KNR Constructions - valuations reasonable

KNR Constructions, yet another small construction company aiming to benefit from the vast opportunities in the construction sector and also to scale up its business, intends to raise Rs 133-141 crore through its initial public offer of 78.74 lakh shares at a price band of Rs 170-180 per share.

KNR, which is mainly into construction of roads and having recently diversified into the irrigation & water supply and urban infrastructure, generates about 70 per cent of revenue from southern India. The boom in road construction has helped the company grow its revenue and net profits over the last few years. KNR's turnover has increased from Rs 182 crore in FY 03 to Rs 324 crore in FY07 (CAGR of 15.5 per cent), while its net profit during the same period has grown from Rs 7.11 crore to Rs 20.40 crore (CAGR of 30 per cent).

While growth has been reasonable, it will improve substantially due to a robust order book and better industry outlook. Its order book expanded from Rs 200 crore in FY05 to Rs 1,734 crore (as on November 30, 2008)-- over five times its 2007 revenue, thus providing strong revenue and earning visibility.

Besides, as a part of growth strategy and to support its growing business needs, the company proposes to invest Rs 21.48 crore towards capital equipment followed by Rs 25.20 crore for increasing working capital and Rs 78.34 crore as investment in the build own and transfer (BOT) projects.

The company currently has two BOT road projects worth over Rs 1,040 crore in joint venture with Patel Engineering. KNR, which owns a 40 per cent stake in each of these JVs, will benefit by way of executing the construction work of worth Rs 800 crore besides, an annuity income once the project is completed after two years. The JV is expected to receive a gross annuity of Rs 154 crore per year, after which operating expenses and interest costs will be deducted.

Additionally, post this IPO, KNR's networth would rise from Rs 70.20 crore as on September 2007, to Rs 195 crore. This increase will help company improve its debt:equity at 0.95 times as compared to current ratio of 2.6 times. A higher networth will also help the company in qualifying for larger projects independently and thus, scale up its business going forward.

At the offer price of Rs 170-180, it is priced at 24-25 times its FY07 earnings and 18-19 times its FY08 annualised earnings . The valuations are reasonable considering the peer group companies like Pratibha Industries, Gayatri Projects and Tantia Construction, which trade between 20-25 times FY07 earnings. For H1FY08, KNR reported a net profit of Rs 12.8 crore.

This is expected to be higher at around Rs 19 crore in the second half, as typically, the first half numbers are lower due to monsoon. For the full year, the fully diluted EPS is expected around Rs 10, translating to a PE of 17-18 times. To sum up, a strong order book of over five times its FY07 revenue and to be executed in about 24 months translates in revenue and earnings growth of over 50 per cent over the next two years and thus support valuations.

Issue Opened: January 24, 2008 Issue closes: January 29, 2008