{LONGTERMINVESTORS} KNR Constructions; Call Success - Balrampur Chini Mills, Hindustan Zinc

 

March 31, 2016
KNR Constructions: Recent order inflows pump up order book – BUY CMP: ₹506, 1-yr Target: ₹655, Upside: 30% KNR Construction, incorporated in 1995, possesses strong expertise in executing EPC projects. KNR which is primarily focused on the roads and highways segment, has strong track record in timely and successful execution of projects across India and has secured repeat orders on continuous basis. It experienced a significant order inflow during FY16 and currently sits on an order book of ~₹3,500cr (whopping ~4x FY15 revenues), which is a threefold increase from the order book position during last year. KNR was always an EPC player, but it also took up select BOT projects to counter slowdown. The company now intends to focus purely on the asset light EPC space, which would help it maintain leverage. Further, the company would benefit from road awards during the next couple of years, especially considering that EPC route will likely dominate future road awards. KNR has generated one of the strongest operating margins on a consistent basis compared with peers, driven by strong execution capabilities, tight cost control, selective subcontracting, and strong fleet of equipment. KNR's comfortable balance sheet position with leverage of ~0.2x would help it deliver robust earnings growth. With highest ever order book and focus shifting back to EPC space, we believe topline is set to clock ~30% CAGR during FY16-18E. Despite strong growth prospects, KNR's standalone EPC business is trading at attractive P/E of 13x FY18E EPS. We have valued the EPC business at 15x and the BOT toll projects based on book value to arrive at a SOTP target price of ₹655, which implies an upside of 30%. We recommend BUY on the scrip.
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Balrampur Chini Mills – Call Success Reco Price: ₹99, Call Closure Price: ₹115 We had recommended a BUY on Balrampur Chini in an Express Idea dated March 16, 2016 with a target price of ₹115. The stock surpassed our target in yesterday's session translating into a return of 16% in just nine trading sessions. We close our Express Idea recommendation. Separately, we had also recommended BUY on the stock in our Q3 FY16 result update dated Feb 10, 2016 with a 1-year target price of ₹110. The stock touched our target yielding a return of 34% and we close our reco. Although we remain positive on sugar prices, for now we keep stock rating and 1-year target under review as we reassess valuation on the back of outlook for 2016-17 cane costs post a management feedback.
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Hindustan Zinc Ltd – Call Success Reco Price: ₹142, Call Closure Price: ₹183 We had recommended BUY on Hindustan Zinc Ltd in our Q3 FY16 Result Update released on Jan 22, 2016 with a target price of ₹183. The stock surpassed the target in today's trading session yielding a return of 28.8%. We believe HZL's earnings growth would remain strong on the back of higher mined metal output and a marginal rebound in metal prices. Though we like the stock, we believe upside would remain capped from current levels. One can book profits at current levels or investors can hold for a dividend of ₹ 24/share. The record date for the dividends will be April 7, 2016.
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Warm Regards, Amar Ambani Head of Research, IIFL
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