| KNR Constructions Limited | ||||||
| Long-term rating upgraded to 'CRISIL AA-/Stable'; short-term rating reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has upgraded its rating on the long-term bank facilities of KNR Constructions Limited (KNRCL) to 'CRISIL AA-/Stable' from 'CRISIL A+/Positive', while reaffirming the short-term rating at 'CRISIL A1+'. |
| Analytical Approach |
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For arriving at its ratings, CRISIL 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 SPVs is non-recourse to the parent, and in-line with CRISIL's 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. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Established market position and strong project execution capabilities KNRCL has established relations with National Highways Authority of India (NHAI; rated '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 executing projects on time. The company mainly bids for projects floated by various government bodies and funded by apex bodies such as Asian Development Bank, MoRTH, and NHAI. Further, 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. Strong project execution capabilities of the company are reflected from successful completion of its projects within the scheduled time and budgeted cost. The strong in-house EPC division undertakes all project implementation for the BOT/HAM road projects. The company also has a track record for executing projects before the scheduled timeline and receive early completion bonuses from the relevant authorities. Established market position and strong execution capabilities have helped the company successfully execute more than 6,000 lane km of road projects till date. * Strong order pipeline providing healthy revenue visibility Order pipeline is strong at Rs 5807 crore as on September 30, 2018. Outstanding order to revenue ratio is over 3 times, providing healthy revenue visibility over the medium term. Around 92% of the orders are from the road segment while the remaining are from the irrigation segment. Of the total orders in the road segment, HAM and EPC orders account for 68% and 24%, respectively. KNRCL currently has a portfolio of nine projects (four BOT projects [two-toll & two-annuity] and five HAM projects) in the roads and highways sector. All BOT projects are operational for over two years now. In April 2018, KNRCL won five HAM projects worth Rs 5,611 crore. They included four projects awarded by NHAI while the other was awarded by Karnataka State Highways Improvement Project (KSHIP). Among the NHAI awarded HAM projects, appointed date is received for one of the projects while financial closure has been achieved for the remaining three. KNRCL will take up EPC works for these HAM projects, which forms Rs 3,975 crore in the order pipeline. Strong execution capabilities are expected to support the timely execution of these projects and result in healthy revenue growth over the medium term. * Strong financial risk profile Operating income grew 28% in fiscal 2018 to Rs 1924 crore, and continued to expand moderately in the first nine months of fiscal 2019 to Rs 1422 crore (8.7% growth over first nine months of fiscal 2018) backed by healthy project execution from ongoing orders. Further, healthy operating margin of around 20% has resulted in steady accretion to reserve, thereby resulting in strong improvement in networth. Networth grew to Rs 1269 crore and debt remained moderate at Rs 241 crore resulting in low gearing of 0.19 time as on September 30, 2018. Additionally, dependence on external borrowings is low as reflected from unsecured loans from promoters of Rs 214 crore out of the total debt of Rs 241 crore as on September 30, 2018. Moreover, total outside liabilities to tangible networth (TOL/TNW) ratio has remained below 1 time, and healthy profitability and moderate debt levels have resulted in robust debt protection metrics: interest coverage and net cash accrual to total debt ratios were 18.50 times and 1.80 times, respectively, in fiscal 2018. Though revenue growth in fiscal 2019, is expected to be marginally impacted due to delay in receipt of appointed dates for the NHAI HAM projects, healthy growth is expected to sustain over the medium term supported by strong outstanding orders and execution capabilities. KNRCL has equity funding requirement of Rs 443 crore for its existing HAM projects to be infused in the next 2 years (including 50% upfront equity to be infused after receipt of appointed dates). Share Purchase Agreement with Cube Highways for 3 of the HAM projects will reduce the equity commitment to around Rs 300 crore. Further, KNRCL is expected to realise Rs 262 crore from the deal in a phased manner with part of the return flowing in at commercial operations date (COD) and the remaining after the expiry of mandatory lock-in period (subject to transfer restrictions in the concession agreement, and regulatory and lender approvals). This deal facilitates KNRCL to remain asset light while churning its equity capital to fund equity requirement of future HAM orders. In the past, KNRCL had supported its BOT subsidiaries to meet cashflow mismatches as they were in the initial years of operations. The support requirement is expected to be limited going forward given the operational track record of these projects and limited shortfall requirement. Further, capex requirement is expected to be moderate over the medium term given the sizeable capex incurred in the past 24-30 months to support the execution of irrigation and HAM orders. Financial risk profile is expected to remain strong supported by strategic sale of the HAM projects and maintaining moderate dependence on external borrowings. Timely execution of ongoing orders, significant increase in exposure to new projects or higher-than-expected support requirement for existing BOT projects necessitating sizeable equity investment, or large debt-funded capex will remain key rating sensitivity factors. Weaknesses * Working capital-intensive operations Although working capital requirement is inherently large in the construction industry, given the high dependence on state and central government authorities for timely receipt of payments, GCAs of 142 days as on March 31, 2018 reflect adequate working capital management. Further, GCAs have remained below 150 days for the past two and half fiscals through September 2018, despite execution of considerable irrigation orders. 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 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 September 30, 2018, the roads and highways segment accounted for 92% and the remaining were from the irrigation segment. Further, more than 95% of the company's orders are concentrated in South India leading to geographical concentration risk. Although the company has taken up irrigation projects in the recent past, and is executing projects across various modes (EPC/HAM) in the roads segment, its revenue is susceptible to changes in government regulations and economic conditions. Limited diversity in revenue will continue to make it susceptible to intense competition and cyclicality inherent in the construction industry. |
| Liquidity |
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Liquidity is adequate, supported by healthy cash accrual, unutilised bank lines, and adequate cash and cash equivalents. Cash accrual is expected to remain over Rs 300 crore, sufficient to service annual maturing debt obligation of Rs 10-50 crore over fiscals 2020 and 2022. Fund-based bank limit utilisation has historically remained low at less than 20% and was at 11% for the 12 months through September 2018. Non-fund-based facilities are primarily used to meet working capital requirement. Average utilisation of the non-fund based facilities was 65% during the 12 months through September 2018. Further, established relationship with suppliers and customers result in a healthy payments cycle and hence lower deployment of own funds. The cash and cash equivalents balance was Rs 172 crore as on September 30, 2018, of which Rs 165 crore was unencumbered. |
| Outlook: Stable |
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CRISIL believes KNRCL will continue to benefit from its healthy business risk profile supported by its established market position and strong order pipeline. Financial risk profile will remain strong backed by lower dependence on external borrowing and adequate working capital cycle. The outlook may be revised to 'Positive' in case of substantial and sustained increase in revenue through geographical and sectoral diversification in order book while maintaining margins, working capital cycle and financial risk profile. The outlook may be revised to 'Negative' in case of significant decline in operating performance on account of delay in project implementation thereby resulting in stretch in working capital cycle, or higher-than-expected support to group companies, or significant increase in exposure to new projects necessitating sizeable equity investment weakens the financial risk profile. |
| About the Company |
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KNRCL, a listed company 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, which has helped it bag orders in diverse regions and of large value. Most of the company's clients are government agencies, such as the Central government, NHAI and the public works departments of state governments. It has also diversified in the past few years with orders executed in irrigation and Flyover and Bridge construction segments as well. |
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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) | |||||||||||||||||||||||||||||||||||||||||||||||||
^Loan fully repaid in December 2018; documents awaited for withdrawal | |||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - List of Entities Consolidated | |||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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