| KNR Constructions Limited | ||||||
| Ratings 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 reaffirmed its 'CRISIL AA-/Stable/CRISIL A1+' ratings on the bank facilities of KNR Constructions Limited (KNRCL). |
| 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 hybrid annuity model (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 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 2 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 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. In May 2020, irrigation orders worth Rs 2,309 crore have been won directly from the government of Telangana through joint ventures with HES Infra, the Navyuga group, and Nagarjuna Construction Company (NCC). The strong project execution capability of the company is reflected in successful completion of projects within the scheduled time and budgeted cost. The strong in-house 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. 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 providing healthy revenue visibility Order pipeline is strong at Rs 6,523 crore as on December 31, 2019. Outstanding order to revenue ratio is around 3.04 times, providing healthy revenue visibility over the medium term. Around 75% 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 54% and 21%, respectively. Additionally, irrigation orders worth Rs 2,309 crore have been won directly from the government of Telangana through joint ventures in May 2020 which would increase the share of irrigation orders to over 35%. KNRCL has a portfolio of nine projects (four BOT projects [two- toll and two annuity] and five HAM) in the roads and highways sector. All BOT projects are operational for over 2 years now. The company has entered into share price agreement (SPA) for sale of one BOT asset. Since April 2018, KNRCL won six HAM projects (one has been terminated due to issue around land acquisition) worth bid project cost of Rs 6,049 crore. KNRCL takes up EPC works for these HAM projects. While some of the work is completed for these projects, around Rs 3,000 crore is outstanding. Strong execution capability is expected to support the timely execution of these projects and result in healthy revenue growth over the medium term. * Robust financial risk profile Operating income grew 10% year-on-year in the first 9 months of fiscal 2020, to Rs 1,569 crore, however revenue is expected to remain at similar levels in fiscal 2020 (as compared to fiscal 2019) , given the adverse impact of Covid-19 on project execution and lower billing in March 2020. However, stable operating margin (around 20%) has resulted in steady accretion to reserve, thereby strengthening networth. Adjusted networth rose to Rs 1,525 crore as on September 30, 2019, from Rs 1,373 crore as on March 31, 2019, and is expected to increase further in fiscal 2020. Debt (including interest-bearing mobilisation advances of Rs 200 crore) remained moderate at Rs 698 crore as on September 30, 2019 resulting in low gearing of 0.46 times. Additionally, dependence on external borrowings is low as reflected from unsecured loans from promoters of Rs 208 crore out of the adjusted debt of Rs 698 crore as on September 30, 2019. Debt is expected to reduce in second half of fiscal 2020 with receipt of construction grants for HAM projects leading to reduction in mobilisation advances outstanding and utilisation of cash accruals to reduce external borrowings. Total outside liabilities to tangible networth (TOL/TNW) ratio is expected to remain below 1 time and debt protection metrics are expected to remain healthy, backed by strong profitability and moderate debt levels. KNRCL had signed a SPA with Cube Highways and Infrastructure III Pte Ltd (Cube Highways) in January 2019 for sale of its stake in 3 HAM projects. In addition to return on its infused equity, this deal has significantly reduced its equity commitment as 49% of equity will be funded by Cube Highways during construction stage. Overall equity commitment for existing HAM projects is Rs 110 crore to be infused in the next 2 years (excluding equity infused till fiscal 2020). Additionally, KNR has sold its entire stake in KNR Walayar Tollways to Cube Highways at an enterprise value of Rs 529 crore in January 2020, in line with their plan to sell its BOT portfolio. The management expects to receive Rs 390 crore from the sale of the project. The proceeds will be used to partly pay off the unsecured loans from the promoters and to meet the equity commitments in HAM projects. This deal facilitates KNRCL to remain asset light while churning its equity capital to fund equity requirement of future HAM orders. Furthermore, limited capex requirement and support to its underlying BOT portfolio will ensure curtailment of the additional debt. While operating performance of the company is expected to be impacted by the lockdown, its financial risk profile is robust and will support its credit risk profile. 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, gross current assets (GCAs) of 143 days as on March 31, 2019, reflect KNRCL's adequate working capital management. However, GCA days are expected to stretch in fiscal 2020 by 40-50 days on account of stretch in receivables due to pending payments from Government of Telangana towards an irrigation project that has been delayed due to Covid-19 and outstanding receivables from portfolio of HAM projects where debt has not been drawn down. While realisation of HAM projects will ensure release of receivables, however the company could face delay in realisation of irrigation payments in fiscal 2021. 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 December 31, 2019, the roads and highways segment accounted for 75% and the remaining were from the irrigation segment. Furthermore, more than 95% of the 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 Strong |
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Liquidity is strong, supported by healthy cash accrual, unutilised bank lines, and moderate cash and cash equivalent. Cash accrual is expected to remain around Rs 300 crore, sufficient to service annual maturing debt obligation of Rs 20-30 crore over fiscals 2021 and 2022 and meet company's capex and incremental working capital requirement. Fund-based bank limit of Rs 138 crore was utilised 47% on average and non-fund-based facilities were utilised 68% on average over the 12 months through April 2020. Furthermore, established relationships with suppliers and customers result in a healthy payments cycle, and hence, lower deployment of own funds. |
| 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. The financial risk profile will remain strong backed by lower dependence on external borrowing and adequate working capital cycle. |
| Rating Sensitivity factors |
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Upward factors * Substantial and sustained increase in revenue (of more than 15%) in fiscal 2021 and 2022, while maintaining operating margin at current levels * Improvement in working capital cycle Downward factors * Significant decline in operating performance (of more than 15%) on account of delay in project implementation leading to stretch in working capital cycle * Higher-than-expected support to group companies * Significant increase in exposure to new projects necessitating sizeable equity investment weakening the financial risk profile. |
| About the Company |
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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. |
| Key Financial Indicators | ||||||||||||||||||||||||
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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) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| 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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