This small-cap infrastructure stock is likely to gain 30%, revenue is up 20% YoY and has returned 127.12% in 3 years

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Stock market outlook

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

Returns on investments

Returns on investments

The company’s stock over the past week has jumped nearly 2.41%. While in the last 1 and 3 months, it gave a positive return of 2.75% and 7.47%, respectively. However, over the past year, it has given a negative return of 14.73%. The stock has yielded multibagger returns of 127.12% and 141.98% over the past 3 and 5 years, respectively.

Building an order pipeline should be a priority

Building an order pipeline should be a priority

KNR’s order book stands at Rs 8,585cr (including the new HAM project worth Rs 340cr), with major contributions from Roads – HAM (44%), Roads – EPC (30%) segments and irrigation (26%). The backlog remains sufficient for the next 2-3 years (2.7x backlog vs. TTM revenue). However, the company has not been able to add any new projects for the past two quarters. Also, he expects no new irrigation projects from the states of Karnataka and Telangana due to funding issues. Total unpaid KNR payments by Telangana government for irrigation projects further increased to Rs 850cr from Rs 650cr in Q4FY22. It is targeting around Rs 3500 -4000cr in orders this year.

Decent revenue pipeline but margins under pressure

Decent revenue pipeline but margins under pressure

KNR recorded a 20% year-on-year increase in revenue to INR 891 cr during the quarter. However, EBITDA margins were under pressure due to inflationary cost pressures and the lower share of high-margin projects such as irrigation. The company expects orders worth Rs 3,500-4,000cr in FY23E, with a potential capital expenditure of Rs 130cr. There is strong competition in road and highway projects, which forces management to focus on margin accretive projects, which will improve the bottom line. Additionally, KNR should also have concrete plans to diversify existing verticals into higher margin projects.

Update of HAM projects

Update of HAM projects

KNR transferred a 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% of KNR infused sub-debt (Rs 163.7cr). The company expects to sell the remaining 51% interest in these two projects and 100% in the third projects by the end of the next quarter. The company has invested a total of Rs 530cr in all HAM projects so far. The company further needs to invest ~Rs 580cr to complete these projects. Of this amount, 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 good operating cash flow generation thanks to improved profitability and cash flow management.

    Valuation and outlook

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, strong execution track record and decent offering pipeline. However, a rising interest rate cycle, inflationary pressures and a supply chain disruption may create headwinds for this sector in the medium term.We reiterate “BUY” on KNR with a price target based on the SOTP of Rs 338/share.We value its EPC business at Rs 301/share (carried forward at 16x FY24E EPS) and investment in HAM projects at Rs 37/share (at 1x P/BV),” the brokerage said.

Disclaimer

Disclaimer

The stock was featured in Edelweiss Wealth Research’s brokerage report. Greynium Information Technologies, the author and the respective brokerage are not responsible 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.

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