After the stock fell 5 percent in April so far, brokerage house Axis Securities has picked KNR Constructions as its top pick of the week. The brokerage has recommended a BUY call for the stock for a target price of ₹260, implying an upside of 10 percent from the current market price of ₹239, as on April 24, 2023.
The brokerage remains bullish on the stock on the back of robust growth visibility, favorable industry tailwind, and its established track record.
In 2023 YTD, the stock has given negative returns in 3 of the 4 months. The 5 percent fall in April was followed by a 1 percent decline in March. While it rose 3.6 percent in February, it was down 3 percent in January as well.
Overall in this calendar year, the stock has shed 5.5 percent, meanwhile, it has lost 14 percent in the last 1 year.
"KNRCL is one of India’s leading infrastructure companies that provide Engineering, Procurement, and Construction (EPC) services. Over the last two decades, KNRCL has emerged as one of the most efficient players across several infra-segments such as roads and highways, bridges, and irrigation projects. Today, it is one of the leading highway development, construction and management companies in the country and has successfully executed more than 6,000 lane km of road projects across 12 states in India," said the brokerage.
Investment rationale
Robust growth visibility: The brokerage noted that as of December 2022-end, KNR’s order book remains robust at ₹8,100 crore, giving revenue visibility for the next 2-3 years. The company has also received a new order intake of ₹2,000 crore in FY23 further boosting its order book, it added. The company's order book is well diversified between roads (HAM & EPC) and irrigation projects. Moreover, it is also looking to further diversify into railways and metros. With a healthy NHAI pipeline, Axis expects the company to receive better order intake in FY24 which shall drive its revenue growth moving forward. It estimates the company to grow its revenue at a CAGR of 17 percent over FY22- FY25E.
Favourable industry tailwind: In the Union Budget 23-24, the government has increased the budgetary support to the road and highways segment by 30 percent YoY. According to Axis, the higher budgetary support augers well for the segment as more roads and highways would be constructed, which in turn would benefit incumbents like KNR Cons. Further, the NHAI asset monetization plan, National Infrastructure Pipeline, and unveiling of the Gati Shakti Plan will provide further momentum to the execution and avoid unnecessary delays, it pointed out.
Established track record: The brokerage observed that KNR Cons is a leading EPC player in the road sector with over two decades of extensive experience, enabling it to successfully scale its operation over the years. Strong project execution skills and timely delivery of projects are its key competitive strengths, it said, adding that it’s a debt-free company on a standalone basis. Factoring in better order inflows, Axis expects the company to maintain its margin profile between 18 and 19 percent over FY22-25E.
Earnings
In the December quarter, the company's net profit more than doubled, up 112 percent to ₹105.7 crore versus ₹50 crore in the year-ago period. Meanwhile, its net revenue was up just 2 percent to ₹881 crore as against ₹863 crore in the same period last year.
Outlook & Valuation
Considering the strong and diversified order book position, healthy bidding pipeline, new order inflows, emerging opportunities in the construction space, and the company’s efficient and timely execution, the brokerage expects the company to report revenue, EBITDA, and adjusted PAT CAGR of 17 percent, 10 percent, and 15 percent, respectively over FY22-FY25E. After the recent correction, valuation has become attractive compared to its long-term average PE of 15x, it noted. The stock is currently trading at 14x and 13x FY24E/FY25E EPS.
Other brokerages
Centrum is also bullish on the stock and has a ‘buy’ call with a target price of ₹346, indicating an upside of 45 percent for the next 1 year.
The brokerage expects KNR’s revenue and PAT to grow by 21 percent and 22 percent CAGR over FY22-24E led by a strong backlog and expected pick-up in order intake. Proceeds from the Cube deal will further strengthen the balance sheet and provide ample growth capital, it stated, adding that unadjusted valuations at 13.6x FY24E earnings appear reasonable given KNR’s strong balance sheet and credentials.
Motilal Oswal also has a positive view on the stock with a ‘buy’ call and a target price of ₹310, indicating an upside of over 29 percent in the next 1 year.
"KNRC is our top pick in the sector. We like KNRC owing to its net cash Balance Sheet on account of its: a) already monetized HAM projects, b) strong order book, c) robust execution capabilities, and d) healthy margins profile," it explained.
It expects a revenue of ₹880 crore (up 15 percent YoY) in the March quarter, EBITDA at ₹160 crore, and adjusted PAT at ₹99.4 crore (+25 percent YoY). However, its operating margin is likely to contract 220bp YoY due to high input prices. The execution is likely to improve post-monsoon, MOSL said, adding that it sees lower tax outgo supporting PAT on a YoY basis. Updates on new order inflows and irrigation receivables are the key monitorables.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
