This Quality Low Leveraged Mid-Cap Infra Company in the Construction Sector is Trading at Attractive Valuations


In the middle of 2017, just before India’s roads sector started showing signs of improvement after years of consolidation, the management of KNR Constructions had a difficult choice to make. Led by father-son duo, Narasimha and Jalandhar Reddy is one of the best quality Infra Company that you can put your bet. Amid a massive correction in mid – and small-cap construction companies, KNR has significantly stood tall and courageous. With investors increasingly trimming exposure to debt-heavy infrastructure businesses, KNR has a clear advantage on that front. However, the most important question is: can an infrastructure company be wary of debt and still be successful in business for long?


Regardless of the worry in the Construction Industry, KNR Constructions (CMP: Rs 220, Current Market capitalization: Rs 4,000 crore) has beaten its companions because of solid execution, reasonable administration of the money cycle and attention on accounting report quality.

In the financial year 2019, the organization announced a debt to equity of just 0.70 times. Interest coverage remained at 4.22 times. Strikingly even at this low financial leverage of the organization further designs to deleverage its book of accounts. It as of late went into a concurrence with Cube Highways to sell its whole stake in the Walayar street venture at an endeavor estimation of Rs 530 crore.

As of September 2019, debt on the undertaking was at Rs 140 crore. Therefore, the value estimation of the arrangement is evaluated at ~Rs 390 crore or P/Inv of ~1x. This is in accordance with our valuation of the venture. There are further National Highway Authority of India claims and other legislative instrumentalities, which are a go through to KNR as and when figured it out. Considering, the arrangement worth may outperform our valuation of the project.

The exchange is probably going to wind up in another two-three months. We factor in continues of Rs 390 crore by March-end 2020. KNR has just monetized three of its HAM ventures. We expect the accounting report to reinforce further with a net money position of >Rs 200 crore/500 crore by FY21/22. The organization has the best accounting report position among mid-cap road infra EPC organizations. This should bolster premium valuations for KNR, in our view.

This is uplifting news from the asset report point of view. The task has a debt of near Rs 140 crore. To that degree, the monetary record will be further deleveraged. Truth be told, post this arrangement the monetary record would have net money. This will give a tremendous favorable position in the market when new offers open for road and highways ventures because a large portion of KNR’s companions experiences the ill effects of high money related influence and absence of financing from the banks.

This is very useful for an organization that is making a profit before interest, taxes, depreciation, and amortization (EBITDA)margins of right around 20 percent and arrival on the value of 19 percent. A blend of better yield proportions, better margins, money in the books and great income permeability should assist the organization with improving valuations. As of now, these elements are not reflecting in their valuations. The organization is as of now exchanging at 13 times its FY21 evaluated profit, which is very modest in the light of nature of the business and income development.

We are expecting income development of around 18-20 percent throughout the following two years. Our certainty essentially originates from KNR’s solid order book of near Rs 4000 crore, which is 1.9 times its financial 2019 incomes. Also, the request permeability is relied upon to go up in the coming a long time with the organization’s improved capacity to offer for new activities because of the monetization of the assets of the road.

Aside from the incomes which will be to a great extent driven by the higher-order book, resource monetization will bring about an expansion in treasury revenues gains accordingly facilitating strong support to the stellar and solid earnings.

After the announcement of the National Infrastructure Pipeline project worth Rs 102 lakh crore by the Union Finance Minister Nirmala Sitharaman some months back, the infrastructure sector is predicted to ramp up momentum in the next few quarters. Since KNR constructions is a well balanced and experienced infra player, it is forecasted to get the massive advantage of this Modi Government’s NIP launch. Apart from this, KNR Construction is showing a strong buying by small retail investors. Hence, I would advise share market investors to add KNR Construction in your portfolio at every dip and the current market price is trading around 200 with a target of Rs 400 in two to three years.

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