This Small Cap Infra Stock Likely To Gain 30%, Revenues Grew 20% YoY, Gave 127.12% Return In 3 Years

Edelweiss Wealth Research is bullish on KNR Constructions Limited. The brokerage recommends buy for target price of Rs 338 apiece. KNR Constructions is a small cap infrastructure sector stock having a market cap of Rs 7,359.91 crore. KNR Construction (KNR) reported a robust set of numbers in Q1FY23, despite weak order inflows. Revenues grew 20% YoY to Rs 891cr.

Stock Outlook

The Current Market Price (CMP) is Rs 261.70/share. The stock hit the 52-week low on 21 June 2022 at Rs 207.50/share and the 52 week high it touched on 1 September 2021 at Rs 343.90. Considering the estimated target price, the stock is likely to gain 30% in 12 months if purchased at the current market price.

Returns on Investments

The stock of the company in the past 1 week, surged by nearly 2.41%. Whereas, in the past 1 and 3 months, it gave a positive return of 2.75% and 7.47%, respectively. However, over the past 1 year, it gave a negative return of 14.73%. The stock gave multibagger returns of 127.12% and 141.98% in the past 3 and 5 years, respectively.

Building an order pipeline to be a priority

KNR's order book stands at Rs 8,585cr (including the new HAM project worth Rs 340cr), with major contributions from the by-roads - HAM (44%), roads - EPC (30%) and irrigation (26%) segments. The order book remains sufficient for the next 2-3 years (2.7x book to TTM revenues). However, the company has not been able to add any new projects since the last two quarters. Furthermore, it does not expect any new irrigation projects from the states of Karnataka and Telangana due to funding issues. KNR's total outstanding payments from the Telangana government for irrigation projects further increased to Rs 850cr from Rs 650cr in Q4FY22. It is targeting around Rs 3500 -4000cr worth of orders in this year.

Decent revenue pipeline but margins under pressure

KNR reported 20% YoY increase in revenues to INR891cr in this quarter. However, EBITDA margins were under pressure due to inflationary cost pressures and lower share of high margin projects such as irrigation. The company expects orders worth Rs 3,500-4,000cr in FY23E, with a potential capex outlay of Rs 130cr. There is strong competition in roads and highways projects making it imperative for the management to focus on margin accretive projects, which will improve the bottom line. Additionally, KNR should also have concrete plans to diversify existing business verticals to higher margins projects.

Update of HAM projects

KNR transferred 49% stake in KNR Tirumala Infra Pvt Ltd and KNR Shankarampet Projects Pvt Ltd in December 2021 for a total value of Rs 245.3cr, which includes repayment of 100% sub-debt infused by KNR (Rs 163.7cr). The company expects to sell remaining 51% stake in these two projects and 100% in the third projects by end of next quarter. The company has invested a total of Rs 530cr in all HAM projects to date. The company further has to invest ~Rs 580cr to complete these projects Of this, the company plans to invest Rs 310cr in FY23E, Rs 160cr in FY24 and Rs 120cr in FY25. Despite this, we expect its debt to remain at minimal levels, with healthy operating cash flow generation from improved profitability and better cash flow management.

Valuation and outlook

At CMP of Rs 260/share, KNR's EPC business is trading at 16x and 13x of FY23E and FY24E EPS, respectively, after adjusting for its investment in HAM projects (at 1x P/BV). "We continue to remain positive on KNR, given its debt-free balance sheet and strong execution track record and decent bid pipeline. However, an increase in interest rate cycle, inflationary pressure and supply chain disruption can create some headwinds for this sector in the medium term. We reiterate 'BUY' on KNR with SOTP-based price target of Rs 338/share. We value its EPC business at Rs 301/share (rolled forward at 16x FY24E EPS) and investment in HAM projects at Rs 37/share (at 1x P/BV)," the brokerage has said.

Disclaimer

The stock has been picked from the brokerage report of Edelweiss Wealth Research. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.