The national highway construction in the country in the first 10 months of financial year 2021 was at 29.81 kilometres (average) per day — the highest in five years.

The NHAI managed to achieve a total national highway construction of 9,242 km in FY21 (up to February 5, 2021), compared to 10,237 km in FY20. Despite the nationwide lockdown, the NHAI took several initiatives to keep the road construction pace intact, including expedition of payments and bidding process. Besides, the Centre too reiterated its focus on infrastructure development in the last budget.

In this backdrop, road construction companies with strong execution track record and low existing levels of leverage in their balance sheet will benefit from this rising tide in the construction space. KNR Constructions (KNRC) with a 20- year execution track record and healthy and diversified order pipeline (company has forayed into irrigation projects as well), seems a good bet in this juncture. But the recent run-up in the space has stretched the valuation multiples of the South India-based construction contractor.

KNRC currently trades at about 21 times its FY22 EPS (Bloomberg consensus estimates) compared to three-year average of 14.1 times (2FY forward multiples). While the company is poised for growth, given its healthy order intake in FY21, execution capabilities and 20 per cent plus operating margins, the current valuations seem full and hence investors can accumulate the stock on dips

Recent performance

Thanks to its strong execution capabilities, the company’s revenues grew by a CAGR of 13 per cent over FY17-20 to ₹2,244 crore. Besides, by controlling its cost over runs, the EBITDA margins inched up to 21.7 per cent in FY20, from 14.9 per cent in FY17. EBITDA grew by 28 per cent CAGR over the same period to ₹487 crore.

In the first nine months of FY21, despite the lockdown hampering on ground construction for a good part of the year, the company managed to clock a growth of 13 per cent in its revenues (₹1,767 crore). However, margins dropped to 20 per cent from 21.7 per cent in the year ago period due to higher employee cost post-pandemic. The management has indicated a likely recovery in margins, with the expected execution of high margin irrigation projects --that constitute about 45 per cent of outstanding order book-- in the coming quarters.

Order pipeline

KNRC bagged orders worth about ₹ 4,000 crore in the first nine months of FY21, taking the total outstanding order book (as of end of December 2020) to ₹7,663.7 crore, spread across Kerala (2 projects), Karnataka (6), Tamil Nadu (13), AP and Telangana (13). Besides, the company received a road upgradation order (EPC) in Tamil Nadu worth ₹540 crore, and a highway construction (EPC) order in Karnataka worth ₹1,100 crore in the last quarter of FY21 thus far, according to exchange filings by the company. The order pipeline is expected to witness more traction, given the NHAI’s deficit in tendering targets for the year. As against the targeted 4,800-5,200 kms for FY21, NHAI has only awarded 2,423 km in 9MFY21. With strong execution in its five captive Hybrid Annuity Model (HAM) based projects, low debt on balance sheet and good cash inflows expected from irrigation projects, KNRC is all game for further order wins in the HAM segment. The management, based on its submitted bids, has guided for an order inflow of Rs 3,000- 4,000 crore in the quarter ended March 2021.

Healthy balance sheet

For its current HAM projects the balance equity requirement of about Rs 280 crore is expected to be funded by internal accruals.

In the second quarter of FY21, the company received ₹300 crore for stake sale of KNR Wallayar Tollways. These proceeds were used to repay a loan taken from the promoter in earlier years and fund the working capital requirements of the company. With a consolidated debt of ₹ 757 crore, the company’s debt equity ratio at the end of September 2020 stood at 0.4 times. Besides, KNRC has signed a pact with Cube Highways for stake sale in 3 HAM projects, which would ease up a fund requirement of another ₹ 322 crore, going ahead.

However, the company’s net working capital days surged to 53 days in March 2020, from 36 days in FY19, following the pandemic. In September 2020, NWC days inched up to 54 days—with delays in payments from Telangana Government, worth ₹ 7,400 crore. While the company has already received ₹5,400 crore as of November 2020, the remaining dues are expected to be settled by March 2021.

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