KNR Construction Ltd- Building Highways

KNR Construction Ltd (KNR), incorporated in 1995, possesses strong expertise in executing EPC projects. KNR which is primarily focused on the roads and highways segment has strong track record in timely and successful execution of projects across India and has secured repeat orders on continuous basis. It is one of best managed road constructor with light balance sheet, low working capital and one of the highest RoCE among peers.

The government has targeted to award 20,000 km of national highways in FY19 which is 17% higher than 17055 km of projects awarded in FY18. The awarding activity has been strong in FY18 led by pick up in awarding in Q4FY18. Of the road projects in FY18, 8652 km was awarded by MoRTH, 7397 km by NHAI and 1006 km by NHIDCL. In value terms, NHAI awarded Rs.1,22,000 cr of projects in FY18. Out of total 7397 km of projects awarded by NHAI, 46% (3396 km) of the projects were awarded on Hybrid Annuity based model (HAM), 51% (3791 km) on EPC basis and very small portion of 3% (209 km) of projects was awarded on BOT Toll model.

The southern region – 30% of the NHAI’s overall awarding pie in value terms and 27% in km terms provides exciting opportunities. We believe the South-focused KNR would be able to ramp up its order backlog. The Bangalore-Mysore (117km, Rs.4200 cr) project, where KNR has participated, is expected to be finalized in the near term. Bids have been submitted and the project is at the evaluation stage.

KNR has bagged 4 NHAI Hybrid Annuity Projects (HAM) with bid project cost of Rs.4467 cr in state of Tamil Nadu, AP and Telangana and is also L1 in one Karnataka HAM project of value ~Rs 1150 cr. The company is confident of achieving financial closure of these HAM projects in next 5 months. Altogether, the company is required to infuse ~ Rs 375 cr of equity in four HAM projects. Based on its strong balance sheet (standalone net debt equity at 0.1x) and decent internal accruals, achieving financial closure in these projects would not be a challenge for KNR. In addition, the Company has option to monetize its BOT assets and land bank which would help its future growth.

KNR always maintained a strong balance sheet, high RoCE and conservative approach in a sector which is highly cyclical in nature. KNR’s balance sheet remains healthy given standalone debt of ~Rs.130 cr (0.1x D/E) and net working capital of 45 days. The Company has filed arbitration claims worth ~Rs.800 cr with NHAI and the management expects to receive at least 50% of this over the next two years which would fund investments in new HAM projects. The two BOT road projects in Kerala and Bihar would be self-sustaining as banks agreed to reduce interest rates.

The company might not require any major capex to execute its current order book including new HAM projects as some of its older projects are on verge of completion and equipment can be mobilized from there. The company is expecting Rs.70 cr  capex for new machinery and another Rs.30cr of regular maintenance capex for FY19.

KNR has adopted a backward integration strategy, owning the required equipment rather than sub-contracting work. It has over 1000 in house professionals which helps the Company mange superior profit margins of around 15-17% and has also achieved track record of timely project completion. KNR has received early project completion bonuses several times.

The Company at the end of Q3FY18 had Rs.3332 cr of order-book (Rs.2423 cr roads, Rs.907 cr irrigation & Rs.2.1 cr others) which offers nearly 2 years of revenue visibility. Traction in order inflows in Q4FY18 and robust pipeline of projects gives strong revenue growth visibility for the next 2-3 years. KNR added four HAM projects with bid project cost of Rs.447cr in Q4FY18 and is confident of achieving financial closure of these projects. It is currently L1 in an order of ~Rs.1100 cr in Karnataka. KNR is expected to maintain 2-2.5 years of revenue visibility and considering the huge opportunity in the road and irrigation space, incremental order intake will not be a challenge in this sector.

As a strategy, KNR would focus on large size projects rather than large number of smaller projects. As per management the current team size and management bandwidth is capable of executing ~20 projects of upto ~Rs.2000 cr. In the longer run, the company intends to participate in larger size project. In irrigation also, KNR is capable of doing Rs.1000-1200 cr of project size.

Given the strong pipeline of projects in the near future, we remain upbeat on the KNR’s medium-term business prospects. We like KNR for its robust execution track record, driven by backward integration, strong balance sheet and consistent operating margins.

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Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’