Rating Rationale
December 29, 2017 | Mumbai
KNR Constructions Limited
Ratings upgraded to 'CRISIL A+/Positive/CRISIL A1+'
 
Rating Action
Total Bank Loan Facilities Rated Rs.1800 Crore
Long Term Rating CRISIL A+/Positive (Upgraded from 'CRISIL A/Positive')
Short Term Rating CRISIL A1+ (Upgraded from 'CRISIL A1')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has upgraded its ratings on the bank facilities of KNR Constructions Limited (KNR) to 'CRISIL A+/Positive/CRISIL A1+' from 'CRISIL A/Positive/CRISIL A1'.

The upgrade reflects strengthened business risk profile, as seen in significant increase in scale of operations due to healthy order execution, while sustaining profitability. Operating income registered a compounded annual growth rate of 22.4% during the four years through fiscal 2017; turnover grew by 71% in fiscal 2017 and was Rs 1508 crore. The growth momentum continued in first half of fiscal 2018 with KNR reporting operating income of Rs 857 crore (27% growth from same period in previous fiscal). Healthy revenue growth will be sustained over the medium term, supported by new orders from road through engineering, procurement and construction (EPC)/hybrid annuity mode (HAM) and irrigation segments; and limited investment/financial support to build-operate-transfer (BOT)/HAM  projects. The rating also factors in strong financial risk profile backed by low gearing and adequate liquidity.

The ratings reflect KNR's established market position in the construction industry backed by strong project execution capabilities, healthy order book visibility, and strong financial risk profile. These strengths are partially offset by working capital-intensive operations, limited segmental diversity in revenue, and exposure to cyclicality in the construction industry.

Analytical Approach

For arriving at its ratings, CRISIL has moderately combined the business and financial risk profiles of KNR and its special-purpose vehicles (SPVs) for BOT projects, KNR Walayar Tollways Pvt Ltd (KWT; 100% subsidiary of KNR) and KNR Muzaffarpur Barauni Tollway Pvt Ltd (KMBT; 51% subsidiary of KNR). CRISIL has factored in KNR's support for funding equity investments in the subsidiaries, and financial support for expected cost overruns and debt servicing in case of cash flow mismatches in the projects. Furthermore, CRISIL has considered unsecured loans from promoters as debt as they are interest-bearing.

Key Rating Drivers & Detailed Description
Strengths
* Established market position and strong project execution capabilities
KNR has established relationship with state government departments, National Highways Authority of India (NHAI; rated 'CRISIL AAA/Stable'), and Ministry of Road Transport and Highways (MoRTH) by virtue of its track record of executing projects on time. Furthermore, established relationship with leading players in the infrastructure segment helps in joint bidding of projects. The group has a fleet of construction equipment, which enables it to bid competitively for several projects. KNR has leveraged its experience and capabilities to bid for complex projects as well.

* Healthy order book providing good revenue visibility
Order book was Rs 3600 crore as on September 30, 2017. The company has around 75% orders from the road segment while the remaining are from the irrigation department. KNR expects to receive around Rs 2000 crore of new HAM/EPC orders in the near term. Majority of its orders is from third party, a trend that is likely to continue over the medium term. Order book to revenue ratio was around 2.5 times, which gives good revenue visibility. The company mainly bids for projects floated by various government bodies and funded by apex bodies such as Asian Development Bank, MoRTH, and NHAI. 

* Strong financial risk profile
Gearing was healthy at 0.16 time as on March 31, 2017, and was at a similar level for the half-year ended September 30, 2017. Low debt and healthy accrual have resulted in strong debt protection metrics. Furthermore, liquidity is adequate, with unencumbered cash and cash equivalents of Rs 56.7 crore as on March 31, 2017, and low fund-based bank limit utilisation of 10% for the 12 months ended November 2017.

In the past, the company had supported its BOT subsidiaries, which is expected to be limited given both the projects are operational and can support their respective debt obligations. Financial risk profile is expected to remain strong over the medium term, backed by healthy capital structure, accrual of over Rs 200 crore annually, and absence of any large debt-funded capital expenditure or additional support required for BOT projects.

Weaknesses
* Working capital-intensive operations
Although working capital requirement is large, gross current assets of 160 days reflect prudent working capital management. Receivables of 60-90 days, on average, have led to a healthy cash flow position. Nonetheless, there is high dependence on central and state governments and multilateral agencies for timely receipt of payments. Sustenance of working capital cycle along with continued healthy revenue growth will remain key rating sensitivity factors. 

* Susceptibility to intense competition and cyclicality in the construction industry
KNR is exposed to cyclicality inherent in the construction industry and volatility in profitability amid intense competition in the EPC segment. Order book as on March 31, 2017, comprised 85% of projects from highways and the remaining from the irrigation segment. Although the company has taken up more irrigation projects in the first-half of fiscal 2018 (reducing exposure to roads and highways segment to around 75%), diversity in revenue is still limited.
Outlook: Positive

CRISIL believes KNR will benefit over the medium term from from its established market position and healthy order book. Further, Financial risk profile is expected to remain steady. The ratings may be upgraded in case of sustained growth in revenue while maintaining operating profitability and working capital cycle. The outlook may be revised to 'Stable' in case of significant deterioration in operating performance or working capital cycle, or higher-than-expected investment in BOT/HAM projects or sharp increase in debt levels or financial guarantees towards project debt of SPVs.

About the Company

KNR, set up in 1995, provides EPC services, primarily for roads and highways. It has executed infrastructure projects independently and through joint ventures to leverage extensive experience and execution capabilities of both parties, which has helped it to bag orders in diverse regions and of large value. Most clients are government agencies such as NHAI and state Public Works Department.

KWT is a wholly owned SPV set up for converting into four lanes the Walayar-Vadakkancherry section of National Highway (NH)'47 (from kilometre (km) 182.25 to 240.00 km) in Kerala through a public-private partnership and on a design-build-finance-operate-transfer (DBFOT [toll]) basis. The project achieved provisional commercial operations date on May 31, 2015, and full commercial operations date on October 31, 2015.

KMBT is an SPV promoted by KNR's wholly owned subsidiary, KNR Muzaffarpur Holding Pvt Ltd (51% stake), and JKM Infra Projects Ltd (JKM; 49% stake) set up for converting to two/four lanes (96.01 km two lanes, 11.55 km four lanes) the Muzaffarpur-Barauni section of NH-28 (from 519.6 to 627.0 km) in Bihar. The project was awarded by NHAI on a DBFOT (toll) basis, and has been delayed by over 22 months from the original commercial operation date (COD) of July 2014, due to delay in land acquisition from NHAI and change in scope. It has received PCOD on July 3, 2016, and achieved 100% PCOD on August 24, 2017. Toll collection on the complete stretch started from September 2017.

Key Financial Indicators
Financials as on / for the period ended March 31 Unit 2017 2016
Revenue Rs crore 1508 880
Profit after tax Rs crore 157 161
PAT Margins % 10.4% 18.3%
Adjusted debt/adjusted networth Times 0.16 0.16
Interest coverage Times 11.71 13.57

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs. Crore) Rating assigned with outlook
NA Letter of credit & bank guarantee NA NA NA 1192.0 CRISIL A1+
NA Cash credit NA NA NA 123.0 CRISIL A+/Positive
NA Long-term loan* NA NA Feb-2019 20.0 CRISIL A+/Positive
NA Long-term loan^ NA NA Nov-2018 20.0 CRISIL A+/Positive
NA Long-term loan# NA NA Aug-2018 30.0 CRISIL A+/Positive
NA Proposed long-term bank loan facility NA NA NA 80.0 CRISIL A+/Positive
NA Proposed cash credit limit NA NA NA 27.0 CRISIL A+/Positive
NA Proposed letter of credit & bank guarantee NA NA NA 308.0 CRISIL A1+
*Outstanding loan as on March 31, 2017 was Rs 10.5 crore
^Outstanding as on March 31, 2017 was Rs 0.53 crore
#Outstanding as on March 31, 2017 was Rs 11.44 crore
Annexure - Rating History for last 3 Years
  Current 2017 (History) 2016  2015  2014  Start of 2014
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  300  CRISIL A+/Positive  30-03-17  CRISIL A/Positive/ CRISIL A1  05-07-16  CRISIL A/Stable/ CRISIL A1    No Rating Change    No Rating Change  CRISIL A-/Stable/ CRISIL A2+ 
Non Fund-based Bank Facilities  LT/ST  1500  CRISIL A1+    No Rating Change  05-07-16  CRISIL A1    No Rating Change    No Rating Change  CRISIL A2+ 
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 123 CRISIL A+/Positive Cash Credit 100 CRISIL A/Positive
Letter of credit & Bank Guarantee 1192 CRISIL A1+ Letter of credit & Bank Guarantee 1200 CRISIL A1
Long Term Loan 70 CRISIL A+/Positive Long Term Loan 16.54 CRISIL A/Positive
Proposed Cash Credit Limit 27 CRISIL A+/Positive Proposed Cash Credit Limit 50 CRISIL A/Positive
Proposed Letter of Credit & Bank Guarantee 308 CRISIL A1+ Proposed Letter of Credit & Bank Guarantee 300 CRISIL A1
Proposed Long Term Bank Loan Facility 80 CRISIL A+/Positive Proposed Long Term Bank Loan Facility 50 CRISIL A/Positive
-- 0 -- Proposed Short Term Bank Loan Facility 83.46 CRISIL A1
Total 1800 -- Total 1800 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Construction Industry
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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