Infrastructure as a theme that spans several sub-sectors has been in much demand, with stocks therein recording spectacular gains over the past couple of years.

However, one part of the infrastructure theme, roads and highway construction, has been in the sluggish lane for over a year now. The National Highways Authority of India (NHAI) has been going slow on new road construction awards this fiscal. In FY24, between April and November, the overall length of new contracts awarded by the NHAI was 2,815 km, much lower than the 5,382 km done in the previous year.

But the awarding pace is set to increase by the end of the current fiscal and certainly in FY25 and the interim Budget has allocated ₹2.78 lakh crore for roads and highway construction. Land acquisition is cited as the key issue in road awards slowing down significantly.

Not surprisingly, many listed companies in the space have been relative underperformers on tepid order flow, and valuations have become attractive with their current order book and a positive outlook.

KNR Constructions is one such predominantly road construction and irrigation projects player whose stock has remained lackadaisical amidst a small-cap frenzy.

A well-diversified order book, strong execution record and a sound debt free balance sheet are positives for the company.

At ₹240, the KNR stock trades at 15 times its expected per share earnings for FY24 and at 13 times its likely FY25 EPS. At these PE multiples, the stock is available at the lower to mid band of the 11-20 times that road players generally trade at, making a case for buying the company’s shares with a 2-3-year perspective. Between FY20 and FY23, the company’s revenues grew at a CAGR of 18.6 per cent to ₹3,744 crore, while the net profits increased at the rate of 30.3 per cent over the same period to ₹499 crore.

In 9MFY24, KNR’s revenues grew by 8 per cent over the same period in FY23 to ₹2,776.5 crore, while net profits declined by 20 per cent to ₹295.7 crore. The decline was largely attributable to an exceptional item (around ₹138 crore) involving sale of projects in the previous fiscal, which resulted in higher profits then.

A healthy diversified book

KNR Constructions is a highway construction (its key business) player and also has significant presence in the irrigation and urban water infrastructure management spaces.

It operates in the five southern States of Karnataka, Telangana, Andhra Pradesh, Tamil Nadu and Kerala.

The company has a fairly large client base. This includes NHAI, Andhra Pradesh Road Development Corporation, Karnataka State Highways Improvement Project, GMR Projects, Telangana Irrigation, Engineers India, Highways Department of Government of Tamil Nadu and Sadbhav Engineering, among others. There is a blend of captive, public and private sector projects to be executed.

KNR Constructions has an order book of ₹6,745 crore, which is 1.8 times its FY23 revenues.

Around 57 per cent of the order book comes from HAM road projects. Another 23 per cent is made up by irrigation orders and 20 per cent from other road works.

Key projects include Ramanattukara to Valanchery bypass, Bangalore-Mangalore Project, Elevated Highway along Avinashi Road in Coimbatore City and Development of six-lane Chittoor-Thatchur Highway.

The company has also indicated that it is trying to win orders worth ₹5,000-₹6,000 crore in the next one year.

KNR has generally ensured that it completes projects within or even ahead of the deadlines specified by clients and concessionaire. There are instances where the company has completed projects more than 100 days ahead of the originally scheduled deadline.

Robust financials

The company has a fairly strong balance sheet and healthy financial metrics. KNR Constructions is debt free and has remained so for the past three fiscal years.

Another key aspect is that it has always maintained fairly healthy margins over a very long period of time.

From 2018 onwards, it has managed to maintain an EBITDA (earnings before interest, taxes, depreciation and amortisation) of 19-20 per cent, occasionally even exceeding this band on the upside, which is among the best in the industry.

The return in equity for the company is also robust. KNR’s RoE was 18.2 per cent in FY23 and 17 per cent in FY22.

Overall, the company checks all the boxes on orders, execution capabilities and financial metrics, and is hurt only by a temporary slowdown in awards.

In the next couple of years, KNR Constructions looks set to ride the infrastructure and highways story.