Broker's call: KNR Constructions (Buy)

CMP: ₹233.55

Target: ₹305

KNR has robust order book of ₹6,680 crore at the end of Q2FY20. This includes ₹1,530 crore estimated EPC component of two HAM projects where appointed dates have not been received. The order book gives strong revenue growth visibility for the next two years. The company targets to add ₹1,000-1,500 crore of new orders in H2FY20 based on its project pipeline from roads, irrigation and flyover space.  The company has maintained guidance of ₹2,300-2,400 crore revenue in FY20E and further targets ₹2,700-2,800 crore revenue in FY21E.

Outlook and valuation: KNR has track record of generating operating cash flows which will help it in meeting capital for future growth. We believe that strong cash flows, deal with Cube Highways and monetization of BOT assets will help the company in meeting upfront equity commitment in the balance two HAM projects. Further, the company has track record of beating its revenue guidance and margin guidance, and we believe that the trend will continue in FY20/FY21. We have maintained our estimates for FY20E/21E. The EPC business (adjusted for BOT/HAM value ₹47/share) is available at a PE of 11x/8.8x based on FY20E/FY21E EPS of ₹17.1/21.5, respectively. We maintain our ‘buy’ rating on the stock with SOTP based target price of ₹305.