KNR Constructions Limited (KNRCL), a leading Indian infrastructure company, has expertise in engineering, procurement, and construction (EPC) projects with emphasis on road highways, irrigation, and urban infrastructure. The text of its Q3 FY ’25 Earnings Conference Call on February 14, 2025, is a rich source of information about its strategic direction, operational performance, and market positioning as of March 05, 2025. Here is a thorough analysis of its growth strategy, future outlook, challenges, key advancements, and whether it is a good investment opportunity or not.
Growth Strategy
KNRCL’s growth plan is multi-pronged, focusing on diversification of its portfolio, enhancing its order book, and riding the infrastructure boom in India. Important aspects are:
Order Book Expansion:
Target: The target of the company is to achieve an order inflow of INR 6,000 crores to INR 10,000 crores by September 2025 with a near-term target of achieving INR 8,000 crores within 2-3 months from February 2025.
Approach: KNRCL is actively bidding in various sectors:
Highways: Bidding in National Highways Authority of India (NHAI) projects such as large-sized HAM (Hybrid Annuity Model) and BOT (Build-Operate-Transfer) toll projects.
- Irrigation: Focusing on HAM-based irrigation projects in Rajasthan and EPC projects in Madhya Pradesh and Telangana.
- Urban Infrastructure: Targeting flyovers and city development projects in Tamil Nadu, Telangana, and Andhra Pradesh.
- Mining Operations: Entering open mining contracts to diversify revenue.
Partnerships: Partnering with big players such as Adani and Cube Highways for EPC on BOT toll projects, including the Agra-Gwalior bid, so that their financial resources are leveraged with minimum equity exposure.
Diversification:
Going beyond conventional road EPC and HAM contracts, KNRCL is also venturing into state government highways (e.g., Tamil Nadu, Karnataka), irrigation HAM models, and urban infrastructure. This decreases dependency on NHAI, which experienced a slowdown in awards.
Asset Monetization:
KNRCL intends to capitalize on four matured HAM assets:
- Palani Project: Share Purchase Agreement (SPA) to be received in Q1 FY ’26 (June 2025), and monetization by December 2025.
- Three Other Assets: Part Commercial Operation Date (PCOD) by March 2025, with monetization by December 2025.
This will release capital (in the range of INR 1,200 crores) for reinvestment in new ventures, increasing liquidity.
Operational Efficiency:
Focus on the completion of ongoing HAM projects (e.g., Sonwarpet to Magadi at 88%, Valanchery to Ramanattukara at 90%) to release annuity payments and enhance cash flow.
Aiming for early project completion, such as the Karnataka irrigation project, to gain bonuses and increase profitability.
Financial Prudence:
Having a robust balance sheet with a consolidated net debt-to-equity of 0.33 (December 2024) and working capital maximization (working days decreased from 71 to 69).
Future Outlook
KNRCL’s future prospects are linked to India’s ambitious infrastructure plans and its capability to implement its strategy successfully:
Revenue Projections:
FY ’26: Expects a 10-15% decline in topline (INR 3,500 crores to INR 4,000 crores) owing to a dwindling order book and delayed payments in irrigation projects.
FY ’27: If INR 10,000 crores worth of orders come through by June 2025, revenue would potentially cross INR 4,700 crores, assuming execution picks up from July 2025.
Sectoral Opportunities:
Government Support: The FY ’25-’26 Union Budget of INR 2.87 trillion for the Ministry of Road Transport and Highways (MoRTH) indicates strong growth potential. MoRTH is targeting the completion of 4,827 km of highways by the end of FY ’25.
Pipeline: A clear pipeline of INR 25,000 crores to INR 30,000 crores across highways (e.g., Assam’s INR 5,200 crores project), irrigation (Rajasthan’s HAM projects), and urban infrastructure (e.g., Andhra Pradesh’s Capital Development Authority projects).
Margin Expectations:
EBITDA margins are likely to settle at 15-15.5% in FY ’26 from 20.3% in 9M FY ’25 (standalone) on the back of weaker revenue and competition pressures. However, irrigation projects may provide better margins if awarded.
Cash Flow Boost:
Recovery of INR 977 crores of Telangana irrigation charges (INR 577 crores certified, INR 400 crores under process of certification) and HAM asset sale proceeds may provide INR 2,400 crores in free cash flow in a year, although INR 401 crores will be invested in HAM equity during FY ’27.
Challenges
Order Book Depletion:
As of December 31, 2024, the book order is INR 5,517 crores (including INR 429 crores of January 2025 irrigation orders), realizable within 1.5-2 years. This is low against 9M FY ’25 revenue of INR 2,507 crores, suggesting minimal visibility beyond FY ’26 in absence of fresh orders.
Aggressive Competition:
NHAI projects experienced bids at minus 25-40%, led by unlisted players and marginal contractors, narrowing margins and trimming KNRCL’s win percentage (usually coming H2 or H3 in bids).
Payment Delays:
Material receivables from Telangana (INR 977 crores) are still outstanding, with receipt of only INR 37 crores in January 2025. The delays continue notwithstanding legal proceedings and negotiations, tightens liquidity.
Equity Constraints:
HAM and BOT ventures involve high equity (12-15% of project expense). Although KNRCL can undertake INR 5,000 crores-plus projects, its equity is “valuable” and restricts independent bids while requiring associations.
Execution Risks:
Aggressive bidding by the competition has contributed to sub-standard construction and tardiness across the industry, something that could ultimately affect KNRCL’s credibility if associated with such projects through partnerships.
Regulatory Uncertainty:
NHAI’s L1 (lowest bid) criterion favors aggressive bidders, and despite PMO reviews advocating larger projects, policy changes are uncertain, posing risks to KNRCL’s bidding strategy.
Key Advancements
Financial Performance:
Independent 9M FY ’25: Revenue of INR 2,507 crores, EBITDA 4% higher at INR 508 crores, and net profit jumped 142% to INR 650 crores, led by arbitration claims (INR 35.6 crores revenue, INR 103.5 crores interest).
Consolidated 9M FY ’25: Revenue increased 25% to INR 3,778 crores, EBITDA increased 109% to INR 1,404 crores, and net profit increased 142% to INR 994 crores, showcasing robust HAM contributions (60% of Q3 revenue).
Arbitration Success:
Received INR 139.1 crores (INR 35.6 crores revenue, INR 103.5 crores interest) from Patel KNR Heavy Infrastructures, enhancing Q3 profitability and evidencing successful dispute resolution.
Project Progress:
HAM projects are in the final stages of completion (e.g., 84-90% completion for four projects), setting KNRCL up for annuity receipts and monetization of assets.
Strategic Partnerships:
Discussions for MOUs with Adani for BOT toll EPC contracts (e.g., Agra-Gwalior) and negotiations with Cube Highways improve KNRCL’s exposure to large-ticket projects without over-leveraging its balance sheet.
Sectoral Diversification:
Forays into mining and urban infrastructure, complemented by irrigation HAM projects, decrease reliance on NHAI and diversify top lines.
Is KNR Constructions a Good Buy?
Positives:
Strong Financials: Outstanding profit growth (142% consolidated PAT in 9M FY ’25) and low net debt-to-equity ratio (0.33) suggest financial health.
Government Tailwinds: India’s infrastructure push (e.g., INR 2.87 trillion budgetary allocation) is in sync with KNRCL’s strengths.
Asset Monetization: Up to INR 1,200 crores from sale of HAMs can be used to fund growth, repay debt, or return to shareholders.
Order Pipeline: A INR 25,000 crores to INR 30,000 crores opportunity pool has substantial upside if KNRCL achieves its INR 8,000 crores to INR 10,000 crores target.
Proven Execution: High completion rates on HAM projects and arbitration victories demonstrate operational dependability.
Risks:
Order Book Uncertainty: Inability to win new orders may result in revenue plateauing after FY ’26.
Receivables Risk: INR 977 crores blocked with Telangana is a liquidity risk if not resolved.
Margin Pressure: Competitive bidding limits EBITDA margins to 13-15%, short of historic levels (20.3% in 9M FY ’25).
Market Volatility: Infrastructure stocks are responsive to policy changes and macroeconomic developments (e.g., interest rates, inflation).
Investment Verdict:
Valuation Context (Hypothetical as of March 05, 2025):
Assumptions: Assuming market cap of INR 8,000 crores based on historic P/E multiples and revenue, a P/E of 12-15x FY ’26 EPS (estimated PAT of INR 500-600 crores) indicates fair value of INR 285-375 per share.
Current Price: Below INR 300 (hypothetical), can be undervalued with a margin of safety.
KNRCL is a moderate-risk buy for long-term investors. Its growth depends on winning new orders and settling receivables, both of which are execution risks. The stock is worth buying if:
- Priced below INR 300 (fair value of INR 350), which has an upside potential.
- There is faith in India’s infrastructure story and KNRCL to leverage it.
Recommendation: Watch Q1 FY ’26 numbers (July 2025) for order inflow traction and Telangana payment news. A “buy” is warranted if orders cross INR 5,000 crores by June 2025 and receivables fall below INR 500 crores, indicating better cash flow and visibility.
Conclusion
KNR Constructions Limited is well-placed to capture India’s infrastructure expansion, supported by a sound diversification strategy and asset monetization plan. Competitive pressures, delayed payments, and replenishing the order book pose challenges to be navigated with caution, though. It presents a great combination of risks and growth possibilities for investors and is a stock to monitor closely in 2025.