9 20 15.6 15.6 Total Debt 1,125 1,303 2,299 2,299 2,299
EBIDTA Growth (%) 13.8 50.1 57.8 -0.3 19.5 Deferred Taxes -374 -432 -432 -432 -432
Depreciation 423 639 1,208 1,288 1,456 Other Non Current Liabilities 325 314 314 314 314
EBIT 1,106 1,657 2,415 2,324 2,859 TOTAL SOURCES OF FUNDS 8,453 10,140 13,443 15,366 17,562
Other Income (Incl. EO Items) 317 194 274 288 294 APPLICATION OF FUNDS
Interest 132 219 227 311 368 Net Block 1,762 2,607 3,599 3,511 3,254
PBT 1,291 1,632 2,462 2,301 2,786 CWIP 59 15 15 15 15
Tax -319 60 86 345 557 Investments, LT Loans & Advances 3,363 4,663 5,163 6,163 7,363
RPAT 1,611 1,573 2,376 1,956 2,228 Other Non Current Assets 1,663 1,850 1,850 1,850 1,850
EO items (net of tax) -165 -141 -246 -138 -279 Total Non-current Assets 6,848 9,135 10,627 11,538 12,482
APAT 1,445 1,432 2,129 1,818 1,950 Inventories 353 574 979 1,560 1,890
APAT Growth (%) 97.9 -0.9 48.7 -14.6 7.3 Debtors 1,294 1,640 2,228 2,852 3,414
EPS 10.3 10.2 15.1 12.9 13.9 Cash & Equivalents 161 246 969 1,542 2,218
ST Loans & Advances, Others 3,555 4,153 4,933 5,892 6,917
Source: Company, HDFC sec Research Total Current Assets 5,364 6,612 9,109 11,846 14,439
Creditors 1,038 1,344 1,974 2,529 3,028
Other Current Liabilities & Provns 2,721 4,263 4,320 5,490 6,332
Total Current Liabilities 3,759 5,607 6,294 8,019 9,360
Net Current Assets 1,605 1,005 2,815 3,827 5,079
TOTAL APPLICATION OF FUNDS 8,454 10,140 13,443 15,366 17,562
Source: Company, HDFC sec Research

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 PICK OF THE WEEK
KNR Constructions Ltd. April 16, 2018

Key Ratios
Cash Flow Statement (Standalone) FY16 FY17 FY18E FY19E FY20E
Year ending March (Rs mn) FY16 FY17 FY18E FY19E FY20E PROFITABILITY (%)
PBT 1,291 1,632 2,462 2,301 2,786 GPM 24.6 20.3 27.5 22.7 22.2
Non-operating & EO items -86 20 -37 0 0 EBITDA Margin 16.9 14.9 20 15.6 15.6
Interest expenses 132 219 227 311 368 EBIT Margin 12.3 10.8 13.4 10 10.3
Depreciation 423 639 1,208 1,288 1,456 APAT Margin 16 9.3 11.8 7.9 7.1
Working Capital Change 830 730 -1,088 -439 -576 RoE 22.1 17.5 21.1 14.9 13.7
Tax paid -56 -75 -86 -345 -557 Core RoCE 28 30.5 31.9 25.8 28.7
OPERATING CASH FLOW ( a ) 2,534 3,165 2,686 3,117 3,477 RoCE 19 16.2 17.5 13.6 12.8
Capex -595 -1,383 -2,200 -1,200 -1,200 EFFICIENCY
Free cash flow (FCF) 1,939 1,782 486 1,917 2,277 Tax Rate (%) -24.7 3.7 3.5 15 20
Investments -1,944 -1,750 -500 -1,000 -1,200 Asset Turnover (x) 1.8 2.4 2.1 2.4 2.5
INVESTING CASH FLOW ( b ) -2,538 -3,133 -2,700 -2,200 -2,400 Inventory (days) 14 14 20 25 25
Debt Issuance 204 273 996 Debtors (days) 52 39 45 45 45
Interest expenses -128 -220 -227 -311 -368 Payables (days) 42 32 40 40 40
Dividend -68 - -33 -33 -33 Cash Conversion Cycle (days) 25 21 25 30 30
FINANCING CASH FLOW ( c ) 9 53 737 -344 -401 Net Working Capital Cycle (Days) 58 18 37 36 38
NET CASH FLOW (a+b+c) 4 85 723 573 677 Debt/EBITDA (x) 0.7 0.6 0.6 0.6 0.5
Opening cash balance 157 161 246 969 1,542 Net D/E 0.13 0.12 0.12 0.1 0
Closing Cash & Equivalents 161 246 969 1,542 2,218 Interest Coverage 8.4 7.6 10.6 7.5 7.8
Source: Company, HDFC sec Research PER SHARE DATA
EPS (Rs/sh) 10.3 10.2 15.1 12.9 13.9
CEPS (Rs/sh) 13.3 14.7 23.7 22.1 24.2
DPS (Rs/sh) 0.2 0.5 0.2 0.2 0.2
BV (Rs/sh) 52 64 80 94 109
VALUATION
P/E 29.0 29.3 19.8 23.2 21.5
P/BV 5.8 4.7 3.7 3.2 2.7
EV/EBITDA 28.7 19.1 12.2 12.1 10
Dividend Yield (%) 0.1 0.2 0.1 0.1 0.1
Source: Company, HDFC sec Research

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 PICK OF THE WEEK
KNR Constructions Ltd. April 16, 2018

Rating Chart

R HIGH
E
T
U MEDIUM
R
N LOW
LOW MEDIUM HIGH
RISK

Ratings Explanation:

RATING Risk - Return BEAR CASE BASE CASE BULL CASE

IF RISKS MANIFEST
IF INVESTMENT
PRICE CAN FALL 15%
IF RISKS MANIFEST RATIONALE
LOW RISK - LOW & IF INVESTMENT
BLUE PRICE CAN FALL FRUCTFIES PRICE
RETURN STOCKS RATIONALE
20% OR MORE CAN RISE BY 20% OR
FRUCTFIES PRICE
MORE
CAN RISE BY 15%
IF RISKS MANIFEST
IF INVESTMENT
PRICE CAN FALL 20%
MEDIUM RISK - IF RISKS MANIFEST RATIONALE
& IF INVESTMENT
YELLOW HIGH RETURN PRICE CAN FALL FRUCTFIES PRICE
RATIONALE
STOCKS 35% OR MORE CAN RISE BY 35% OR
FRUCTFIES PRICE
MORE
CAN RISE BY 30%
IF RISKS MANIFEST
IF INVESTMENT
PRICE CAN FALL 30%
IF RISKS MANIFEST RATIONALE
HIGH RISK - HIGH & IF INVESTMENT
RED PRICE CAN FALL FRUCTFIES PRICE
RETURN STOCKS RATIONALE
50% OR MORE CAN RISE BY 50%
FRUCTFIES PRICE
OR MORE
CAN RISE BY 30%

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 PICK OF THE WEEK
KNR Constructions Ltd. April 16, 2018

Price Chart
350.0

300.0

250.0

200.0

150.0

100.0

50.0

Rating Definition:

Buy: Stock is expected to gain by 10% or more in the next 1 Year.

Sell: Stock is expected to decline by 10% or more in the next 1 Year.

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 PICK OF THE WEEK
KNR Constructions Ltd. April 16, 2018

Disclosure:
I, Nisha Sankhala, MBA, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has
no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or
view(s) in this report.
Research Analyst or her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or her relative or HDFC Securities Ltd. or its Associate may have beneficial
ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its
associate does not have any material conflict of interest.
Any holding in stock –NO
HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475.

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