Cut FY21/22F EPS by 27%/10% to reflect Covid-19-linked headwinds; despite strong ramp-up in execution, realisation of payments from Telangana state is a key watchable; we turn ‘neutral’ with a lower TP of Rs285. KNR Construction reported strong execution in Q1FY21 with revenue growing 3% YoY to Rs 4.8billion (vs our estimate of Rs 4.3billion), and ebitda margin of 19.7% was significantly higher than our estimate of ~16%. However, despite execution strength, our risk perception of the stock has increased leading to our cautious stance.
Telangana state revenues have been adversely impacted by the Covid-19-linked lockdowns, with further funds being devoted to combat the pandemic. This has constrained infrastructure spending from the state budget. Furthermore, unlike other state projects, irrigation projects are fully state funded (unlike in Karnataka where certain state roads are multi-lateral funded), and until bank funding is available, making payments may be challenging for the state. Already, KNR’s debt levels have risen by Rs1.2 billion vs FY20, with receivables from Telangana alone standing at Rs1.26 billion, with another Rs4.41billion of unbilled revenue.
