KNR Constructions

KNR Constructions is entering the capital market on 24^th January 08, with a public issue of Rs.78.75 lakh equity shares of Rs.10 each in the band of Rs.170 to Rs.180 per share.

The company is a pure contracting company, executing road and irrigation projects and most of the road projects were executed and are under execution with JV partner Patel Engineering Ltd. The unexecuted order book of the company, as at 30^th November 2007, was at Rs.1,734 crores, of which about 89% is for road transportation engineering projects, with 68% of total orders having received from Central Government organizations and about 73% of the contract is  from Southern region. Presently, the company has about 2 BOT road projects on annuity basis, which are essentially assured return, low-risk model.

For FY 07, the topline of the company was at Rs.332 crores with EBITDA of Rs.52.54 crores, resulting in a margin of 15.83%. PBT was placed at Rs.26.92 crores while PAT was at Rs.20.40 crores, resulting in an EPS of Rs.10.10.

For 6 months ending 30^th September 07, the total income of the company was at Rs.242 crores with EBITDA of Rs.37.17 crores resulting in a margin of 15.36% with PBT of Rs.20.20 crores and PAT of Rs.13.55 crores. On post issue equity of Rs.28.12 crores, EPS of FY 08 is likely to surpass Rs.10.

Now let's have a look at the valuations of the company. At the upper band of Rs.180, it will have a market capitalization of Rs.510 crores. Adding debt thereto, of Rs.190 crores, EV of the company works out to Rs.700 crores. This translates into order to market cap of about 2.5 times.

On expected EPS of Rs.10 for FY 08 share is valued at a PE of about 18 at the upper band. The construction equipments of over Rs.185 crores at the gross level, gives an added margin and advantage to the company. That could be one of the reasons why large projects are being procured by the company, as average size of each work is of about Rs.70 crores.

Promoters' stake of close to 72% of expanded equity base is also assured feature.

The company is mobilizing funds mainly to invest in BOT projects of about Rs.80 crores, purchasing equipments of Rs.21 crores and for working capital of Rs.25 crores. At the upper band of Rs.180, the company should be able to mobilize over Rs.140 crores. Improved capital base coupled with better net worth of the company, should enable it to go alone, for projects with better margins.

In view of recent fall in the secondary market, existing contracting companies have corrected sharply and are available at a PE multiple of anywhere between 12 to 15, based on FY 08 results. The valuation of this company at the upper band of Rs.180, gives a multiple of about 18 times, which is quite expensive.

In this situation, it would be better to go for peers available in the secondary market, as the upper band of Rs.180 is quite expensive. Even lower band of Rs.170 per share results in a multiple of 17 times which is quite high.

So now that you know, better to give a pass to this issue.