Apply for KNR Constructions IPO: Arihant Cap Mkts

2008-01-25 14:25:22 Source : moneycontrol.com


Arihant Capital Markets has come out with research report on KNR Constructions IPO. The firm has recommended subscribing to the issue.

KNR Constructions, an infrastructure project development company, has opened for subscription with an initial public offering (IPO) of 7,874,570 equity shares of Rs 10 each for cash at a price to be decided through a 100% book-building process.

The issue will close for subscription on January 29, 2008. The price band has been fixed between Rs 170 and Rs 180 per equity share

Arihant Capital Markets report on KNR Constructions IPO

Investment Positive

Strong Order Book

Order book is considered an indicator of potential future performance since it represents a significant portion of the likely future revenue stream. The value of work remaining to be completed from order book as of November 30, 2007, was Rs 1733.82 crore. The current order book of the company is around 5.4x of the operational income for the period ended March 07 with an execution period of 24 – 30 months.

Currently the company has 25 projects on hand across various states in India covering Uttar Pradesh, Assam, Karnataka, Andhra Pradesh and Tamil Nadu. Most of the company’s road projects under execution are with their joint venture partner, Patel Engineering Ltd with whom they have a business association for the past 7 years.

Good clientele base

Most of KNRC’s clients are governmental agencies like the NHAI, and public works department under the State Governments of Andhra Pradesh, Madhya Pradesh, Karnataka, Tamil Nadu and Uttar Pradesh. They have also been executing projects, funded by multilateral agencies like World Bank and Asian Development Bank.

Expertise in sourcing and maintaining supply chain for raw material

One of the primary raw materials required for all road constructions projects is stone aggregate. KNRCL’s requirement is met out of boulders crushed through their own crushers at various sites. It enables to control the operating costs and the project execution period. Procurement from the captive quarries has also enabled an assured supply on a timely basis at reasonable prices.

Concerns

Competition

KNRCL operates in a competitive environment. While service quality, technical ability, performance record, experience, health and safety records and the availability of skilled personnel are key factors in client decisions among competitors, price is often the deciding factor in most tender awards. KNRC mainly competes with domestic Indian entities in the different segments in which they operate. Some of key competitors are MSK Projects Limited, Patel Engineering, Sadbhav Engineering Limited, and Madhucon Projects Limited.

Heavy dependence on road transportation engineering projects

As on September 30, 2007 revenues from road transportation-engineering segment has contributed to approximately 95% of the income from operations on consolidated basis. The balance order book of the Company as on November 30, 2007 also reflects substantial dependence of Company on the segment, 89.34% of the total balance order book position.

This segment is able to generate operating revenues of about 12.5%-13% on the upper side. Also KNRCL’s operations primarily comprise of contracts under the NHDP awarded by NHAI, which is a government agency and various State Governments. There may be delays associated with collection of receivables from the Government, Government owned or controlled entities. KNRCL also derives a major portion of the revenues from contracts, which they have/are jointly executed/executing with Patel Engineering Limited.

Valuations

The issue is priced at 23.94x FY07 earnings on post issue capital at floor price and at 25.35x at cap price.

Recommendation

With an order book of Rs 1734 crore for a period of 24 – 30 months which translates to 5.4x of FY 07 revenues, KNRCL seems to be well positioned to take advantage of the opportunities showing good growth prospects in the future.

Based on the valuations of 23.94x and 25.35x at a price band of 170 and 180 respectively the issue looks to be reasonably priced as compared to its peers. With the gearing up of infrastructural development, aggressive development plans and strong order book in hand we believe KNRCL is well poised to take advantage of the opportunity Also the current order book provides strong visibility for the future revenue growth of the company. We recommend our investors to subscribe to the issue with a long term view.