Recommendation from a Construction - Infrastructure

This column gives you a scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.[EasyDNNnews:PaidContentStart]

KNR Construction - Infrastructure: ON A SOLID FOOTING

HERE IS WHY

✓ Part of India’s infrastructure development story
✓ High level of engineering skills
✓ Successful execution of huge orders

The Indian construction industry is the engine of the Indian economy and India is slated to become the thirdlargest construction market globally by 2025. As of now, it is the second-largest employer providing jobs to 51 million people. The construction industry in India is expected to reach USD 1.4 trillion by 2025. Cities driving growth, campaigns such as Smart Cities and multimodal logistics are some of the major key factors responsible for increasing the infrastructure demand in India. 

This is part of the plan to meet India’s aim of reaching a USD 5 trillion economy by 2025. Keeping India’s development and infrastructure needs in mind, the recommendation for this issue is KNR Constructions. The company is a multi-domain infrastructure project development entity providing engineering, procurement and construction (EPC) services across various fast-growing sectors such as roads and highways, irrigation and urban water infrastructure management

As regards the company’s financials, in Q4FY23 on a consolidated basis itsrevenue rose by 13 per cent YoY to ₹1,245.33 crore compared to ₹1,102.09 crore from the previous year’s same quarter. On a sequential basis, its revenue increased by 42.33 per cent. Its PBIDT excluding other income dropped by 11.8 per cent to ₹245.97 crore YoY as compared to ₹278.87 crore from the previous year’s same quarter, while sequentially it increased by 24.97 per cent. The net profit stood at ₹142.02 crore compared to ₹139.71 crore, a YoY increase by 1.66 per cent, while sequentially it increased by 32.21 per cent.

The company has more than 25 years of experience and has successfully executed more than 7,500 lane km road projects across 12 states. As of March 31, 2023, the company’s order book stood at ₹7,092.1 crore with ₹5,499.7 crore in road projects and ₹1,592.4 crore in the irrigation sector. Recently, the company has won orders worth ₹1,780 crore which is not included in the order book. The company has started to diversify into other segments such as railways and metros to address the requirements of the order impact. 

Primarily, KNR Constructions’ clients are government bodies like National Highways Authority of India and Ministry of Road Transport and Highways as well as state governments like Andhra Pradesh, Telangana, Karnataka, Uttar Pradesh and Madhya Pradesh. Some of the company’s completed projects include the four lanes of NH 24, Hapur bypass, rehabilitation and upgrading of the Surat-Manor section of NH 8 etc. The company’s business strategy is to focus on projects involving higher degree of engineering skills and focus on securing EPC contracts from reputed clients and concessionaires.

It also focuses on capitalising the opportunities provided by infrastructure development in the country and continuously explores growth potential by forming strategic joint ventures. The company is currently trading at a PE of 17.2 times as against the industry PE of 35.5 times and lower than its three-year median PE of 19.9 times. In the last three years the company has delivered average ROE of 16.6 per cent and ROCE of 21.4 per cent. The company has debt-to-equity of 0.23 times with an interest coverage ratio of 5.05 times. Taking into account the company’s business and its valuation, we recommend BUY.

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