Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facility of KNR Constructions Limited (KNRCL) to 'CRISIL AA/Stable’ from ‘CRISIL AA-/Positive‘. The short-term rating has been reaffirmed at ‘CRISIL A1+’.

 

The upgrade reflects steady improvement in the business risk profile, supported by strong operating performance, a healthy order book and stable working capital cycle along with a healthy financial risk profile. The scale of operations is likely to exceed Rs 4,100 crore in the next two fiscals, from around Rs 3,600 crore estimated in fiscal 2023. A robust pipeline of orders worth Rs 9,900 crore and order book to revenue of 2.53 times will offer healthy revenue visibility. Revenue has recorded a compound annual growth rate of around 11% over fiscals 2019 to 2023 (from Rs 2,144 crore to Rs 3,500 – 3,600 crore). A strong execution track record, along with a healthy order book (approximately Rs 8,100 crore as of December 2022) to revenue ratio of 2.53 times should also aid revenue growth. In fiscal 2023, revenue was driven by execution of orders under the hybrid annuity model (HAM) and those from the irrigation segment. Further, operating margin is estimated at 19% in fiscal 2023, and also likely to sustain in future.

 

Despite moderate working capital requirement, reliance on debt has been low, as liquidity is aided by funds realised through monetisation of HAM projects and healthy cash accrual. Financial risk profile is robust, as reflected as 0.35x for total outside liabilities to adjusted networth (TOL/ANW) ratio as on March 31, 2023. Lower debt, monetisation of completed HAM assets and healthy profitability have resulted in strong debt protection measures. KNRCL entered into an agreement for sale of three HAM projects and the sale proceeds, post completion of these projects have helped the company to sustain its financial risk profile. Monetisation of KNR Palani HAM project, which is in progress, should be completed in fiscal 2024. Net cash accrual of over Rs 500 crore should more than suffice to cover the principal repayment and capital expenditure (capex) requirement in the medium term. Reliance on debt remains low with healthy cash surplus of Rs 179 crore as on March 31, 2023.

 

The ratings continue to reflect the established market position of KNRCL in the construction industry, backed by strong project execution capabilities, healthy order pipeline 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 build, operate, and transfer (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.

 

Furthermore, unsecured loans from promoters are considered as debt as they are interest-bearing (nil outstanding as on March 31, 2023). Interest-bearing mobilisation advances have also been considered as debt (Rs 160.46 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 two decades 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. The company 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 6,000 lane km of road projects in India.

 

Strong order pipeline providing adequate revenue visibility

Strong pipeline of orders worth nearly Rs 9,900 crore and outstanding order to revenue ratio of about 2.53 times provide strong revenue visibility over the medium term. The roads segment accounts for nearly 76% of the orders and the irrigation segment forms the balance. Within the roads segment, HAM and EPC orders account for 49% and 28%, respectively.

 

Order concentration is high with the top 10 projects forming around 90% of the book. The company has an ongoing HAM portfolio of five projects, of which one has achieved the provisional commercial operation date (PCOD) and four are under construction with progress largely on track. These projects will drive revenue growth in the current fiscal. Strong execution capabilities should support timely completion of projects and aid sustenance of revenue growth.

 

Robust financial risk profile

Operating income grew 10% year-on-year in fiscal 2023,  to Rs 3,600 crore, led by strong execution of work orders, mainly HAM and irrigation projects. Operating margin was steady around 19% in fiscal 2023. Stable operating margin has resulted in steady accretion to reserve, thereby strengthening networth.

 

An early monsoon in key operating states could impact order execution in the first half of fiscal 2024, though revenue growth is likely to sustain at 10-12%, supported by the healthy order book. Sustenance of moderate operating performance as demonstrated in the past two fiscals will remain a key monitorable in the near term.

 

Debt remains low, owing to healthy accrual and realisation of sale proceeds from monetisation of HAM projects. The company had no long-term debt outstanding as on March 31, 2023. Low debt and healthy networth have ensured minimal gearing and TOLANW ratios of 0.06 and 0.35 time, respectively, as on the same date. Lower debt and healthy profitability support the debt protection metrics with interest coverage and net cash accrual to total debt ratios of 17.57 and 3.87 times, respectively, in fiscal 2023.

 

Capital structure should remain comfortable with minimal external debt and large internal accrual funding majority of the equity commitment for the ongoing project. Debt metrics will also be strong with interest coverage of over 15 times and net cash accrual to adjusted debt above 2 times in the medium term.

 

About 30% of networth is locked in investments in the underlying BOT and HAM portfolio. Further, the company plans to invest around Rs 500 crore over fiscals 2024 to 2026, towards its equity commitment in the ongoing HAM projects and to meet cash flow mismatches in the underlying SPVs. Bulk of investments are towards HAM projects, but they carry lower risk due to the fixed annuity inflow. Deleveraging through sale of these 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) although high, stood at 192 days as on March 31, 2023, driven by receivables of 107 days (117 days). However, over 50% of receivables were from the ongoing HAM asset portfolio, where the debt was undrawn to keep the project cost low. Receivables should normalise to around 100 days going forward. However, sustenance of working capital cycle will remain a key rating sensitivity factor.

 

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 76% of the order book and the irrigation segment formed the balance. 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 the company to bid aggressively to bag contracts. Competition has intensified further as bidding norms were relaxed by MoRTH and NHAI in the last fiscal. While operating margin remains healthy at 19-20%, 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, unutilised bank lines and moderate cash and equivalents. Cash accrual of Rs 550-600 crore should suffice to meet any annual maturing debt obligation (currently nil long-term debt) and meet the capex and incremental working capital requirement. On an average, the fund -based bank limit of Rs 145 crore was utilised at 15% while the non-fund-based facilities were utilised at 49% over the 12 months through March 2023.

 

Cash and equivalents are projected around Rs 179.18 crore as of March 2023. KNRCL recorded cash surplus of Rs 26.44 crore as on December 31, 2022. Additionally, the company 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

• Substantial increase in scale and profitability supported by improvement in geographic and segmental diversity, resulting in cash accrual of over Rs 1,000-1,200 crore
• Sustained improvement in financial risk profile through divestment of stake in HAM projects, prudent working capital management leading to significant build-up of cash surplus

 

Downward factors

• Decline in revenue and profitability resulting in cash accrual of less than Rs 500 crore on a sustained basis
• Significant stretch in working capital cycle
• Large capital expenditure or sizeable investments in existing or new HAM projects, necessitating sizeable equity investment thereby weakening the financial risk profile and leading to gearing of over 1 time

About the Company

KNRCL, listed on the Bombay Stock Exchange and National Stock Exchange, was incorporated in 1995. The company 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 the company 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.

 

The company has won 11 HAM projects between April 2018 and March 2023. This includes 10 projects awarded by NHAI and one by Karnataka State Highways Improvement Project (KSHIP). Of these 11, three have been monetised and five  are under construction.

 

The company 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 five years now.

 

KNRCL entered into special purpose agreements (SPAs) with Cube Highways for a HAM project, each in January 2019, February 2019 and August 2019. The company has received a total consideration of Rs 490 crore over two tranches on December 31, 2021, and October 31, 2022, respectively and is likely to further receive Rs 34 crore post approval from NHAI. Thereby, a total consideration value of Rs 524.75 crore from the sale of three HAM project to Cube Highways was received against investment of Rs 365 crore (return ranging from 1.43 - 1.44 times).

Any other information: Not applicable