| 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 Ltd (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 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 6519 crore as on June 30, 2019. Outstanding order to revenue ratio is around 3.04 times, providing healthy revenue visibility over the medium term. Around 85% of the orders are from the road segment while the remaining are from the irrigation segment. Of the road orders in the total order book, HAM and EPC orders account for 67% and 18%, respectively. KNRCL currently has a portfolio of ten projects (four BOT projects [two-toll & two-annuity] and six HAM projects) in the roads and highways sector. All BOT projects are operational for over two years now. Since April 2018, KNRCL won six HAM projects worth bid project cost of Rs 6,531 crore. They included five projects awarded by NHAI and one awarded by Karnataka State Highways Improvement Project (KSHIP). Among the NHAI awarded HAM projects, three of the projects are under construction, one is awaiting appointed date (financial closure achieved), and the other has received letter of award in March 2019 (Concession agreement is yet to be signed). Concession agreement has been signed for KSHIP project in January 2019 and financial closure documents have been submitted to the Authority. KNRCL will take up EPC works for these HAM projects, which forms around Rs 4,400 crore in the outstanding 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. * Robust financial risk profile Operating income grew 28% year-on-year in fiscal 2018, to Rs 1,924 crore, and continued to expand moderately in fiscal 2019, to Rs 2,144 crore (11% growth over fiscal 2018), backed by healthy project execution. Furthermore, stable operating margin (of around 20%) has resulted in steady accretion to reserve, thereby strengthening networth. Adjusted networth rose to Rs 1,373 crore as on March 31, 2019. Debt (including interest-bearing mobilisation advances of Rs 71 crore) remained moderate at Rs 335 crore resulting in low gearing, of 0.24 time. Additionally, dependence on external borrowings is low as reflected from unsecured loans from promoters of Rs 205 crore out of the adjusted debt of Rs 335 crore as on March 31, 2019. 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 adjusted debt ratios were 15.77 times and 1.27 times, respectively, in fiscal 2019. Though there was a dip in operating income in Q1 FY20 (16.5% over Q1 FY19) on account of delay in receipt of appointed dates for HAM projects, it is likely to pick up from Q2 FY20 with the receipt of appointed dates for two of the projects in Q1 FY20. Operating margin continued to remain at around 19.4% in Q1 FY20. Revenue growth and profitability is likely to sustain over the medium term supported by strong executable orders and execution capabilities. KNRCL has equity funding requirement of Rs 427 crore for its existing HAM projects (including HAM project won in March 2019) to be infused in the next 2 years (excluding 50% upfront equity infused after receipt of appointed dates in fiscal 2019 & Q1 fiscal 2020). Share purchase agreement (SPA) signed with Cube Highways since January 2019 for 4 of the HAM projects should reduce the equity commitment to around Rs 236 crore for the existing projects. Further, KNRCL is expected to realise Rs 358 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 30-36 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, GCA of 143 days as on March 31, 2019 reflect adequate working capital management. Further, GCAs have remained below 150 days for the past three fiscals through March 2019, 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 June 30, 2019, the roads and highways segment accounted for 85% 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: Strong Liquidity is strong, supported by healthy cash accrual, unutilised bank lines, and moderate cash and cash equivalents. Cash accrual is expected to remain over Rs 300 crore, sufficient to service annual maturing debt obligation of Rs 20-50 crore over fiscals 2020 and 2022 and meet company's capex and incremental working capital requirement. Fund-based bank limit utilisation has historically remained low at less than 20% and was at 14% for the 12 months through May 2019. 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 May 2019. 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 31 crore as on June 30, 2019, of which around Rs 16 crore was unencumbered. Additionally, the company also benefits from the track record of promoters bringing in funds into the operations in the form of unsecured loans. They currently stand at Rs 205 crore as on June 30, 2019. |
| 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. |
| 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. |
| 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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