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KNR Construction — Building The Road To Growth
KNR Construction — Building The Road To Growth
Initiate coverage with BUY: Target price Rs300
We initiate coverage on KNR Constructions (KNRC) with BUY and SOTP TP of Rs300 (valuing standalone business at Rs271/sh based on 9x FY12E earnings and AP-7 BOT at Rs30/sh based on DCF). We have not valued KNT-1 as it has been securitized and KNRC has realized the cash proceeds.
Significant discount versus peers
Our analysis suggests that KNRC is trading at 35% discount to the average peer group multiple, owing to: (i) muted order booking during FY10; and (ii) lull in order awards. During Q1FY11, KNRC has seen Rs8bn worth of order inflows taking the order book to Rs18bn and is currently L1 in orders worth Rs14bn. This robust order intake is expected to result in multiple expansion.
Order book to grow 3x, diversification on anvil
Momemtum in Road segment awards is expected to pick up in 2HFY11. Besides Roads, KNRC is evaluating opportunities in Pipeline and Contract mining via MOUs with other players. KNRC has pre-bid MOUs with large players in roads segment. We expect order book to grow 3x over FY12E.
Profitability and growth robust
KNRC has witnessed strong growth in last 5 years having delivered average 13-15% EBIDTA margins and 6-7% net margins. This has been on the back of higher average order drop size, own equipment bank and ownership in aggregate quarries. Ahead, KNRC is focusing on maintaining margins as they intend to enter at the pre-bid stage with key developers.
Balance sheet strong; CFO positive; D/E at 0.3x
Strong cash flow generation and high promoter holding gives comfort on future growth. D/E at low levels versus peer group, strong customer advances and high margins have resulted in strong cash flows. Low D/E gives adequate headroom for funding future growth.
BOT story intact; asset monetization freeing up capital
KNRC owns 40% in two BOTs — KNT-1 and AP-7. KNT-1 is already monetized through securitization and AP-7 is likely to be securitized in 3QFY11. This will free up Rs1bn for investment in other BOTs. Currently KNRC is L1 in a toll project on BOT basis in Kerala worth Rs7.4bn, LOA is expected in 3QFY11.
We initiate coverage on KNR Constructions (KNRC) with BUY and SOTP TP of Rs300 (valuing standalone business at Rs271/sh based on 9x FY12E earnings and AP-7 BOT at Rs30/sh based on DCF). We have not valued KNT-1 as it has been securitized and KNRC has realized the cash proceeds.
Significant discount versus peers
Our analysis suggests that KNRC is trading at 35% discount to the average peer group multiple, owing to: (i) muted order booking during FY10; and (ii) lull in order awards. During Q1FY11, KNRC has seen Rs8bn worth of order inflows taking the order book to Rs18bn and is currently L1 in orders worth Rs14bn. This robust order intake is expected to result in multiple expansion.
Order book to grow 3x, diversification on anvil
Momemtum in Road segment awards is expected to pick up in 2HFY11. Besides Roads, KNRC is evaluating opportunities in Pipeline and Contract mining via MOUs with other players. KNRC has pre-bid MOUs with large players in roads segment. We expect order book to grow 3x over FY12E.
Profitability and growth robust
KNRC has witnessed strong growth in last 5 years having delivered average 13-15% EBIDTA margins and 6-7% net margins. This has been on the back of higher average order drop size, own equipment bank and ownership in aggregate quarries. Ahead, KNRC is focusing on maintaining margins as they intend to enter at the pre-bid stage with key developers.
Balance sheet strong; CFO positive; D/E at 0.3x
Strong cash flow generation and high promoter holding gives comfort on future growth. D/E at low levels versus peer group, strong customer advances and high margins have resulted in strong cash flows. Low D/E gives adequate headroom for funding future growth.
BOT story intact; asset monetization freeing up capital
KNRC owns 40% in two BOTs — KNT-1 and AP-7. KNT-1 is already monetized through securitization and AP-7 is likely to be securitized in 3QFY11. This will free up Rs1bn for investment in other BOTs. Currently KNRC is L1 in a toll project on BOT basis in Kerala worth Rs7.4bn, LOA is expected in 3QFY11.
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