KNR CONSTRUCTION

Overflowing EPC order book!

Promoted in 1995 by Narasimha Reddy, who has a rich experience of 50 years in infrastructure development, the company is a unique provider of engineering, procurement and construction (EPC) services. It is engaged in the fast-growing sector of roads and highways, and has an established presence in irrigation and urban water infrastructure management. It is known for its industry-leading operating margin (standing around 20 per cent in recent years), best-in-class working capital cycle, a robust order book (Rs 11,400 crore as on March 31, 2021) and efficient and timely execution of projects. Obviously, this is an excellent addition to the portfolio of every discerning investor

Consider:

• KNRCL’s efficiency in execution of various projects is legendary in today’s infrastructure development space. With its rich experience of a quarter of a century, it has established a highly impressive track record of executing projects ahead of schedule. The company employs a backward integration model powered by a wide range of equipment assets and in-house quarry mines, with minimal sub-contracting. This, in turn, has enabled the company to enjoy good EBITDA margins of 14 to 15 per cent and PAT margins of 7 to 7.5 per cent respectively during the last five years.
• The company has been able to build up a robust order book. The strong order book of Rs 7,117.9 crore (Rs 4,088.8 crore for 5 road projects and Rs 3,109.1 crore in the irrigation sector) as on March 31, 2021 took the total order book to Rs 11,400 crore, including L&T orders of Rs 4,320 crore. This provides visibility of 3 to 4 years. There are 4 to 5 more process bids that are underway – each of Rs 7,000 crore — in fiscal 2022. The order book comprises (a) an elevated highway along Avinashi Road in Coimbatore City – EPC for Rs 989.6 crore, (b) Magadi to Somwarpeth project — a HAM (hybrid annuity model) for Rs. 634.4 crore (c) Chevyarpesha Panayur Road – EPC for Rs 539 crore, (d) Oddanchatram to Modathukulam project – HAM for Rs 468.8 crore, (e) Trichy Tokallgram project – HAM for Rs 263.1 crore, (f) Other road projects for Rs 1,139 crore and (g) Irrigation projects for Rs 3,109.1 crore.
• Many more projects are lined up, which include the Palamal Irrigation Project (expected to start in the first half of 2022), the Habi Hotspot (to be completed in the current year), a recent LOA of six-laning of Ramanattu Kara junction of Valanchery bypass section of NH-66 with a bid price of Rs 1,745 crore, and a recent LOA of six-laning from the start of Valanchary bypass with a bid price of Rs 1,595 crore.
• Going ahead, the flow of orders for KNRCL will continue unabated as the government is keen to develop infrastructure at a fast pace. The government’s focus on the development of health institutions and urban infrastructure will be continually sustained in the coming years. The Railways have been the other major driver for the EPC segment, which has always managed to attract higher budgetary allocations. These segments are likely to further get a push in the coming years as the government plans health, education, Smart Cities and Housing for All projects. Further, FDI in India in the infra sector is less than 1 per cent of the GDP, compared to 2.4 per cent in China and 1.8 per cent in Brazil. Thus, the future prospects for KNRCL are all the more bright going ahead.

The company has been steadily growing on the financial front. During the last 10 years, its revenues have expanded from Rs 899 crore in fiscal 2010 to Rs 2,904 crore in fiscal 2021, with the net profit zooming from Rs 66 crore to Rs 473 crore. Within the next five years, the company’s sales turnover is expected to cross the Rs 5,000- crore mark, with a corresponding improvement in earnings. The stock is worth including in the portfolio of every smart investor.

CONSOLIDATED PERFORMANCE INDICATORS (Rs. in crore)

SOUTH INDIAN BANK

Regrowth with new focus

South Indian Bank, a small bank headquartered at Thrissur in Kerala, has been facing unfavourable head winds on account of the Covid-19 pandemic. The bank, with 924 branches spread throughout the country, 4 service branches, 53 extension counters, 20 regional offices, 1,500 ATMs and 91 cash deposit machines, has put up a highly disappointing performance during the pandemic year ended March 2021, with a steep fall in income and earnings. But the management has chalked out a comprehensive plan to take the bank out of the rut and put it back on the path of growth. In other words, the bank will be on the path of revival going ahead.

Just Consider:

• The bank was doing quite well of late. During the last five years, its income expanded from Rs 5,847 crore in fiscal 2017 to Rs 6,193 crore in fiscal 2018 and further to Rs 7,784 crore in fiscal 2020. But its income fell back to Rs 7,305 crore in fiscal 2021 and the profit at net level steadily declined from Rs 392.50 crore in fiscal 2017 to Rs 247.53 crore in fiscal 2019, nosedived to Rs 104.59 crore in fiscal 2020 and further slumped to Rs 81.91 crore in fiscal 2021, with the earnings per share (EPS) dwindling from Rs. 2.18 in fiscal 2017 to just 30 paise in fiscal 2021. Needless to say, the company, which had paid dividends at the rate of 40 per cent for fiscal 2017 and fiscal 2018, was forced to skip it altogether for the last two fiscal years – 2020 and 2021.
• Unfortunately, the bank has started the new fiscal year 2022 on a highly depressing note. with its net profit in Q1 (April-June 2021) plunging 88 per cent yoy to Rs. 10.31 crore from the level of Rs 82 crore earned in the corresponding quarter last year. The sharp drop in earnings was attributed to the growth in the business and personal loan segments.
• Prospects for fiscal 2022 are also not rosy, as Murali Ramakrishnan, Managing Director and CEO, expects the asset quality to continue deteriorating and the slippage ratio for the year to be 3.3 to 3.4 per cent, as recovery efforts will be extremely difficult.
• However, with a view to changing the business environment, Mr Ramkrishnan is working on short- and mediumterm growth strategies to remain competitive in the new environment. In fact, he has identified of many focus areas, including beefing up capital to strengthen the balance sheet, a focused drive on building strong and low-cost CASA book, leveraging of the strong distribution network to increase business, strengthening of NRI relationships, and augmenting the talent of young resources.
• Maintains Mr Ramkrishnan, “As per the strategy of the bank, the corporate portfolio was consciously de-drawn and is presently at 25 per cent of the total advances portfolio. Also, the stressed accounts in the large corporate book which were identified, have either turned into NPAs or have been sold to ARC, barring a few which are closely monitored. Going forward, the focus will be to continue to grow retail MSME, SME and agriculture with a selective corporate focus. We expect the need for provisioning to be less as the risk will be diversified. Select business focus and diversification of advance portfolio will ensure that the stress on account of provisions will be minimal, thus contributing to sustained income and investor confidence.”

With this strategy, the company will be back on the path of profitability. Further strengthening the core fee income through advanced technology initiatives and improving the income from bancassurance tie-ups and other third party businesses will further improve the profitability of the bank.

This means that the worst will be over soon and the bank will be back on the growth path after a year. Some good news for investors is the fact that the stock price has dropped to a very attractive level of around Rs 10. Courageous investors can certainly include these shares in their portfolio.

PERFORMANCE INDICATORS (Rs. in crore)