Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank loan facilities of KNR Constructions Ltd (KNRCL) at 'CRISIL AA/Stable/CRISIL A1+’.

 

Operating income grew 9.3% year-on-year to Rs 4,100 crore in fiscal 2024 from Rs 3,752 crore, led by strong execution of work orders in both roads and irrigation projects. Operating margin was steady at 18.7% in fiscal 2024 compared to 19.5% in fiscal 2023. The margin was impacted with booking doubtful advance of Rs 32 crore and doubtful trade receivables of Rs 10 crore for one of its subsidiary companies i.e., KNR Muzaffarpur Barauni Tollway Pvt Ltd (KMBTPL) as the toll revenue of the project is not sufficient to recover the cost of the maintenance and the debt obligation. While operating performance is stable with healthy operating margin and cash accruals, sustenance of the same will remain a key monitorable. Order book to revenue ratio has moderated to 1.6 times as of March 2024 as outstanding order book is lower at Rs 6,505 crore (including two hybrid annuity mode [HAM] projects with no receipt of appointed date [AD]) as of March 2024 compared to Rs 8,872 crore as of March 2023. While KNRCL is expecting order inflow of Rs 5,000-6,000 crore in fiscal 2025 which will strengthen its order book position, order book ramp-up is a key monitorable to provide medium term revenue visibility. Given the lower order book and monsoons in southern part of India affecting execution, operating revenue is expected to stagnate in fiscal 2025 with some moderation in margin.

 

Financial risk profile is robust, as reflected as 0.27 times for total outside liabilities to adjusted networth (TOL/ANW) ratio as on March 31, 2024. Lower debt coupled with healthy profitability have resulted in strong debt protection metrics. KNRCL doesn’t have any external long-term debt outstanding as on March 31, 2024 with networth of Rs 3,226 crore. Capital structure should remain comfortable with minimal external debt with debt protection metrics expected to remain strong; internal accrual is expected to remain sufficient to fund majority of the equity commitment for the ongoing projects. In addition to on-going portfolio of build, operate and transfer (BOT) projects, KNRCL is expected to add more such projects including projects under the BOT-toll model. Size of such projects and equity commitments towards the same will remain key monitorables. Liquidity is supported by low utilisation of bank lines at 18% on average in 12 months through March 2024 and cash and bank balance of Rs 235 crore as of March 2024. Monetisation of existing HAM assets should help KNRCL sustain growth and maintain a healthy financial profile.

 

The rating continues to reflect the established market position of KNRCL in the construction industry, backed by strong project execution capabilities, healthy operating performance and robust financial risk profile and liquidity. These strengths are partially offset by the working capital-intensive operations, and susceptibility to intense competition and cyclicality in the construction industry.

Analytical Approach

CRISIL Ratings has moderately combined the business and financial risk profiles of KNRCL and its special-purpose vehicles (SPVs) for BOT and HAM projects. Debt in special purpose vehicles (SPVs) is non-recourse to the parent, and in line with the moderate consolidation approach of KNRCL. The investment requirement, likely cost overrun in under-implementation projects and cash flow mismatches in operational projects have been factored into the financials of KNRCL.

 

Interest-bearing mobilisation advances of Rs 93 crore as on March 31, 2024 have also been considered as debt (Rs 157 crore as on March 31, 2023). Retention money has been included under receivables.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position and strong project execution capability: Healthy track record of over 25 years in the construction industry and timely project execution have helped KNRCL build strong relationships with National Highways Authority of India (NHAI; CRISIL AAA/Stable), Ministry of Road Transport and Highways (MoRTH), and various state government departments. KNRCL mainly bids for projects floated by various government bodies and funded by apex bodies such as the Asian Development Bank, MoRTH, and NHAI. The fleet of construction equipment enables it to bid competitively for several projects. Furthermore, established relationships with leading players in the infrastructure segment supports joint bidding as well.  

 

The strong project execution capability is reflected in the successful completion of projects under the scheduled time and cost. The robust in-house engineering, procurement and construction (EPC) division undertakes project implementation for BOT/HAM road projects. Execution of projects before the scheduled timeline has also led to receipt of early completion bonuses from the relevant authorities. Till date, KNRCL has successfully executed more than 8,700 lane km of road projects across 12 states in India.

 

• Healthy operating performance: Operating income grew 9% year-on-year to Rs 4,100 crore in fiscal 2024 from Rs 3,752 crore, led by strong execution of work orders in both roads and irrigation projects with operating margin remaining stable at 18.7% in fiscal 2024. While margin is expected to moderate fiscal 2025 onwards on account of increased competition in roads sector leading to bidding aggression, it will remain comfortable at 16-18% going forward. Sustenance of operating performance as demonstrated in the past will remain a key monitorable. Net cash accruals over Rs 500 crore should suffice to capex and incremental working capital requirement apart from minimal debt obligations in medium term.

 

Outstanding order book is lower at Rs 6,505 crore (including two HAM projects with no AD receipt) as of March 2024 compared to Rs 8,872 crore as of March 2023 which has lead to moderation in order book to revenue ratio to 1.6 times. While KNRCL is expecting order inflow of Rs 5,000-6,000 crore in fiscal 2025 which will strengthen its order book position, order book ramp-up is a key monitorable to provide medium term revenue visibility.

 

The roads segment accounts for nearly 68% of the orders with irrigation and pipeline segment contributing 15% and 17% respectively. Within the roads segment, HAM and EPC orders account for 50% and 18%, respectively. Order concentration is high with the top 10 projects forming 85% of the outstanding order book as of March 2024. Strong execution capabilities should support timely completion of projects and aid sustenance of revenue growth.

 

• Robust financial risk profile: Stable operating performance has resulted in steady accretion to reserve, thereby strengthening networth which stood at Rs 3,226 crore as of March 2024. KNRCL doesn’t have any external long-term debt outstanding as on March 31, 2024. Low debt and healthy networth have ensured minimal gearing and TOL/ANW ratios of 0.03 and 0.27 time, respectively, as on March 31, 2024. Lower debt and healthy profitability support the debt protection metrics with interest coverage and net cash accrual to total debt ratios of 37.91 and 6.57 times, respectively, in fiscal 2024. Capital structure should remain comfortable with minimal external debt and large internal accrual funding majority of the equity commitment for the ongoing project with debt protection metrics expected to remain strong.

 

About 16% of networth is locked in investments in the underlying BOT and HAM portfolio as of March 2024. Further, KNRCL plans to invest around Rs 500 crore over fiscals 2025 to 2027, towards its equity commitment in the ongoing HAM projects in the underlying SPVs. KNR has made a provision towards impairment of equity of Rs 55 crore for KMBTPL as toll revenue is not sufficient to fund cash outflows. KNRCL is expected to support its BOT portfolio in future as well in case of any shortfall. Also, size of upcoming BOT-toll projects and equity commitments towards the same will remain a key monitorable. Though bulk of investments are towards HAM projects, they carry lower risk due to the fixed annuity inflow. Monetisation of existing HAM assets should help KNRCL sustain growth and maintain a healthy financial profile.

 

Weaknesses:

• Working capital-intensive operations: The working capital requirement is inherently high in the construction industry, given the dependence on the state and central government authorities for timely receipt of payments. Gross current assets (GCAs; net of cash) stood high at 226 days as on March 31, 2024, driven by receivables of 152 days (125 days as of March 2023). KNRCL has pending receivables of around Rs 700 crore from irrigation projects in Telangana which have stretched the receivables cycle. These pending receivables are expected to be received in fiscal 2025. Nevertheless, over 50% of receivables are from the ongoing HAM asset portfolio, where the debt was undrawn to keep the project cost low. However, improvement in receivable cycle and hence sustenance of working capital cycle will remain a key monitorable.

 

• Susceptibility to intense competition and cyclicality in the construction industry: KNRCL remains exposed to cyclicality inherent in the construction industry and volatility in profitability amid intense competition in the EPC segment. The roads and highways segment accounted for 68% of the order book and the irrigation and pipeline segment formed the balance as of March 2024. With increased focus of the central government on the infrastructure sector, especially roads and highways, KNRCL should reap benefits over the medium term. However, most of the projects are tender-based and hence, intense competition requires KNRCL to bid aggressively to bag contracts. Competition has intensified further as bidding norms were relaxed by MoRTH and NHAI in recent fiscals. While operating margin remains healthy over 18%, intense competition may constrain it going forward. Amidst cyclicality inherent in the construction industry, ability to maintain profitability margin through operating efficiency becomes critical.

Liquidity: Strong

Liquidity is supported by healthy cash accrual, low utilisation of bank lines and moderate cash and equivalents. Net cash accrual over Rs 500 crore should suffice to capex and incremental working capital requirement apart from minimal debt obligations. On an average, the fund-based bank limit of Rs 145 crore was utilised at 18% while the non-fund-based facilities were utilised at 47% over the 12 months through March 2024. KNRCL have cash and equivalents of Rs 235 crore as of March 2024. Additionally, KNRCL also benefits from the track record of promoters to infuse funds via unsecured loans.

Outlook: Stable

CRISIL Ratings believes KNRCL will continue to benefit from its established position in the construction industry and its comfortable financial risk profile.

Rating Sensitivity factors

Upward factors:

• Higher-than-expected revenue growth over 20% while maintaining operating margin on a sustained basis
• Significant geographic and segmental diversification in order book
• Sustenance of financial risk profile through divestment of stake in HAM projects and prudent working capital management

 

Downward factors:

• No significant order inflows resulting in order book-to-revenue ratio remaining below 2 times on a sustained basis
• Decline in revenue and profitability or significant stretch in working capital cycle on a sustained basis
• Large capital expenditure or sizeable investments in existing or new HAM projects, necessitating sizeable equity investment thereby weakening the financial risk profile

About the Company

KNRCL, listed on the Bombay Stock Exchange and National Stock Exchange, was incorporated in 1995. KNRCL provides EPC services, primarily for the roads and highways segment. It has executed infrastructure projects independently and through joint ventures (to leverage the extensive experience and execution capabilities of both parties). This has helped KNRCL bag orders of larger value, in diverse regions. Majority of clients are government agencies, including the central government, NHAI, and the public works departments of state governments. KNRCL has diversified in the past few years, having executed orders related to irrigation and construction of flyovers and bridges. KNRCL has won a pipeline project of Rs 1,105 crore from govt. of Telangana in fiscal 2024.

 

KNRCL has a current portfolio of 8 HAM projects which includes 7 projects awarded by NHAI and one by Karnataka State Highways Improvement Project (KSHIP). Of these, two have received provisional commercial operations date, four are under-construction and two are yet to receive AD.

 

KNRCL also undertakes EPC works of under-construction HAM projects. It also has a BOT portfolio of three assets - one BOT toll and two annuity projects. All BOT projects have been operational for over six years.

Key Financial Indicators (CRISIL Ratings adjusted)

Financials as on/for the period ended	Unit	2024	2023
Revenue	Rs crore	4100	3752
Profit after tax (PAT)	Rs crore	494	499
PAT margin	%	12.0	13.3
Adjusted debt/adjusted networth	Times	0.03	0.06
Interest coverage	Times	37.91	27.25

Note: Above-mentioned financials factor CRISIL Ratings adjustments.

Any other information: Not Applicable