KNR Constructions Ltd Management Discussions.


The accelerated economic momentum achieved across the globe in 2017, continued till the first half of 2018. However, the second half of the year witnessed several unfavourable events that slowed down the by 200 basis point to 3.6% in 2018 from 3.8% achieved in 2017. Factors that triggered the slowdown include:

• TradedisputesbetweenUSandChina

• UncertaintyoftheBrexitoutcome

• Macroeconomic issues in Turkey, Argentina and South Africa due to high debt

• Shrinkage in the Automobile sales in Germany

• Financial tightening across the developed economies

The spill over impact ofthese events also impacted the growth rate of the emerging and developing economies. Several countries across the globe implemented course corrective actions to stabilise the financial and inflationary situations. Going forward, the global growth is expected to decrease to 3.3% in 2019 due to uncertainty surrounding Brexit exit and the aftermath of the US-China trade wars. It is further expected to rebound to 3.6% in 2020 with the expectation of favourable fiscal policy around the world and increase in the growth of relatively big size economies such as India and China.


The Indian economy achieved a GDP growth of 6.8% in 2018-19 as against 7.2% in 2017-18. The year started off with a high expectations as the teething concerns post GST implementations started settling down. However, the second half of the year witnessed multiple challenges in the form of depreciating rupee, contracting IIP, rising crude oil prices, NBFC liquidity stress and after effects of the overall global slowdown. On a positive note, India continued to shine and remained as one of the fastest growing economies globally on the back of strong policy reforms and firm fundamentals. The inflation consumer price index remained below the RBI target of 4%. The GST collections increased by 10% on year on year basis to Rs 1.13 Tn, the highest ever collection since the implementation. Besides, India improved its ranking by 23 places to the 77th rank in the World bank ease of doing business 2018 index

Crisil has estimated the GDP growth of 6.9% in 2019-20 increasing by 100 basis point on year on year basis. The momentum is expected to pick up in the second half of 2018-19 owing to the continuation of the second term for the Government which will further bring in positive reforms to the monetary policy and focus on strengthening the consumption- led economic growth.


Infrastructure will play a crucial role in achieving the Governments ambition of making India a USD 5 Tn economy by 2024. Growth in infrastructure related activities like electricity generation, highway construction, railway freight traffic and cargo at major ports will give much needed boost to the infrastructure sector. Considering this, the Government of India has placed a huge impetus on developing the infrastructure of the country. Various initiative such as industrial corridors, DFC, Bharatmala, Sagarmala and UDAN schemes will help in improving the connectivity of the country. Over the next five years, the Government has planned an investment of Rs 100 Lakhs Crores in the infrastructure segment. Apart from budgetary support, the Government is encouraging foreign portfolio investors to invest in infrastructure debt funds, introduce credit default swaps for the infrastructure sector, deepen the corporate bond market, and encourage equity investment by non-residential Indians.

India has attracted foreign investor in the infrastructure space, some of the recent investment of 2018-19 includes:

• The private equity and venture capital invested USD 1.97 Bn in the infrastructure sector

• The Asian Infrastructure Investment Bank (AIIB) has announced USD 200 Mn investment into the National Investment & Infrastructure Fund (NIIF)


Road construction sector has been one of the best performing sectors for the Indian Government. Over the last five years, the investments in road sector has increased by three times to Rs 1.58 Lakhs Crores in 2018-19 on the back of financial support from private players and the Government. The authorities had set an optimistic target of constructing 15,000 km for financial year 2018-19 out of which they have achieved approximately 10,800 km. This was mainly due to land acquisition delays and lack of fund availability. Despite of this the target achievement stood at 72% which is better than the five-year average range of target achievement which has remained between 55%-70% for road construction. Going ahead, the road construction target per day has been set at 40 km/day. The Government aims to build 1,25,000 Km of village roads with an investment target of Rs 80,250 Crores for phase-ill of the Pradhan Mantri Gram Sadak Yojana.

While in the highway sector, the Government expenditure almost doubled from Rs 34,345.2 Crores in 2014-15 to Rs 78,525.5 Crores in 2018-19. Over the last decade around 5,000 kms of highways have been developed. During 2018-19, the construction and expansion of highway in India witnessed a dramatic surge, reaching all time high of 10,800 kms. The National Investment and Infrastructure Fund (NIIF) involved in finding alternative sources to fund highway projects has helped NHAI (National Highways Authority of India) in meeting the needs of the mega project. In coming few years, the government plans to roll out approximately 40,000 kms of awards. Most of these awards will be coming under the Bharatmala Pariyojana Phase-1 and Phase-ll.

NHAI and MoRTH together awarded the project worth Rs 3 Tn in last five years, while in the same period the state invested Rs 1.7 Tn. NHAI has been aggressive in awarding the project from past five years. In 2018-19 NHAI awarded close to 2,500 km.

By 2023-24, NHAI is expected to award 32,300 Km, out of which 50% of the order book is expected to be Engineering Procurement Construction (EPC) and remaining 40% to be Hybrid Annuity Model (HAM). As of 2018-19, NHAI has acquired close to 8,500 hectares of land and in the next five years they are planning to acquire 90,000 hectares.

Targets vs achievements for road construction (National Highways)

Year 2014-15 2015-16 2016-17 2017-18 2018-19
Target (Km) 5,300 10,950 15,000 15,000 15,000
Total Constructed (Km) 4,410 5,051 8,231 9,829 10,824
Constructed under NHAI 1,500 2,017 2,552 3,071 3,320
Constructed under MORTH 2,910 4,044 5,559 5,758 7,504
% Achieved 70 55 55 55 72


KNRCL is a well-known player in the construction segment and has a longstanding presence of over two decades. Presence of a large fleet of construction equipment valuing more than Rs 1,000 Crores Gross block, including modern batching plants, excavators, dumpers, pavers, crushers etc. enables the group to bid competitively for several projects. The management comprises well-qualified and experienced professionals, with adequate technical and project management capabilities. KNRCLs track record and ability to handle projects supported by advanced machinery has resulted in repeat orders from NHAI and state public works departments. KNRCL has leveraged its experience and capability to bid for executing BOT projects and entered the HAM segment in 2018.

KNRCL has a portfolio of 10 projects of which 6 HAM projects worth Rs 65,312 Million (BPC), two BOT toll projects and two annuity projects (with 40% stake). The 2 BOT toll and 2 annuity projects are already operational, financial closure for 4 HAM Projects have been achieved and project work was started in 3 HAM projects with appointed declared by NHAI.

The notable feature of the KNRCL HAM projects are the agreed participation to the extent of 49% by Cube Highways and Infrastructure Pte III Limited, Singapore, which is investing first time in under construction projects and buy back of all the 4 HAM projects in a phased manner i.e., on COD and after expiry of mandatory lock-in period as per Concession Agreement and subject to various regulatory, lenders approval and facilitate exit of KNRCL with an expected return of more than 1.5 times of the investment. This will help KNRCL to monetise the HAM assets and re-invest the capital in future projects. KNRCL is in negotiation with PE investorto monetise its KNR Walayar BOT(toll) asset.


KNRCLs outstanding order book as on March 31, 2019 is Rs 40 bn, which includes EPC value of 3 HAM projects for which Appointed date has been received is Rs 25.51 bn which is 55%. Out of the remaining order book, Central Government projects contribute Rs 5.7 bn (15%) and State Government project contribute Rs 5.8 bn (17%) and the Company has a book-to-bill ratio of 1.9x LTM revenue. KNRCL is now focusing on foraying into other areas such as building flyovers, metro-rails and railways to diversify the order book and widen opportunities. With a proven track record of timely order execution and healthy infrastructure industry prospects, KNRCL estimate of standalone revenue is set to Rs 25 bn in FY19-20.


Awards and accolades:

KNRCL has been ranked 485 among Fortune 500 Companies by Fortune India Magazine 2018.

The Company has been awarded as the "2nd fastest growing Construction Company (Medium category)" and "Indias Top Challengers" at Construction World Global Awards 2018.

The Company received an Award for "Best Executed Irrigation Project of the year 2018- Kaleshwaram Project" from Construction Times Awards 2018.

The Companys Credit Rating is revised from A+ Positive to AA- Stable by CRISILand India Ratings.

The Major Projects Awarded:

1 Construction of Flyover at Ramanathapuram and Sungam Junctions at KM 7/200 -10/350 (Old N.H.67, N.G.M. Road KM. 340/0 - 343/150) with project cost of Rs 207.88 Crores.
2 Four Laning of Oddanchatram-Madathukulam section of NH-209 (New NH_83) (Design CH.Km 29000 to Km.74.380) under Bharatmala Pariyojana Phase-1 under the category of Residual works of NHDP on HAM in the state of Tamilnadu- at a Bid project ofRs 920 Crores (LOA dated March 7, 2019).


Boost to road sector development

Infrastructure is one of the vital sectors in moving up the economy which can be given boost through de-bottle necking of the road. This has led the Government to announce various programmes to give a thrust to the sector. Considering our four decades of experience and history of executing projects well before the scheduled date defines our ability which augurs well for our future growth to bag big orders.

PAN India presence

We at KNRCL has executed projects all around the country so we are well set to capitalise on any infrastructure development initiatives implemented by the Government to execute the project in anystates ofthe country.

Poor quality raw material

Inferior quality of raw material used in the construction deteriorates the road condition over a period of time, which is a threat and also creates a bad reputation for the Company. We at KNRCL uses the best quality of raw material where our top management is involved in the selection of raw material.

Credit crunch in a country

In 2018-19, India went through liquidity crisis which in turn created a credit crunch in a country. Due to which infrastructure industry witnessed a drying up of lending from banks and NBFCs. However, at KNRCL we got a good credit rating coupled with strong profitability and balance sheet leading to lower cost of borrowing and easy availability ofthe debt fund.


At KNRCL, we recognise that every business has its inherent risks and it is required to possess a proactive approach to identify and mitigate them. The Company has embedded an efficient Enterprise Risk Management System (ERMS), which regularly scans the internal and external environment to identify risks, decide on possible mitigation plans and incorporate them in its strategic plans.

Competition Risk: With increased project awarding by the government, the road and construction industry is expected to attract several domestic as well as international players. This increase in competition may lead to an aggressive bidding environment, resulting in price cut and low operating margins as well as lower market share of project awards.

Risk Mitigation: With two decades of industry experience and led by a proven management team, who have honed their project managing skills right from the drawing board to the final execution, the Company is confident of meeting present and future competition and enjoy continued growth. To further mitigate this risk, where considered prudent, the Company forms strategic partnershipsandjoint ventures with quality players. This facilitates synergies both in the financial and technical arenas and enables it to compete with the larger players.

Slow-down in Road Sector: Any slowdown on part of the government to award road projects could adversely affect growth prospects.

Risk Mitigation: The present government has taken focused steps to ensure that infrastructure creation moves at an accelerated pace, thus reducing the possibility of this risk to a considerable extent. Moreover, the Company already has sufficient order backlog to ensure growth momentum in the medium term. Construction Risk: Infrastructure projects involve complex design and engineering, significant procurement of equipment and supplies and extensive construction management and other activities conducted over extended time periods, sometimes in remote locations. This could lead to cost-time overruns, thereby impacting profitability.

Risk Mitigation: KNRCL with its vast experience of project management, balanced capital structuring and efficient cost control measures is well geared to mitigate this risk. Further, inhouse repository of specialised construction equipment reduces dependence on external sources, expedite execution and sustain margins.

Raw Material Risk: Increase in the cost of raw materials, particularly steel and cement, or their unavailability over the tenor ofthecontractcan impact schedules and profit margins.

Risk Mitigation: The Company enters into long-term arrangement with suppliers for requisite raw materials for the tenure of the project, thus guaranteeing a continuous flow. Backward integration by sourcing aggregates from its mines, for road projects under execution also enables it to control costs. Also, leveraging its industry experience, the Company effectively supervises the availability of raw materials thus keeping the cost escalation risk to a minimum.

Interest Rates: Rising interest rates during the life span of a project, fuelled by inflation, can decrease profit margins.

Risk Mitigation: The Company factors this risk into the cost of project before bidding for it. Despite this, the Company is open to resorting to interest rate hedging in case the need arises.

Traffic Growth Risk: Revenue from the Companys toll-based BOT projects are subject to risks associated with unpredictability of traffic growth.

Risk Mitigation: The Companys operational toll-based BOT project caters to traffic plying between South Indias economically vibrant cities and towns. Major industries are also located on this stretch. With the anticipated uptick in economic activity, commercial traffic is expected to maintain a positive growth momentum, thus reducing the possibility of low toll revenues. Regulatory Risk: The complex nature of infrastructure projects means that the Company has to interface with various regulatory authorities throughout the project life cycle, making them especially vulnerable to regulatory action. These requirements are complex and subject to frequent changes as well as new restrictions. Failure to comply with these requirements may result in significant liability to the Company.

Risk Mitigation: To deal with this risk effectively, the Company has a regulatory compliance review mechanism in place. Through this the Company gets regular updates and makes changes in its compliance on a real time basis.

Political Risk: Political disharmony can interrupt or disturb the settled commercial terms of a project, as infrastructure projects with their high visibility have a strong element of public interest. Risk Mitigation: With greater thrust on infrastructure by successive governments, this risk has been alleviated to a considerable extent. Further to ensure minimal intrusion from the political machinery, the Company ensures that its work speaks for itself. Also, years of experience in working with various Governments and its agencies in its life span, has made KNRCL fully capable of handling any changes in the political setup.



The total income from the operations posted by the Company on standalone basis for the year ended March 31, 2019, is Rs 2,137.26 Crores as againstRs 1,931.65 Crores during the same period in the last financial year thereby recording an increase in turnover ofRs 205.61 Crores (about 10.64 %).


EBITDA increased from Rs 383.91 Crores for the year ended March 31, 2018 to Rs 426.96 Crores in the current year ended March 31, 2019. EBITDA on turnover has stabilised at 19.99% due to reduction of back to back sub-contracting turnover.


The net profit after tax or the current year ended is Rs 263.26 Crores as againstRs 272.09 Crores in the corresponding previous year. The profit after tax as a percentage of turnovers has gone down from 14.09% to 12.32 % due to:

1) Higher depreciation in irrigation projects as per Management estimate

2) Revenue from Non 80 IA projects has been increased; hence the Tax liability has gone up


The net worth has gone up from Rs 1,157.83 Crores to Rs 1,414.31Crores in the current year thereby recording an increase of about 22.15%.


Earnings per share is down from 19.35 to 18.72 in the current year due to reason mentioned above.

Debt: Equity

The Debt-Equity ratio has remained almost the same as 0.19 times.


During the year on a standalone and consolidated basis there was no significant change in the financial ratios compared to previous year.


There is no significant change during the current financial year 2018-19, comparing with previous financial year 2017-18.


The Human Resource (HR) strategy at KNRCL is focused on creating a performance-driven culture in the Company, where innovation is encouraged, performance is recognised and employees are motivated, to realise their potential. Companys HR department co-creates all HR strategies along with senior management and BOD so as to influence change, attract talent and build capabilities. HR department is fully specialised to respond to varied human resource needs of KNRCLs business units to enable each division to maintain the human strategic advantage. The Company employed a total of 1,642 employees during the year.


Statements in the Management Discussion and Analysis describing the KNRCLs objectives, projections, estimates, expectations may be forward- looking statements. Actual results may defer materially from those expressed or implied. Important factors that could make difference to the KNRCLs operations include economic conditions in which the KNRCL operates, changing Government regulations, tax laws, statutes and other incidental factors.