Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA-/Positive/CRISIL A1+' ratings on the bank facilities of KNR Constructions Ltd (KNRCL).

 

The ratings reflect KNRCL’s healthy business risk profile supported by revenue increasing to Rs 3,272.6 crore in fiscal 2022 with operating income growing 21% and 20% in the last two fiscals, respectively. Business profile is expected to be healthy with sustenance of annual revenue growth (12-15% in the medium term) and healthy financial risk profile. The strong execution track record along with healthy order book (approximately Rs 9,350 crore as of June 2022) to revenue ratio of 2.6 times is expected to support revenue growth. In fiscal 2022, growth in operating income was aided by the execution of hybrid annuity model (HAM) order book and orders from the irrigation segment. Further, operating margin remained at a healthy 21%, which is expected to sustain in the future as well. Continued healthy revenue growth and operating margin over 20% will remain a key rating driver.

 

Working capital cycle improved in fiscal 2022 largely due to decrease in debtor days to 95(includes retention money withheld) from 117days the previous fiscal. While working capital requirements remained high, reliance on debt continued to be low given the realisation of funds from monetisation of HAM projects and healthy cash generation. Financial risk profile has remained robust as reflected in lower total outside liabilities to adjusted networth (TOLANW) ratio of around 0.49 time as on March 31, 2022. Lower debt and healthy profitability has resulted in strong debt protection measures. KNRCL has entered into an agreement for the sale of three of its HAM projects. Realisation of sale proceeds in the next 6-12 months with the completion of these HAM assets this fiscal is expected to keep the dependence on borrowings low and help the company sustain its healthy financial profile. Timely conclusion of sale transaction of HAM projects in fiscal 2023 will remain a key monitorable. 

 

The ratings continue to reflect the company’s established market position in the construction industry backed by strong project execution capability, order pipeline, and robust financial risk profile and liquidity. These strengths are partially offset by 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. The debt in KNRCL’s special purpose vehicles (SPVs) is non-recourse to the parent, and in line with CRISIL Ratings’ moderate consolidation approach. The investment requirement, expected cost overrun in under-implementation projects, as well as 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 (outstanding as on March 31, 2022 is nil). Interest-bearing mobilisation advances have also been considered as debt (Rs 145 crore as on March 31, 2022). Retention money has been considered as a part of debtors.

 

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

KNRCL has established relationships with National Highways Authority of India (NHAI; CRISIL AAA/Stable), Ministry of Road Transport and Highways (MoRTH), and various state government departments by virtue of its track record of over two decades in the construction industry and timely project execution. 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 group has a fleet of construction equipment, which enables it to bid competitively for several projects. Furthermore, established relationship with leading players in the infrastructure segment helps in joint bidding of projects.  

 

The strong project execution capability of the company is reflected in the successful completion of projects within the scheduled time and budgeted cost. The robust in-house engineering, procurement and construction (EPC) division undertakes all project implementation for BOT/HAM road projects. The company also has a track record for execution of projects before the scheduled timeline and receipt of early completion bonuses from the relevant authorities. The established market position and strong execution capability have helped the company successfully execute more than 6,000 lane km of road projects till date.

 

• Strong order pipeline provides healthy revenue visibility

Order pipeline is strong at approximately Rs 9,350 crore as of June 2022.  Outstanding order to revenue ratio is about 2.6 times, providing strong revenue visibility over the medium term. Around 76% of the orders are from the road segment and the remaining are from the irrigation segment. Of the road orders, HAM and EPC orders account for 48% and 28%, respectively.

 

Order concentration is high with the top 10 projects forming around 90% of the order book. The company has an ongoing HAM portfolio of eight projects of which three have achieved provisional commercial operation date (PCOD), two are in advanced stage of construction and balance three are under construction- progress on these is largely on track. The company has three projects in the initial stages of construction of which two have received Appointed Date (AD) in January 2022. These projects will drive the company’s revenue growth in the current fiscal. Strong execution capabilities of the company are expected to support timely completion of the projects and aid the sustenance of revenue growth.

 

• Robust financial risk profile

Operating income grew 21% year-on-year in fiscal 2022, to Rs 3272 crore due to strong execution of work orders. The revenue in fiscal 2022 was supported by the execution of HAM order book and irrigation projects. Operating margin continued to be strong at around 21% in fiscal 2022. Stable operating margin has resulted in steady accretion to reserve, thereby strengthening networth.

 

An early monsoon in the key operating states for the company may likely impact order book execution in the first half of fiscal 2023, however CRISIL Ratings expects revenue growth to be healthy at 12-15% for the entire fiscal supported by healthy order book. Sustenance of moderate operating performance demonstrated in the past two fiscals will remain a key monitorable in the near term.

 

Further, debt has been lower given the healthy accruals and realisation of sale proceeds from the monetisation of HAM projects. The company did not have any long-term debt outstanding as on March 31, 2022. Low debt and healthy networth has kept the gearing and TOLANW ratios at comfortable levels of 0.07 and 0.51 time, respectively, as on March 31, 2022. Lower debt and healthy profitability has resulted in strong debt protection measures with interest coverage and net cash accrual to told debt ratios of 26.8 and 3.63 times, respectively, in fiscal 2022.

 

The capital structure is expected to remain comfortable with minimal external debt and large internal accruals to fund majority of the equity commitment for the ongoing project. Debt metrics will continue to 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 KNRCL’s networth is locked in investments made in the underlying BOT and HAM portfolio. Further, the company is expected to invest around Rs 580crore over fiscals 2023,2024 and 2025, towards equity commitment of ongoing HAM projects along with financial support for meeting cash flow mismatches at the underlying SPVs. While a majority portion of the investments are towards HAM projects, which carry lower risk due to their fixed annuity inflows, deleveraging through sale of these assets is expected to help KNRCL sustain growth while maintaining it financial profile.  KNRCL has entered into an agreement for the sale of three of its HAM projects. Realisation of sale proceeds (~Rs 205 crore) in next 6-12 months will help KNRCL to remain asset light while churning its equity capital to fund equity requirement of its HAM orders. Timely conclusion of sale transaction of HAM projects will remain a key monitorable.

 

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. The gross current assets (GCAs) although high, moderated to 211 days as on March 31, 2021 (228 days a year earlier) driven by decrease in debtor days to 95(117). However, over 50% of debtors were from KNRCL’s own ongoing HAM asset portfolio where the debt was undrawn to keep the project cost low. This was a one-time impact in fiscal 2021 and debtor days are expected to normalise to around 100 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 is exposed to cyclicality inherent in the construction industry and volatility in profitability amid intense competition in the EPC segment. Of the order pipeline as on June 31, 2022, the roads and highways segment accounted for 76% and the remaining were from the irrigation segment. With increased focus of the central government on the infrastructure sector, especially roads and highways, KNRCL is expected to reap benefits over the medium term. However, most of its projects are tender-based and face intense competition, which may hence require it to bid aggressively to get contracts. Competition has intensified further due to the relaxation in bidding norms by MoRTH and NHAI last fiscal. While operating margin is currently healthy at 21%, intense competition may constrain it going forward. Also, given the cyclicality inherent in the construction industry, the ability to maintain profitability margin through operating efficiency becomes critical.

Liquidity: Strong

Liquidity is strong, supported by healthy cash accrual, unutilised bank lines, and moderate cash and equivalents. Cash accrual is expected to remain at Rs 550-600 crore, sufficient to service any annual maturing debt obligation (currently nil long-term debt) and meet the company’s capex and incremental working capital requirement. Fund-based bank limit of Rs 145 crore was utilised 18% on average and non-fund-based facilities were utilised 54% on average over the 12 months through May 2022.

 

Cash and equivalents were Rs 136 crore as on March 31, 2022. Additionally, the company also benefits from the track record of promoters bringing in funds into the operations in the form of unsecured loans.

Outlook Positive

CRISIL Ratings believes KNRCL’s business risk profile is expected to improve with scaling up of operations supported by its healthy execution capabilities and strong order pipeline. This along with steady accruals and realisation of sale proceeds for its HAM projects is likely to keep the financial risk profile healthy.

Rating Sensitivity factors

Upward factors

• Sustenance of healthy operating performance leading to net cash accrual of Rs 500-550 crore
• Maintenance of healthy financial risk profile with TOLTNW remaining below 0.5-0.6 time

 

Downward factors

• Significant and sustained decline in operating performance with revenue growth of less than 10% on account of delay in project implementation or lower order inflows
• Stretch in working capital cycle
• Significant increase in exposure to new projects necessitating sizeable equity investment/support to underlying operational BOT/HAM projects resulting in weakening in the financial risk profile

About the Company

KNRCL, listed on the Bombay Stock Exchange and National Stock Exchange, was incorporated in 1995 and 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 it bag orders in diverse regions and of large value. The 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, with orders executed in irrigation and flyover and bridge construction segments as well.

 

KNRCL won nine HAM projects between April 2018 and March 2022. This includes eight projects awarded by NHAI and one by Karnataka State Highways Improvement Project (KSHIP). Of these nine, three have achieved PCOD, five are under construction while one has been terminated.

 

EPC works of the under-construction HAM projects is undertaken by KNRCL. Over and above, the company has a BOT portfolio of three assets- one BOT Toll and two Annuity projects. All the BOT projects are operational for over five years now.

 

KNRCL entered into a special purpose agreement (SPA) with Cube Highways for a HAM project each in January 2019, February 2019 and August 2019. Through this agreement, the company will, in a phased manner, sell its entire shareholding to Cube Highways, subject to transfer restrictions in the concession agreement, and regulatory and lender approvals. Cube Highways will take over the majority shareholding and maintenance of these projects once they achieve commercial operations date (COD/PCOD). The company transferred its 49% stake in KNR Tirumala Infra Pvt. Ltd and KNR Shankarampet Projects Pvt Ltd to Cube Highways on December 30, 2021. The transfer of the remaining 51% stake in Tirumala Infra Pvt Ltd and KNR Shankarampet Projects Pvt Ltd and 100% stake in KNR Sriranagm Infra Pvt Ltd is pending. Additionally, KNR also concluded a sale deal with Cube Highways for KNR Walayar Tollways in September 2020.

Any other information: Not applicable