KNR Constructions Robust Performance on Execution Ramp-up

Market Cap. (Rs bn) 18 Free Float (%) 39 Shares O/S (mn) 28 KNR Constructions Robust Performance on Execution Ramp-up KNR Constructions (KNRC) has reported a better-than-expected performance in 1QFY17, as healthy inflow seen over last 12-months and execution ramp-up from new projects led to robust ~74% yoy growth in revenue to Rs3.06bn way ahead our estimate. EBITDA stood strongly at Rs442mn (+58% yoy) and EBITDA margin continued to remain healthy at ~14.5% (flat on adjusted last year s margins). Reported PAT surged by 101% yoy to Rs302mn vs. our estimate of Rs279mn mainly owing to better top-line growth and lower-than-anticipated tax rate. We continue to maintain our positive stance on KNRC mainly on account of healthy order book (4.9x TTM revenue), strong balance sheet (0.1x net D/E) and sound execution credentials well-proved by track record of early completions, which we believe would boost to growth, going forward. Hence, we reiterate our recommendation on the stock with a revised SOTP-based Target Price of Rs770. Strong show led by healthy inflows Revenue booking remained robust as revenue grew 74% yoy & 3% qoq to Rs3.03bn in 1QFY17 primarily owing to execution ramp-up from fresh projects (secured Rs29bn orders in FY16 & Rs17.5bn till date in FY17E). EBITDA margin continued to remain healthy and stood at strong ~14.5%. PAT came in at Rs302mn (+101% yoy) ahead of the expectations. Robust Order Backlog oers Growth Visibility KNRC s current order backlog at Rs49.2bn (Rs42.6bn as on June 30, 2016), which is ~4.9x TTM revenue, lends sound visibility of future growth. It bagged orders worth Rs29bn in FY16 and has further secured orders over Rs17.5bn in FY17E till date. Further, 93% of its total order book is from the government while 6% orders are from international clients. Share price (%) 1 mth 3 mth 12 mth Absolute performance 12.6 22.5 21.3 Relative to Nifty 8.4 12.2 20.0 Shareholding Pattern (%) Mar 16 Jun 16 Promoter 60.8 60.8 Public 39.3 39.3 1 Year Stock Price Performance 700 650 600 550 500 450 400 350 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Note: *CMP as on August 16, 2016 Outlook and Valuation In our view, strong show in order-inflow in FY16 and 1QFY17 ytd coupled with execution ramp-up from new projects will aid KNRC to witness a healthy growth, going ahead. Healthy order book, sound execution credentials and light balance-sheet are expected to fuel growth of 43% & 31% CAGR in Revenue & APAT over FY16- FY18E. Hence, we maintain our recommendation on the stock with a revised SOTP-based Target Price of Rs770, valuing KNRC s standalone business at Rs696/ share based on 11x FY18E earnings and Kerala & Bihar BOT at Rs74 (at 1x P/BV). Key Financials (Rs mn) FY15 FY16P FY17E FY18E Sales 8,761 8,851 13,043 18,167 EBITDA 1,261 1,380 1,865 2,634 Net Profit 785 1,036 1,392 1,774 EPS (Rs) 27.9 36.8 49.5 63.1 DPS (Rs) 1.2 1.2 1.2 1.2 P/E (x) 23.0 17.4 13.0 10.2 P/B (x) 3.2 2.5 2.1 1.7 EV/EBITDA 14.9 13.8 10.1 7.0 RoE (%) 14.5 16.0 17.5 18.7 Divi. Yield (%) 0.2 0.2 0.2 0.2 Research Analyst: Binod Modi Contact: (22) 33201097 Email: binod.modi@relianceada.com 1

Risks to the view Delay in execution Geographical diversification may put pressure on margins Conference Call Key Highlights Roads Projects: Road projects over 10,000kms were awarded and over 6,000kms were constructed in FY16. Further, the Government targets to award 25,000kms in FY17E (2.5x FY16) and intends to construct 15,000kms (including 8,000kms NHAI roads) in FY17E. Adoption of land acquisition act by several states is helping the overall roads and highway sector. Order-inflow Guidance: KNRC added orders worth >Rs17.5bn till date in FY17E in roads and irrigation segment. It expects further to add orders to the tune of ~Rs10-15bn during FY17E. Thus it is likely to exceed its earlier inflow guidance of Rs20-25bn for FY17E. Though KNRC s current bidding pipeline is less than Rs5.0bn, it expects several tenders to come-up post monsoon. KNRC envisages many roads projects to come up especially from Uttar Pradesh & Bihar. Further, lots of irrigation projects are also expected to come up from Talangana. Revenue & Margin Guidance: It has guided for revenue of Rs12.0bn in FY17E and Rs17.0bn in FY18E with an average EBITDA margin of 13.5-14.5%. Tax rate for FY17E is guided at 8-10% and 12% for FY18E based on current order book. KNRC intends to double its revenue by FY20E. Capex: Given the significant spike in order inflow, it has increased its capex guidance to Rs800-850mn from Rs500-600mn for FY17E, while the capex for FY18E is also expected to be in the same range. BOT Project (Walayar Toll-ways): KNRC s toll collection stood at Rs95.8mn in 1QFY17, which is way below considering the revenue expectations of Rs500mn for FY17E. Management cited that non-completion of a stretch at one-end (being executed by other contractor) is hurting traic as of now. KNRC is expected to infuse additional equity of ~Rs800mn for this project. Muzaarpur-Barauni BOT Project: Provisional Completion Certificate for 75% of project length has been issued on June 03, 2016. Toll collection from the project recorded at Rs12.2mn in 1QFY17. Working Capital Cycle: Working capital cycle stands at 45 days. Debtors & Inventory levels stand at Rs1.38bn & Rs400mn, respectively while payable stands at Rs1.4bn. Gross standalone and consolidated debt stands at Rs1.0bn & Rs7.5bn, respectively. Loans and advances to subsidiary reached at Rs2.5bn. 2

Market Cap. (Rs bn) 18 Free Float (%) 39 Shares O/S (mn) 28 Exhibit 1: Result Summary (Rs mn) 1QFY17 1QFY16 % yoy chg 4QFY16 % qoq. chg FY16 FY15 % yoy chg Net Sales 3,036 1,746 73.9 2,943 3.2 8,851 8,760 1.0 Expenses Cost of materials consumed 793 839 (5.5) 707 12.2 2,792 3,370 (17.2) Changes in WIP 0 0 % sales 26.1 48.1 24.0 31.5 38.5 Employee Costs 129 98 30.8 116 11.3 435 381 14.3 % sales 4.2 5.6 3.9 4.9 4.3 Spreading & Assortment Exps. 423 186 127.7 530 (20.1) 1,587 989 60.5 % sales 13.9 10.6 18.0 17.9 11.3 Sub-contract exps. 956 157 508.9 793 20.5 1,684 1,606 4.8 % sales 31.5 9.0 26.9 19.0 18.3 Other Exps. 294 186 58.2 362 (18.8) 973 1,154 (15.6) % sales 9.7 10.6 12.3 11.0 13.2 Total Exps. 2,595 1,466 76.9 2,507 3.5 7,471 7,500 (0.4) EBITDA 442 280 57.8 436 1.2 1,380 1,260 9.5 EBITDA margins (%) 14.5 16.0 (148.6) 14.8 (1.9) 15.6 14.4 120.0 Depreciation 132 105 24.9 110 19.9 431 541 (20.2) Finance Costs 43 25 68.8 40 5.9 126 122 3.1 Other Income 54 22 148.7 169 (68.1) 479 126 281.5 PBT 321 171 87.9 455 (29.4) 1,301 723 80.0 Tax Exps. 19 21 (8.8) (125) (310) (7) % PBT 5.9 12.1 PAT 302 150 101.3 580 (47.9) 1,611 730 120.7 APAT 302 150 101.3 385 (21.4) 1,036 730 41.9 Net Margins (%) 9.0 8.6 19.7 18.2 8.3 Exhibit 2: Revised v/s Old estimates FY17E FY18E Old Revised % change Old Revised % change Sales 12,435 13,043 4.9 17,403 18,167 4.4 EBITDA 1,840 1,865 1.4 2,610 2,634 0.9 EBITDA margins (%) 14.8 14.3 15.0 14.5 PAT 1,371 1,392 1.5 1,732 1,774 2.4 EPS (Rs) 48.7 49.5 1.6 61.6 63.1 2.4 Source: RSec Research 3

Exhibit 3: A snapshot of key orders Key Projects Rs bn Madurai Ramanathpuram Project 7.45 Thiruvananthapuram Bypass from Kazhakkoottam to Mukkola Junction 5.71 Upgrading Arcot Villupuram Road 3.06 Rehabilitation and upgradation of Dindigul-Bangalore Road (Pollachi to Coimbatore Section) 4.15 Flyover in Salem- TN 2.87 Top 5 Road Projects 23.24 Other Road Projects 12.04 Irrigation Projects 7.3 Total Order Book 42.58 Exhibit 4: Segmental Order Break-up (%) Exhibit 5: Geographical Break-up (%) 17 1 6 6 83 87 Road (Third Parties) Irrigation South East Central International 4

Profit & Loss Statement Y/E March (Rs mn) FY15 FY16 FY17E FY18E Income 8,761 8,851 13,043 18,167 % yoy growth 4.3 1.0 47.4 39.3 Operting Expenses 7,500 7,471 11,178 15,533 EBITDA 1,261 1,380 1,865 2,634 EBITDA Margin (%) 14.4 15.6 14.3 14.5 Depreciation & Amortization 541 431 410 389 Interest 122 126 153 147 Other Income 125 479 336 268 PBT 723 1,301 1,637 2,366 Tax (7) (310) 246 591 % Tax (1.0) (23.8) 15.0 25.0 Net Profit- Reported 730 1,611 1,392 1,774 YoY Growth (%) 19.7 120.7 (13.6) 27.5 Net Profit- Adjusted 785 1,036 1,392 1,774 Net Profit Margin (%) 9.0 11.7 10.7 9.8 Balance Sheet Y/E March (Rs mn) FY15 FY16P FY17E FY18E Sources of Funds Share Capital 281 281 281 281 Reserves & Surplus 5,412 6,991 8,350 10,091 Total Shareholder's funds 5,693 7,272 8,631 10,372 Loans 964 1,171 1,125 1,276 Deferred Tax Liability (net) (239) (276) (276) (276) Total Liabilities 6,418 8,167 9,480 11,372 Application of Funds Gross Fixed Assets 5,509 6,056 6,856 7,656 Less: Acc. Depreciation 3,156 3,587 3,997 4,386 Net Fixed Assets 2,353 2,468 2,858 3,269 Investments 315 434 474 514 Inventories 420 353 528 736 Sundry Debtors 1,765 1,294 1,799 2,565 Other Current Assets 1,638 1,617 2,348 3,452 Cash & Bank Balances 157 163 289 761 Loans & Advances 3,542 6,178 7,043 8,175 Toal Current Assets 7,522 9,604 12,008 15,690 Current Liabilities 3,463 3,807 5,404 7,465 Provisions 309 532 456 636 Total Current Liabilities 3,772 4,340 5,860 8,101 Net Current Assets 3,749 5,265 6,148 7,589 Misc. Expenditure 0 0 0 0 Total Assets 6,418 8,167 9,480 11,372 5

Cash Flow Statement Y/E March (Rs mn) FY15 FY16E FY17E FY18E PBT 723 1,301 1,637 2,366 Depreciation 541 431 410 389 Tax Paid (114) (209) (246) (591) Net Change in Working Capital (358) 1,126 109 163 Others 122 126 153 147 Net Cash from Oper. Activities 914 2,777 2,064 2,475 Capex (390) (547) (800) (800) Sale / (Purchase) of Investments (379) (2,272) (905) (1,172) Net Cash used in Invest Activities (769) (2,819) (1,705) (1,972) Finance cost (155) (159) (186) (180) Proceeds from Equity - - - - Proceeds from Debt 56 208 (46) 150 Others - - - - Net Cash used in Fin. Activities (99) 49 (232) (30) Net Increase/ (Decrease) in Cash 45 6 126 472 Cash at Beginning of the Year 112 157 163 289 Cash at End of the Year 157 163 289 762 Key Ratios Y/E March FY15 FY16E FY17E FY18E Valuation Ratio (x) P/E 23.0 17.4 13.0 10.2 P/CEPS 14.2 8.8 10.0 8.3 P/BV 3.2 2.5 2.1 1.7 EV/EBITDA 14.9 13.8 10.1 7.0 EV/Sales 2.1 2.2 1.4 1.0 Dividend Payout (%) 6.9 3.8 3.0 2.1 Dividend Yield (%) 0.2 0.2 0.2 0.2 Per Share Data (Rs) EPS (Basic) 27.9 36.8 49.5 63.1 EPS (Diluted) 27.9 36.8 49.5 63.1 CEPS 45.2 72.6 64.1 76.9 DPS 1.2 1.2 1.2 1.2 Book Value 202 259 307 369 Returns (%) RoCE 13.7 19.6 20.3 24.1 RoE 14.5 16.0 17.5 18.7 Turnover ratios (x) Asset Turnover 1.6 1.5 1.9 2.4 Inventory (days) 16 16 12 13 Receivables (days) 61 63 60 60 Payables (days) 31 38 36 35 WCC (days) 46 41 36 38 Solvency ratios (x) D/E (x) 0.14 0.1 0.1 0.0 Current Ratio (x) 2.0 2.2 2.0 1.9 6

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