RESULTS REVIEW 3QFY17 14 FEB 2017

KNR Constructions
NEUTRAL
INDUSTRY INFRASTRUCTURE Outperformance priced in
CMP (as on 13 Feb 2017) Rs 175 KNRC delivered strong 3QFY17 numbers, with APAT Highlights of the quarter
beat of ~9.7% (adjusted for Rs 108.6mn exceptional Strong order book, new wins slowing: KNRCs 3QFY17
Target Price Rs 174 write off on annuity assets monetisation and MAT order backlog came in at Rs 42.3bn (2.9x FY17E
Nifty 8,805 credit of Rs 67.7mn). The balance sheet is healthy, revenues). It has already achieved ~90% of our order
Sensex 28,352 with standalone net debt at Rs 1.5bn (Rs 340mn inflow assumption. With no new order wins in 3QFY17,
KEY STOCK DATA
increase QoQ, net D/E at 0.17x, 0.03x adjusting for Rs KNRC may face growth challenges (management
1,210mn promoter loan). expects to win Rs 10bn in FY17E).
Bloomberg KNRC IN
No. of Shares (mn) 141 9MFY17 order wins stood at Rs 17.9bn (90% of our WC cycle improves, net D/E at 0.17x: Receivable days
MCap (Rs bn) / ($ mn) 24/365 assumptions) with no wins during 3QFY17. The improved to 30 days end-2QFY17 vs 34 days end-
KNRC-Patel JV has earlier announced its stake sale in 2QFY17. KNRCs gross debt is stable at Rs 1,600mn, the
6m avg traded value (Rs mn) 21
KNT01 and AP07 annuity projects to the Essel Group. large part of which is the promoters loan of Rs
STOCK PERFORMANCE (%) 1,210mn. KNRCs Muzaffarpur BOT construction is
52 Week high / low Rs 202/82 Whilst this is a deleveraging exercise (as projects complete and it expects full COD by Mar-17E. The toll
3M 6M 12M have no residual equity value), the Rs 3.5bn claims collection may rise to Rs 12mn/day post-COD vs Rs
Absolute (%) 27.0 42.7 76.9 under arbitration may result in an upside on account 9mn/day for 75% PCOD.
Relative (%) 23.0 41.7 58.9
of favourable awards from NHAI. KNRC bore a Rs Near-term outlook: KNRCs strong bid discipline may
108.6mn write-off on these assets as an exceptional lead to a slowing of new orders which poses a risk to
SHAREHOLDING PATTERN (%)
loss during 3QFY17. Owing to limited upside, we earnings growth. The share price has risen 91% over a
Promoters 58.09
downgrade KNRC to NEUTRAL with TP of Rs 174/sh. year and we believe outperformance is priced in.
FIs & Local MFs 26.88
FPIs 4.88 Financial Summary (Standalone)
Public & Others 10.15 Y/E Mar (Rs mn) 3QFY17 3QFY16 YoY (%) 2QFY17 QoQ (%) FY16 FY17E FY18E FY19E
Source : BSE Net Revenues 3,806 2,035 87.0 3,632 4.8 9,025 14,422 16,117 18,609
EBITDA 577 467 23.6 560 3.1 1,554 2,168 2,414 2,738
APAT 347 200 73.7 280 23.9 891 1,295 1,302 1,414
Diluted EPS (Rs) 2.5 1.4 73.7 2.0 23.9 6.3 9.2 9.3 10.1
P/E (x) 27.6 19.0 18.9 17.4
Parikshit D Kandpal EV / EBITDA (x) 16.5 11.6 10.0 8.5
parikshitd.kandpal@hdfcsec.com RoE (%) 13.8 16.3 14.0 13.3
+91-22-6171-7317 Source: Company, HDFC sec Inst Research

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters
 KNR CONSTRUCTIONS : RESULTS REVIEW 3QFY17

Standalone Quarterly Financial

KNRCs standalone 3QFY17
Particulars (Rs mn) 3QFY17 3QFY16 YoY (%) 2QFY17 QoQ (%) 9MFY17 9MFY16 YoY (%)
net revenue of Rs 3.8bn was
Net Sales 3,806 2,035 87.0 3,632 4.8 10,474 5,908 77.3
1.4% ahead of our estimates Material Expenses (2,773) (1,410) 96.6 (2,715) 2.1 (7,660) (4,033) 89.9
Employee Expenses (148) (105) 41.5 (130) 14.0 (407) (317) 28.5
EBITDA of Rs 577mn was Other Operating Expenses (325) (204) 59.3 (331) (1.7) (950) (611) 55.3
7.8% ahead of our Operating Profit 560 316 77.0 457 22.4 1,458 946 54.1
estimates, with EBITDA Other operating income 17 151 103 (83.1) 115 159 (27.6)
margins at 15.2% being EBITDA 577 467 23.6 560 3.1 1,574 1,106 42.3
~91bps higher than our Interest Cost (66) (27) 142.2 (56) 19.4 (165) (91) 81.3
estimates of 14.2% Depreciation (166) (106) 56.4 (146) 13.3 (444) (315) 41.0
Other Income (7) 34 (122.0) 132 (105.6) 181 199 (8.7)
PBT 337 367 (8.1) 490 (31.2) 1,146 898 27.6
We have adjusted Rs Tax (31) (26) 19.6 (51) (37.9) (101) 166
108.6mn of exceptional RPAT 306 341 (10.3) 439 (30.4) 1,045 1,065 (1.8)
write-offs on the E/o (adj for tax) 41 (141) (129.0) (159) (125.7) (102) (341)
impairment of KNT01 and APAT 347 200 73.7 280 23.9 944 724 30.3
AP-07 annuity projects Source: Company, HDFC sec Inst Research
which were sold during the
Margin Analysis
quarter (in other income, 3QFY17 3QFY16 YoY (bps) 2QFY17 QoQ (bps) 9MFY17 9MFY16 YoY (bps)
reversed same in EO item Material Expenses % Net Sales 72.9 69.3 357 74.7 (187) 73.1 68.3 485
and deducted Rs 67.7mn of Employee Expenses % Net Sales 3.9 5.1 (125) 3.6 32 3.9 5.4 (147)
MAT credit in exceptional) Other Op Expenses % Net Sales 8.5 10.0 (148) 9.1 (57) 9.1 10.3 (128)
Operating Profit % Net Sales 14.7 15.5 (83) 12.6 212 13.9 16.0 (210)
APAT was ~9.7% ahead of EBITDA Margin (%) 15.2 22.9 (778) 15.4 (25) 15.0 18.7 (369)
our estimates after Tax Rate (%) 9.3 7.2 217 10.3 (101) 8.8 (18.5) 2,732
adjusting for net EO item of APAT Margin (%) 9.1 9.8 (70) 7.7 141 10.0 18.0 (804)
Source: Company, HDFC sec Inst Research
Rs 41mn.
Change in estimates
9MFY17 order intake/order FY17E FY17E % FY18E FY18E % FY19E FY19E %
book stands at Rs17.9/Rs New Old Change New Old Change New Old Change
42.3bn. No new orders were Revenues (Rs mn) 14,422 13,371 7.9 16,117 16,486 (2.2) 18,609 18,846 (1.3)
won in 3QFY17. EBITDA (Rs mn) 2,168 1,973 9.9 2,414 2,416 (0.1) 2,738 2,719 0.7
APAT (Rs mn) 1,308 1,153 13.4 1,330 1,435 (7.3) 1,454 1,442 0.8
Change in estimate to factor EPS (Rs) 9.3 8.2 13.4 9.5 10.2 (7.3) 10.3 10.3 0.8
in higher depreciation Source: Company, HDFC sec Inst Research

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 KNR CONSTRUCTIONS : RESULTS REVIEW 3QFY17

Key assumptions and estimates

We expect 22.6% FY17-19E STANDALONE (Rs mn) FY16 FY17E FY18E FY19E Comments
order book CAGR We expect 22.6% FY17-19E order book CAGR on back of strong
Closing order book 34,640 40,218 44,101 60,493
NHAI & State EPC roads pipeline
Order book growth (%) 162.8 16.1 9.7 37.2
FY17-19E revenue CAGR New order booking 30,480 20,000 20,000 35,000 Already received Rs 17.9bn new order during 9MFY17
13.6%, EBIDTA CAGR 12.4% Book to bill ratio 3.8 2.8 2.7 3.3 Book to bill ratio to improve on new orders wins
Total Revenue 9,025 14,422 16,117 18,609 Expect execution to pick up during FY17-19E, 13.6% CAGR
Growth (%) 3.0 59.8 11.8 15.5
EBIDTA 1,554 2,168 2,414 2,738 FY17-19E EBIDTA CAGR of 12.4%
FY17-19E APAT CAGR of 4.5% Margins decline on account of higher competition in EPC segment.
EBIDTA margin (%) 17.2 15.0 15.0 14.7
Margins to remain in 14.5-15% range
Depreciation 431 628 723 806
Financial Charges 126 230 319 280 In line with borrowing
The reported PAT includes PBT 1,301 1,569 1,760 2,021 FY17-19E PBT CAGR of 13.5%
impact of high other income PBT margin (%) 14.4 10.9 10.9 10.9
and tax reversals on MAT Tax (309.9) 164.8 457.5 606.2
KNRC does 80I tax benefit reporting in P&L whilst paying marginal
and prior period tax Tax rate (%) (23.8) 10.5 26.0 30.0
tax rate in cash flows. The tax benefit will expire mid FY18E
provisioning being written RPAT 1,611 1,405 1,302 1,414
back. Also includes liabilities Net margin (%) 17.9 9.7 8.1 7.6 Margins to remain muted
no longer required being Adjustment of Rs 108.6mn BOT diminution, Rs 174mn in MAT credit
Extraordinary (720.0) (110.0) - -
written back. The combined and Rs 36mn excess other operating income
impact is Rs 720mn for FY16. Adjusted PAT 891 1,295 1,302 1,414 FY17-19E APAT CAGR of 4.5% owing to higher tax
We have adjusted this to Gross Block Turnover 1.6 2.3 2.2 2.3 Improvement on account of new orders inflow
Debtor days 52 67 67 67 To improve further as economic recovery picks pace
arrive at normalised PAT of
Higher revenue growth, robust client advance to result in higher
Rs 891mn CFO - a 2,565 1,669 2,173 1,916
positive cash flow from operations
CFI - b (2,591) (873) (900) (750)
For FY17E we have adjusted FCF - a+b (26) 796 1,273 1,166
non-recurring JV profit and CFF - c 30 251 (501) (413)
higher other income upto Total change in cash - a+b+c 4 1,047 771 753
9MFY17 Source: HDFC sec Inst Research

Net cash position doesnt

change debt materially

Page | 3

We value standalone EPC
business at Rs 151/share
(15x one-year forward
Mar-19E EPS)
Kerala BOT at Rs 14/share
(at 0.5x P/BV of equity
invested)
Muzaffarpur Barauni BOT at
Rs 4/share (at 1x P/BV of
equity invested)
Real estate at Rs 5/share (at
1x P/BV of amount invested)
Our SOTP target price is
Rs 174/share
Outlook and valuation
Downgrade to NEUTRAL with TP of Rs 174/sh
Valuation Methodology
We roll forward our estimates and value KNRC on P/E
basis in line with peers, namely Sadbhav/J
Kumar/Ashoka Buildcon, at 15x one-year forward. Our
rationale behind this is (1) Improving order book with
~1.5x increase over FY17-19E period to Rs 60.5bn, (2)
strong balance sheet with net D/E of 0.17x end-
3QFY17, (3) Superior earnings quality vs. similar sized
peers makes a case for valuation premium, and (4)
limited near-term BOT capex (Kerala BOT equity of Rs
3,970mn already invested, Muzaffarpur-Barauni BOT
project Rs 530mn invested).
Out of the total gross debt of Rs 1,600mn, KNR
promoter share of debt is Rs 1,210mn. Promoters have
utilized the own stake sale proceeds to retire bank
debt which has been replaced as promoter loans (at
bank rate of borrowing). Adjusted for promoter loan
standalone Net D/E is 0.03x. This gives us comfort on
SOTP Valuation
Particulars Segments
Core construction
KNR Standalone
business
Kerala BOT Roads toll
Muzaffarpur Barauni BOT Roads toll
Real Estate Land on Book
Total
Source: HDFC sec Inst Research
KNR CONSTRUCTIONS : RESULTS REVIEW 3QFY17
gearing. Apart from that, improvement in the working
capital cycle (driven by 10% interest-free mobilisation
advances on NHAI road EPC order) will keep debt
under check.
Investments in the roads sector will continue to drive
stock performance, and KNRC with its strong execution
skills is likely to benefit from the pick-up in order
inflowsi. Owing to strong price performance we
downgrade KNRC to NEUTRAL from BUY stance with
SOTP-based target price of Rs 174/share (previous Rs
174/sh).
We value the (1) Standalone EPC business at
Rs 151/share (15x one-year forward Mar-19E EPS), (2)
Kerala BOT at Rs 14/share (at 0.5x P/BV of equity
invested), (3) Muzaffarpur Barauni BOT at Rs 4/share
(at 1x P/BV of equity invested), and (4) Real estate at
Rs 5/share (at 1x P/BV of amount invested).
Value Value per share
Rationale
(Rsmn) (Rs)
21,217 151 At 15x Mar-19E EPS
1,985 14 At 0.5x P/BV(x) of invested equity
530 4 At 1x P/BV(x) of invested equity
694 5 At book value in balance sheet
23,896 174
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 KNR CONSTRUCTIONS : RESULTS REVIEW 3QFY17

Income Statement (Standalone) Balance Sheet (Standalone)

Year ending March (Rs mn) FY15 FY16 FY17E FY18E FY19E Year ending March (Rs mn) FY15 FY16 FY17E FY18E FY19E
Net Revenues 8,761 9,025 14,422 16,117 18,609 SOURCES OF FUNDS
Growth (%) 5.0 3.0 59.8 11.8 15.5 Share Capital 281 281 281 281 281
Material Expenses 6,696 6,805 11,307 12,652 14,641 Reserves 5,411 6,988 8,360 9,630 11,011
Employee Expenses 381 435 649 709 819 Total Shareholders Funds 5,692 7,270 8,642 9,911 11,293
Other Operating Expenses 423 231 433 484 558 Long Term Debt 2 70 83 83 83
Operating Profits 1,261 1,554 2,033 2,272 2,590 Short Term Debt 962 1,098 1,598 1,448 1,348
Operating Profit Margin (%) 14.4 17.2 14.1 14.1 13.9 Total Debt 964 1,168 1,681 1,531 1,431
Other Operating Income 82 - 135 141 147 Deferred Taxes (239) (276) (276) (276) (276)
EBIDTA 1,344 1,554 2,168 2,414 2,738 TOTAL SOURCES OF FUNDS 6,417 8,162 10,047 11,166 12,448
EBIDTA (%) 15.3 17.2 15.0 15.0 14.7 APPLICATION OF FUNDS
EBIDTA Growth (%) 2.7 15.7 39.5 11.3 13.4 Net Block 2,243 2,409 2,780 2,957 2,901
Depreciation 541 431 628 723 806 CWIP 26 59 59 59 59
EBIT 803 1,123 1,540 1,690 1,932 Investments, LT Loans & Advances 1,885 3,846 4,819 4,819 4,819
Other Income (Incl. EO Items) 42 305 259 388 369 Total Non-current Assets 4,154 6,314 7,659 7,835 7,780
Interest 122 126 230 319 280 Inventories 359 353 679 992 1,273
PBT 723 1,301 1,569 1,760 2,021 Debtors 1,765 1,294 2,632 2,940 3,391
Tax (7) (310) 165 457 606 Cash & Equivalents 157 161 1,209 1,980 2,733
RPAT 730 1,611 1,405 1,302 1,414 ST Loans & Advances, Others 3,360 4,382 3,797 3,209 3,795
EO items (net of tax) - (720) (110) - - Total Current Assets 5,642 6,190 8,317 9,121 11,193
APAT 730 891 1,295 1,302 1,414 Creditors 705 1,121 1,580 1,766 2,039
APAT Growth (%) 19.7 22.1 45.3 0.6 8.6 Other Current Liabilities & Provns 2,674 3,223 4,349 4,025 4,486
EPS 5.2 6.3 9.2 9.3 10.1 Total Current Liabilities 3,379 4,343 5,930 5,791 6,525
EPS Growth (%) 19.7 22.1 45.3 0.6 8.6 Net Current Assets 2,262 1,847 2,387 3,330 4,668
Source: Company, HDFC sec Inst Research TOTAL APPLICATION OF FUNDS 6,417 8,162 10,047 11,166 12,448
Source: Company, HDFC sec Inst Research

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 KNR CONSTRUCTIONS : RESULTS REVIEW 3QFY17

Cash Flow (Standalone) Key Ratios (Standalone)

Year ending March (Rs mn) FY15 FY16 FY17E FY18E FY19E FY15 FY16 FY17E FY18E FY19E
PBT 723 1,301 1,569 1,760 2,021 PROFITABILITY (%)
Non-operating & EO items 47 (28) - - - GPM 23.6 24.6 21.6 21.5 21.3
Interest expenses 128 127 230 319 280 EBITDA Margin 15.3 17.2 15.0 15.0 14.7
Depreciation 541 431 628 723 806 EBIT Margin 9.2 12.4 10.7 10.5 10.4
Working Capital Change (516) 712 (593) (171) (585) APAT Margin 8.3 9.9 9.0 8.1 7.6
Tax paid (251) 22 (165) (457) (606) RoE 13.5 13.8 16.3 14.0 13.3
Core RoCE 18.5 33.5 34.3 28.6 27.6
OPERATING CASH FLOW ( a ) 671 2,565 1,669 2,173 1,916
RoCE 13.3 12.8 14.9 13.8 12.9
Capex (310) (641) (1,000) (900) (750)
EFFICIENCY
Free cash flow (FCF) 361 1,924 669 1,273 1,166
Tax Rate (%) (1.0) (23.8) 10.5 26.0 30.0
Investments 60 (1,950) 127 - -
Asset Turnover (x) 1.9 2.1 2.8 2.5 2.4
INVESTING CASH FLOW ( b ) (250) (2,591) (873) (900) (750)
Inventory (days) 15 14 17 22 25
Share capital Issuance - - - - - Debtors (days) 74 52 67 67 67
Debt Issuance 56 204 513 (150) (100) Payables (days) 29 45 40 40 40
Interest expenses (130) (123) (230) (319) (280) Cash Conversion Cycle (days) 59 21 44 49 51
Dividend (33) (68) (33) (33) (33) Other Current Assets (days) 140 177 96 73 74
Others (302) 16 Other Current Liab (days) 111 130 110 91 88
FINANCING CASH FLOW ( c ) (409) 30 251 (501) (413) Net Working Capital Cycle (Days) 88 68 30 31 38
NET CASH FLOW (a+b+c) 13 4 1,047 771 753 Debt/EBITDA (x) 0.7 0.8 0.8 0.6 0.5
Opening cash balance 112 157 161 1,209 1,980 Net D/E 0.14 0.14 0.05 (0.0) (0.1)
Closing Cash & Equivalents 124 161 1,209 1,980 2,733 Interest Coverage 6.6 8.9 6.7 5.3 6.9
Source: Company, HDFC sec Inst Research PER SHARE DATA
EPS (Rs/sh) 5.2 6.3 9.2 9.3 10.1
CEPS (Rs/sh) 9.0 9.4 13.7 14.4 15.8
DPS (Rs/sh) 0.2 0.4 0.2 0.2 0.2
BV (Rs/sh) 40 52 61 70 80
VALUATION
P/E 33.7 27.6 19.0 18.9 17.4
P/BV 4.3 3.4 2.8 2.5 2.2
EV/EBITDA 18.9 16.5 11.6 10.0 8.5
OCF/EV (%) 2.6 10.0 0.1 0.1 0.1
FCF/EV (%) 1.4 7.5 2.7 5.3 5.0
FCFE/Market Cap (%) 1.2 8.1 3.9 3.3 3.2
Dividend Yield (%) 0.1 0.2 0.1 0.1 0.1
Source: Company, HDFC sec Inst Research

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 KNR CONSTRUCTIONS : RESULTS REVIEW 3QFY17

RECOMMENDATION HISTORY
Date CMP Reco Target
KNR TP
16-Feb-16 91 BUY 160
190 31-May-16 108 BUY 160
170 16-Aug-16 128 BUY 160
150 15-Nov-16 140 BUY 174
130 6-Jan-17 169 BUY 174
110
14-Feb-17 175 NEU 174
90
70
50
Rating Definitions
BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period

Dec-16
Oct-16
Aug-16
Apr-16

Nov-16

Jan-17
Feb-16

Sep-16

Feb-17
May-16

Jun-16

Jul-16
Mar-16

NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period
SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

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 KNR CONSTRUCTIONS : RESULTS REVIEW 3QFY17

Disclosure:
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Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further
Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest.
Any holding in stock No

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