If you are looking to play the infrastructure theme through road construction companies, then KNR Constructions can be a good addition to your portfolio.
A solid execution track record, healthy order book and pan-India presence make the mid-tier company an attractive bet. The company’s financials are robust too.
The stock corrected by about 18 per cent from its peak in the recent correction from January, mostly due to the correction in the mid-cap space in the market. There were also mild concerns on whether the order book was growing at an adequate pace.
But recent road contract wins under the hybrid annuity model this month, outside of its traditional stronghold of EPC projects, clearly suggest that the company is nimble enough to adapt to newer models of delivery. Importantly, these wins are from the Centre’s ambitious Bharatmala project of the Centre.
Investors with a two-year horizon can buy the shares of KNR Constructions. At ₹288, the stock trades at 18 times its likely FY19 earnings. The valuation multiple is lower than that of players such as PNC Infratech and Ashoka Buildcon.
The company has a net debt-to equity ratio of just 0.1, among the best in the industry. In a sector where many road players are sitting on mountains of debt and several are loss-making, KNR’s conservative capital structure is a comforting exception.
In the nine months of FY-18, the company’s revenues grew by 23 per cent over the same period in FY-17 to ₹1307.3 crore, while adjusted net profits increased by 66 per cent to Rs 192.4 crore.
Well-executed
KNR Constructions is predominantly an EPC (engineering, procurement and construction) player, focused mostly on roads. It is also into irrigation and urban waste water infrastructure management projects, also through the EPC mode.
The advantage of working with an EPC model of highway construction is that there is no revenue risk for the bidders of the highway contracts. There are no toll, traffic or annuity risks for the companies executing these projects. Costs are known upfront and bidding is done accordingly — usually aggressively. Despite making such bids, the company has still managed to derive a healthy EBITDA margin of over 15 per cent consistently over the past several years, suggesting strong control over cost structure and robust execution capabilities.
The company has also enjoyed a robust return on equity of 17-20 per cent over the years.
Apart from a strong presence in all the five southern states, KNR has also executed large projects in MP, UP, Odisha and Assam. It has also delivered projects in a few smaller states. About 92 per cent of its order book comes from the Central and State governments. These include the NHAI and road development authorities and state highway departments of various states.
KNR has also completed a few build-operate-transfer (BOT) contracts that are running on annuity or toll modes.
Expanding order book
The company’s EPC order book stood at ₹3,332 crore as of December 2017, which is about 2.2 times its FY17 revenues, indicating strong revenue visibility.
In March, the company managed to bag two significantly large contracts as a part of the Centre’s Bharatmala Pariyojana, totalling ₹2,964 crore. These are for highway projects in Telangana and Andhra Pradesh, the contracts are awarded under the hybrid annuity model, where costs are shared by the government and the bidder.
These are contracts to be executed within the next two to two-and-a-half years and would then have a long concession period of 15 years. So revenue inflows are expected to be steady over the long term for KNR.
Thus, the company has been able to tap into lucrative highways projects, apart from bidding under newer bidding models.
According to a CRISIL report, about ₹1.4 lakh crore of road projects will be awarded under the HAM model by 2022. Therefore, KNR has made a good start by diversifying into such potentially rewarding contracts.
There may be a mild increase in debt due to the capex planned over the next couple of quarters, but is expected to stabilise by FY19. In any case, KNR’s healthy capital structure would allow it to accommodate more debt to execute larger projects.