Detailed Rationale

Crisil Ratings has placed its ratings on the bank loan facilities of KNR Constructions Limited (KNRCL) on ‘Rating Watch with Developing Implications’.

 

The rating action follows KNRCL’s announcement vide press release dated May 21, 2025 highlighting that it had received a show cause notice from National Highways Authority of India (NHAI; 'Crisil AAA/Stable') to respond within 15 days regarding the incident of settlement of embankment and failure of reinforced earth wall in one of the company’s projects, Ramanattukara-Valanchery section of national highway (NH) 66 in Kerala, wherein KNRCL is also the engineering, construction and procurement (EPC) contractor. Subsequently, Ministry of Road Transport and Highways (MoRTH) vide a press release dated May 22, 2025 stated that KNRCL has also been disallowed from participating in ongoing/future bidding forthwith. However, the company has not received any official communication on this yet.

 

It is understood that the ministry has set up a three-member expert committee to investigate the matter and suggest remedial measures, and the committee’s report is awaited. Clarity on incremental cost which will need to be incurred to rectify the damaged portion, penalty, if any, applicable on the concessionaire and contractor and the period post which KNRCL will become eligible for bidding for NH projects, will only emerge once the expert committee report is made available. Consequently, the credit risk profile of KNRCL is susceptible to the outcome of the ongoing investigation. Crisil Ratings will continue to monitor the developments related to this incident and will resolve the watch once the extent of impact on KNRCL is established.

 

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.

 

Operating income has declined 10% year-on-year to Rs 2,507 in the first nine months of fiscal 2025 (9m 2025) owing to a modest order book position limiting execution. The operating income is expected to remain constrained for full fiscal 2025 as well. Operating margin declined to 16.4% (adjusting for claims and one time income) in 9m 2025 compared with 17.5% in the corresponding period previous fiscal on account of increased competition in roads sector leading to bidding aggression and lower execution of irrigation projects. While moderated, it is expected to remain healthy at 15-16% going forward. Nevertheless, net cash accrual was supported by one-time income of Rs 142 crore received towards interest on unsecured loan for KNR Muzaffarpur Barauni Tollway Pvt. Ltd (KMBTPL) post settlement of the same with the authority and Rs 104 crore towards interest on arbitration claim from Patel KNR Heavy Infrastructures Ltd.

 

Order book continues to remain modest at Rs 5,517 crore as of December 2024, translating to order book to revenue ratio of 1.35 times (based on operating income of fiscal 2024). KNRCL is expecting order inflow of up to Rs 8,500 crore in the next few months primarily from state road projects and mining segment, wherein the company has been declared the lowest bidder. Timely receipt and ramp-up of these orders will remain a key monitorable.

 

Financial risk profile continues to remain robust supported by no external long-term debt, minimal working capital debt and healthy net worth of Rs 3,945 crore as of March 2025. The total outside liabilities to adjusted net worth (TOL/ANW) ratio is also expected at below 0.5 time. Liquidity is supported by low utilisation of bank lines and cash and bank balance of Rs 144 crore as of March 2025.

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 NHAI, 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 it declined 10% year-on-year to Rs 2,507 in 9m 2025 owing to a modest order book position limiting execution, net cash accruals over Rs 700 crore should suffice to capex and incremental working capital requirement apart from minimal debt obligations in medium term. Operating margin declined to 16.4% (adjusting for claims and one time income) in 9m 2025 compared with 17.5% in the corresponding period previous fiscal on account of increased competition in roads sector leading to bidding aggression and lower execution of irrigation projects. While moderated, it is expected to remain healthy at 15-16% going forward. Sustenance of operating performance as demonstrated in the past will remain a key monitorable.

 

Order book remains lower at Rs 5,517 crore (including two HAM projects which received AD recently) as of December 2024 translating to order book to revenue ratio of 1.35 times compared to 6,505 crore and 1.59 times respectively as of March 2024. While KNRCL is expecting order inflow up to Rs 8,500 crore in the next few months 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 54% of the orders with irrigation and pipeline segment contributing 26% and 20% respectively. Within the roads segment, HAM and EPC orders account for 41% and 13%, respectively. While order concentration is high, strong execution capabilities should support timely completion of projects and aid sustenance of revenue growth.

 

Robust financial risk profile: Stable operating performance over the years has resulted in steady accretion to reserve, thereby strengthening networth which stood at Rs 3,945 crore as of March 2025. KNRCL doesn’t have any external long-term debt outstanding as of now and reliance on working capital debt is minimal. 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. TOL/ANW ratio is expected to remain comfortable below 0.5 time. 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.

 

Only about 20-25% of net worth is estimated to be locked in investments in the underlying BOT and HAM portfolio as of March 2025. Further, KNRCL is expected to invest Rs 150-160 crore over fiscals 2026 and 2027, towards its equity commitment in the ongoing HAM projects in the underlying SPVs. KNRCL is expected to support its existing BOT portfolio in future as well in case of any shortfall. Further, it 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 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 ~289 days as on September 30, 2024. High GCA is primarily due to pending receivables of around Rs 600 crore as of December 2024 (down from Rs 700 crore as of March 2024) from irrigation projects in Telangana which have stretched the receivables cycle. These pending receivables are expected to be gradually realised. Nevertheless, the remaining 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 54% of the order book and the irrigation and pipeline segment formed the balance as of December 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 700 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 22% while the non-fund-based facilities were utilised at 35% over the 12 months through March 2025. KNRCL have cash and equivalents of Rs 144 crore as of March 2025. Additionally, KNRCL also benefits from the track record of promoters to infuse funds via unsecured loans.

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, three have received provisional commercial operations date and five are under-construction.

 

It also has a BOT portfolio of two annuity projects which have been operational for over fourteen years.

 

For the nine months ended December 2024, the profit after tax (PAT) was Rs 650 crore on operating income of Rs 2,507 crore against PAT and operating income of Rs 296 crore and Rs 2,776 crore for the corresponding period of the previous fiscal.

Key Financial Indicators (Crisil Ratings adjusted)

Financials as on / for the period ended		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