Edel Invest Research Buy

KNR Constructions Ltd: Initiating Coverage

Well equipped for revival CMP: INR 253 Target: INR 341

KNR Constructions Ltd. is in the business of construction of roads and highways, which comprises 95% of
its order book. The balance 5% of the company’s order book comes from irrigation. KNR has impressive
Pankaj Kumar
track record of executing projects ahead of schedule. The company employs a backward integration
+91-22-4088 6252
model, powered by a wide range of equipment assets and in-house quarry mines with minimal sub-
pankajr.kumar@edelweissfin.com
contracting. As a result, it has enjoyed good average EBITDA margins of 14-15% and PAT margins of 7-
7.5%, respectively in the past 5 years. In addition, the company has maintained a strong balance sheet
with low net debt-to-equity of 0.1-0.2x and average core ROCE of 20% plus in the past 5-7 years. The
company adopted a selective approach during the challenging economic time by staying away from
aggressive bidding, resulting in muted 5% CAGR in sales and PAT during FY09-14 and tepid order backlog
of INR 1200 cr. However, during the up-cycle (FY05-FY09) its sales grew by a CAGR of 72% and PAT by
87% CAGR. With an impending revival in project awarding in the road sector and strong balance sheet,
the company is well equipped to achieve over 20% sales CAGR in the next three years with 20% plus core
ROCE.

Strong track record of executing projects ahead of schedule

KNR has a sterling track record of executing projects ahead of schedule since 1995. The top management is
actively involved at all stages of project execution. It has adopted a prudent approach in terms of selection
of projects with marquee clientele like NHAI, MORTH, Sadbhav Engineering, etc. It has executed the INR
902 cr Bijapur-Hungund road project in record 18 months, which was 11 month ahead of schedule. It also Bloomberg: KNRC:IN
received early completion bonus for the same. Further, it is expected to complete the in-house BOT project
Walayar Tollways in Kerala 8-9 months ahead of schedule. 52-week range (INR): 264 / 46

A conservative player in construction space Share in issue (Crs): 2.8

KNR has remained selective in the past 4-5 years of highly challenging business environment by staying
away from aggressive bidding. As a result, its order book, revenue and earnings growth remained muted at M cap (INR crs): 711
5% CAGR in 2009-14. Its growth also got impacted by cancellation of some large sized orders of ~INR 1300
cr (from GMR & GVK). But, during the up-cycle (FY05-FY09), its sales grew at 72% CAGR and PAT by 87% Avg. Daily Vol. BSE/NSE :(‘000): 182
CAGR. Armed with a strong balance sheet profile and exemplary execution track record, KNR is well placed
for revival in the construction sector, particularly in road space.

Strong balance sheet with positive OCF

KNR has low standalone debt-to-equity of 0.15x and relatively low working capital of less than 90 days. It
has a track record of generating positive operating cash flows. The company has not raised capital post IPO SHARE HOLDING PATTERN (%)
in 2008 and has been meeting its funding requirements from internal accruals. Further, the company does
not have any equity commitment in BOT projects and as a strategy it remains more focused on the EPC
business. It has historically maintained over 20% adj ROCE (vs present level of 15%). With improved
Others
outlook on order inflows, the company has the potential to achieve 20% plus core ROCE with minimal 13.93
capex considering its historical asset turnover.
DII
Revival in growth on improved outlook for road sector 15.08
After 2 years of lull phase, project awarding in the road sector is expected to pick up as the new Central
Government is taking desired steps on resolving various sticky issues like environment clearance, land FII
Promoter
acquisition, financing, etc faced by the developers. In the current fiscal year, the Road Ministry targets 0.85
70.14
awarding of 8000 km projects, with 4500-5000 km of projects awards expected through the EPC route.
Besides, the opportunity for state roads amounts to INR 50000 cr plus in FY15, which is positive for road
construction companies like KNR.

Valuation
We believe that KNR, with an impressive execution track record, strong balance sheet and decent ROCE 250
profile would be a major beneficiary from revival in the road space. We assign Buy rating on the stock with
200
the target price of INR 341 (INR 283 from EPC & INR 58 from BOT).
150
Financial Table
Year to March FY12 FY13 FY14 FY15E FY16E 100
Income from operations 751 692 835 895 1161
50
YoY Grth% -5.4 -7.8 20.6 7.2 29.7
EBITDA 134 116 126 134 169 0
Dec-13
Jun-13

Jun-14
Oct-13
Nov-13
Apr-13

Jul-13

Apr-14

Jul-14
Feb-14
Feb-13

Sep-13
Mar-13

Mar-14
Jan-13

Jan-14
Aug-13

Aug-14
May-13

May-14

EBITDA Margin% 17.8 16.8 15.1 15.0 14.5

Profit after tax 53 52 61 61 79
YoY Grth% -7.2 -1.2 17.0 -0.1 30.1 KNR Sensex
EPS 18.8 18.5 21.7 21.7 28.2
ROAE (%) 13.8 12.1 12.6 11.2 13.1
ROACE (%) 18.4 12.3 12.7 12.5 17.2
P/E 13.3 13.5 11.5 11.5 8.9 rd
EV/EBITDA 5.6 6.6 6.0 5.1 3.9
Date: 3 September 2014

1
KNR Constructions Ltd

Key Rationale
Expect sharp pickup in order inflows in FY15
We expect pick-up in awarding of road projects in H2FY15, especially on the EPC side as the Road
Ministry aims to award over 5000 km of road projects this year. KNR presently has bid pipeline of more
than 20 EPC projects with total value of INR 11000 cr in national highways located in Karnataka, Assam,
Rajasthan, MP, AP, Kerala, etc. Further, the company expects revival of bids in state highway projects in
Tamil Nadu, Rajasthan, UP, Bihar, etc. It would be participating in INR 12000 cr of projects in UP.The
company is also exploring opportunities in other segments like Metro and Railway contracts in JV.

Chart1: Projects completion ahead of schedule (Days) Chart 2: Order Book trend (INR cr)

1800 3500 4.5

1500 3000 4.0
1200 3.5
2500
900 3.0
600 2000 2.5
300 2.0
1500
0
1.5
1000
Ramagundam

Aswaraopet
Hyderabad -
Karimnagar -
Hungund
Vadakkancherry*

Siricilla - Siddipet
Bijapur –

Kamareddy

Narsapur -
Hyderabad -

1.0
Chanda
Walayar-

500 0.5
0 0.0
FY08

FY09

FY10

FY11

FY13

FY14
FY12*

FY15E

FY16E
Scheduled Completion Actual Completion Net Sales Order book OB to Bill (x)

Chart 3: RoE & RoCE Chart 4: NHAI projects awarding (Km)

30.0
7000
25.0
6000
20.0 5000
15.0 4000
3000
10.0
2000
5.0 1000
0.0 0
FY15*
FY10
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09

FY11
FY12
FY13
FY14
FY15E

FY16E
FY08

FY09

FY10

FY11

FY12

FY13

FY14

Adjusted RoCE% Adjusted RoE% BOT EPC

Source: Company, Industry, Edel Invest Research

*Note: Expected early completion in Kerala BOT, FY12-13 OB not adjusted for cancellation,
FY15 NHAI awarding is till August 2014
Competitive intensity ebbs in large projects
The competitive intensity has reduced in recent times, particularly in the large-sized projects due to
many companies facing cash crunch, distress balance sheet, etc. Total number of prequalified bidders
has reduced to less than 50 in FY15 from over 100 in FY11. As per the company, the number of bidders
in a INR 500 cr plus EPC projects have reduced from 20-25 two years ago to 8-9 at present.

Expect early completion in Kerala BOT

KNR management expects to complete Kerala BOT project 8-9 months ahead of schedule besides early
completion bonus, as the tolling on 75% of the stretch is expected to start from January 2015 Vs
scheduled November 2015 (approx INR 30 cr positive impact on project).

2
KNR Constructions Ltd

Company background
Incorporated in 1995, KNR Construction Ltd. is in the business of construction of roads and
highways (95% of order book) and irrigation projects (5% of the order book). The company is
promoted by Mr. K. Narsimha Reddy, who started his career in 1968 in the business of civil
mechanical contracts in Highway sector and has 46 years of experience in the sector. The
company has a track record of executing 5400 lane km of projects across 12 states in India. It
is currently executing ~20 projects in states like Arunachal Pradesh, Bihar, Madhya Pradesh,
Andhra Pradesh, Karnataka, Kerala and Tamil Nadu. It has present order backlog of INR 1200
cr, of which 85% is located in South India. Besides, the company has 3 BOT road projects of
670 lane km in AP, Karnataka & Kerala.

KNR has maintained strong EBITDA and PAT margins of over 15% & 7%, respectively in the
past 5 years. It has operated at a low net debt-to-equity of 0.1-0.2x with average adjusted
ROCE of 20% plus in the past 5-7 years.It adopted selective approach during the challenging
times by staying away from aggressive bidding, resulting in muted 5% CAGR in sales and PAT
during FY09-14. However, during the up-cycle (FY05-FY09) its sales grew at 72% CAGR and
PAT at 87% CAGR.

Risk & Concerns:

Delay in infra capex revival: KNR’s future growth depends on capex in infrastructure sector
primarily in roads. Any delay in revival of project awarding would impact the growth of the
company and our estimates.

Aggreesive bidding in NHAI EPC contracts: KNR would bid for large size NHAI EPC projects
and will face competition from larger players. Any aggressive bidding environment can lead
to margin dilution.

Diversification to new verticals: The company intends to explore opportunity in new

verticals of Civil Construction such as elevated metro, railways, building, etc in JV. Any
unsuccessful venture out of these verticals may negatively impact margins or balance sheet
of the company.

3
KNR Constructions Ltd

Valuation
We expect KNR’s revenue and PAT to grow at a CAGR of 18% and 14%, respectively in FY14-
16E. FY15E revenue is expected to grow by a modest rate of 7% due to a lower order backlog
(of INR 1200 cr) while in FY16E the topline should grow by a healthy 30% as order inflows are
expected to accelerate on improved overall capex outlook in the road sector. We expect
average INR 2000 cr per annum of order inflows in the next two years considering average
INR 50,000 cr per annum of highways projects awarding by Central and State Governments.
We expect EBITDA margins to fall marginally by 50-60bps in FY16E, led by lower margins in
new contracts. We expect adjusted RoCE to average 22% in FY15-16E due to improvement in
the under utilized resources led by strong growth outlook. At the CMP, the standalone
contruction business is available at FY15E & FY16E PE of 8.8x and 6.8x and EV/EBITDA of 5.1x
and 3.9x, respectively. The stock has historically traded in the forward PE band of 3x-10x. We
believe that with an impressive execution track record, strong balance sheet and decent
ROCE profile, KNR would be a major beneficiary from the impending revival in the road
infrastructure space. We assign a ‘Buy’ rating on the stock with the target price of INR 341.
Our target price includes INR 283 per share value for construction business (valued at 5x
EV/EBITDA, adjusted for standalone net debt) and INR 58 per share value for BOT business
(valued at 1.2x BV of equity invested, factoring in early completion).

Table: 1 Valuation Table

Value INR/
Segment Parameter FY16E Multiple (x) Value (INR cr)
Share
Construction Business EBITDA 169 5 843 300
Road BOT BV of equity 136 1.2 163 58
Consol KNR EV 1006 358
Less: Net Debt 47 17
Equity value 959 341

Chart 5: Average Forward PE Chart 6: PE Band

12.0 300
10.0 250 10x
8.0 200
6.0 150 7.5x
(INR)

4.0 100 5.0x

2.0 50
0.0 2.5x
0
Oct-12
Jan-11

Dec-13
May-13
Nov-09

Aug-11
Mar-12
Jun-10

Jul-14
Feb-08
Sep-08
Apr-09

Oct-08

Oct-10

Oct-12
Jun-11
Jun-09

Jun-13
Feb-08

Feb-10

Feb-12

Feb-14

Chart 7: Average Forward EV/EBITDA Chart 8: EV/EBITDA Band

6.0
800
5.0
4.0 600 5x
3.0 400 4x
(INR)

2.0 3x
1.0 200
2x
0.0 0
May-…
Feb-10
Feb-08

Feb-09

Feb-11

Feb-12

Feb-13

Feb-14
Aug-08

Aug-10
Aug-09

Aug-11

Aug-12

Aug-13

Aug-14

Oct-12
Jan-11

Dec-13
Nov-09

Aug-11
Mar-12
Sep-08

Jun-10

Jul-14
Feb-08

Apr-09

Source: Company, Edel Invest Research

4
KNR Constructions Ltd

Financials Income statement (INR crs)

Year to March FY12 FY13 FY14 FY15E FY16E
Income from operations 751 692 835 895 1,161
Direct costs 550 513 640 689 913
Employee costs 24 27 35 37 42
Other expenses 66 63 69 72 80
Total operating expenses 617 576 709 761 992
EBITDA 134 116 126 134 169
Depreciation and amortisation 51 56 57 61 56
EBIT 82 61 69 73 112
Interest expenses 10 11 17 13 15
Other income 6 18 16 16 16
Profit before tax 78 67 67 76 113
Provision for tax 26 15 6 15 34
Adjusted net profit 53 52 61 61 79
Equity shares outstanding (mn) 3 3 3 3 3
EPS (INR) basic 18.8 18.5 21.7 21.7 28.2
Diluted shares (mn) 2.8 2.8 2.8 2.8 2.8
EPS (INR) fully diluted 18.8 18.5 21.7 21.7 28.2
Dividend per share 1 1 1 1 4
Dividend payout (%) 5.3 5.4 4.6 5.3 15.1

Common size metrics- as % of net revenues

Year to March FY12 FY13 FY14 FY15E FY16E
Operating expenses 82.2 83.2 84.9 85.0 85.5
Depreciation 6.8 8.0 6.9 6.8 4.9
Interest expenditure 1.3 1.6 2.1 1.4 1.3
EBITDA margins 17.8 16.8 15.1 15.0 14.5
Net profit margins 7.0 7.5 7.3 6.8 6.8

Growth metrics (%)

Year to March FY12 FY13 FY14 FY15E FY16E
Revenues (5.4) (7.8) 20.6 7.2 29.7
EBITDA 2.6 (13.0) 8.0 6.5 25.9
PBT (6.2) (14.5) (0.2) 13.8 48.7
Net profit (7.2) (1.2) 17.0 (0.1) 30.1
EPS (7.2) (1.2) 17.0 (0.1) 30.1

5
KNR Constructions Ltd

Financials Balance sheet (INR crs)

As on 31st March FY12 FY13 FY14 FY15E FY16E
Equity share capital 28 28 28 28 28
Reserves & surplus 379 428 485 543 610
Shareholders funds 407 456 513 571 638
Borrowings 56 71 58 58 58
Sources of funds 462 527 571 629 696
Gross block 474 508 539 569 619
Depreciation 164 218 275 336 392
Net block 310 290 264 233 227
Total fixed assets 310 294 264 233 227
Investments 55 48 40 40 40
Inventories 27 30 34 37 64
Sundry debtors 93 121 117 126 175
Cash and equivalents 8 7 11 80 101
Loans and advances 322 450 476 453 522
Total current assets 451 608 639 695 862
Sundry creditors and others 264 319 341 306 398
Provisions 89 108 43 45 47
Total CL & provisions 353 427 383 351 445
Net current assets 98 181 256 344 418
Net Deferred tax (1) 4 12 12 12
Uses of funds 462 527 571 629 696
Book value per share (INR) 145 162 183 203 227

Cash flow statement (INR crs)

Year to March FY12 FY13 FY14 FY15E FY16E
Net profit 53 52 61 61 79
Add: Depreciation 51 56 57 61 56
Add: Deferred tax (2) (4) (8) 0 0
Gross cash flow 102 103 110 121 136
Less: Changes in W. C. 79 103 71 19 53
Operating cash flow 23 0 39 102 83
Less: Capex 70 39 27 30 50
Free cash flow (47) (39) 12 73 33

6
KNR Constructions Ltd

Financials Ratios
Year to March FY12 FY13 FY14 FY15E FY16E
ROAE (%) 13.8 12.1 12.6 11.2 13.1
ROACE (%) 18.4 12.3 12.7 12.5 17.2
Total Asset Turns 1.6 1.3 1.5 1.4 1.7
EBIT Margins 11.7 11.3 10.1 9.9 11.0
Debt/Equity 0.1 0.2 0.1 0.1 0.1
Debtors (days) 45 64 51 51 55
Inventory (days) 13 16 15 15 20
Adjusted Other Current Assets (days) 124 187 149 130 122
Payable (days) 128 168 149 125 125
Adj Cash conversion cycle (days) 54 99 66 71 72
Debt/EBITDA 0.4 0.6 0.5 0.4 0.3
Net debt/Equity 0.1 0.1 0.1 (0.0) (0.1)
Adj Asset Turns 1.9 1.6 2.0 1.7 2.1
EBIT Margins (%) 11.7 11.3 10.1 9.9 11.0
Adjusted RoCE (%) 22.7 15.0 16.4 18.0 26.4

Valuation parameters
Year to March FY12 FY13 FY14 FY15E FY16E
Diluted EPS (INR) 18.8 18.5 21.7 21.7 28.2
Y-o-Y growth (%) (7.2) (1.2) 17.0 (0.1) 30.1
CEPS (INR) 37.0 38.3 42.0 43.2 48.3
Diluted P/E (x) 13.3 13.5 11.5 11.5 8.9
Price/BV(x) 1.7 1.5 1.4 1.2 1.1
EV/Sales (x) 1.0 1.1 0.9 0.8 0.6
EV/EBITDA (x) 5.6 6.6 6.0 5.1 3.9
Diluted shares O/S 2.8 2.8 2.8 2.8 2.8
Basic EPS 18.8 18.5 21.7 21.7 28.2
Basic PE (x) 13.3 13.5 11.5 11.5 8.9
Dividend yield (%) 0.4 0.4 0.4 0.4 1.5

7
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Capital Markets (Individual Clients Group)

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