knr constructions ltd Management discussions

THE ECONOMIC SCENARIO The Global Landscape

After growing by 2.3% in 2019, the global economy shrank by 3.5% in 2020 (Source: https://www.imf.org/en/Publications/WEO/ Issues/2021/01/26/2021-world-economic-outlook-update). This decline was primarily on account of the Covid-19 outbreak, and the consequent pause in economic activities worldwide. Overall, economies weakened during the early months of the financialyear, due to complete lockdowns, exponentially rising

Covid-19 cases and a zero- and even negative-interest rate environment. However, economies swiftly recovered thereafter, due to easing of restrictions, deceleration in growth of Covid-19 cases and economic stimulus announced by several countries. The world Gross Domestic Product (GDP) is forecasted to grow by 6% in 2021 and it is expected to moderate subsequently to 4.4% in 2022, based on Government support, vaccine roll-outs and unlocking of the economies. (Source: https:// www.cnbc.com/2021/04/06/imf-world-economic-outlook-april-2021-global-gdp-to-hit-6percent.html#:~:text=The%20 organization%20said%20Tuesday%20it,an%20earlier%20 estimate%20of%204.2%25). While advanced economies are rebounding, many of the worlds under developed and developing countries are being left behind, and much remains to be done to reverse the pandemics staggering human and economic costs. Moreover, the recovery is not assured: the possibility remains that additional COVID-19 waves, further vaccination delays, mounting debt levels, or rising inflationary pressures deliver setbacks.

The Indian Landscape

Indias gross domestic product (GDP) shrank 7.3% to 135.13 trillion in 2020-21 primarily owing to Covid-19 restrictions and the consequent weakness in several sectors, as is evident by the

25% contraction in GDP in the first quarter of 2020-21(Source: https://www.worldbank.org/en/country/india/overview). Overall, the economic slowdown, led by the Covid-19 outbreak and the consequential stringent lockdowns, severely impacted economic activity, bringing several manufacturing and trading activities to a halt. However, the GDP rebounded finan year, due to deceleration thelatermonthsofthe in de-growth of Covid-19 cases, alongside Government initiatives. The Government announced a special package of 2 Lakh Crores, equivalent to 10% of Indias GDP, as part of the Atmanirbhar Bharat initiative, to revive the countrys economic growth. Going ahead, the real GDP growth in India is forecasted at 12.5% in 2021 and 6.9% in 2022 (Source: https://timesofindia.indiatimes.com/business/india-business/ imf-projects-indias-growth-rate-to-jump-to-impressive-12-5-in-2021/articleshow/81933929.cms#:~:text=IMF%20 projects%20Indias%20economic%20growth%20rate%20 at%2012.5%25%20in%202021,-TIMESOFINDIA.COM%20 /%20Updated&text=Notably%20in%202020,%20economy%20 contracted,for%20the%20country%20in%202021).

THE INDUSTRY SCENARIO The Infrastructure Sector

The infrastructure sector is among the core pillars of the Indian economy. The sector is highly responsible for propelling Indias overall development and receives intense focus from the Government, with a vision towards world-class infrastructure in the country. India is expected to become the worlds third largest construction market by 2022. According to the Department for Promotion of Industry and Internal Trade (DPIIT), FDIs in the construction development sector (townships, housing, built up infrastructure and construction development projects) and construction (infrastructure) activities stood at USD 25.93 billion and USD 23.99 billion, respectively, between April 2000 and December 2020. In the Union Budget 2021, the Government announced an investment of 2,33,083 Crore (USD 32.02 billion) to enhance the transport infrastructure, thus providing a massive push to the industry. (Source: https://www.ibef.org/ industry/infrastructure-sector-india.aspx)

The Government announced the National Infrastructure Pipeline (NIP) for the FY 2020-2025 to facilitate the implementation of world-class infrastructure projects in the country. This first-of-its-kind initiative is expected to significantly enhance the economy, reduce unemployment rate, and drive the competitiveness of the Indian economy. It is jointly funded by the Central Government, state Governments, and the private sector. The NIP was launched with a projected outlay of

111 Lakh Crore ($1.5 trillion), to be spread over 2020-2025

 

(Source: https://www.indiabudget.gov.in/economicsurvey/ doc/vol2chapter/echap08_vol2.pdf). The NIP is expected to comprise around 7,400 projects, out of which approximately

217 projects, worth 1,10,000 Crore (USD 15.09 billion), were completed as of 2020. (Source: https://www.ibef.org/industry/ infrastructure-sector-india.aspx ).

The Road Construction Sector

An efficient transportation system is critical to sustain the economic growth and the burgeoning demand for passenger and freight movement. Road transportation has gradually increased over the years with improvement in connectivity between cities, towns and villages in the country. Over the last few years, the Indian economy has been one of the fastest growing economies in the world. Sustaining this growth rate of around 8% to 10%, is likely to require huge investments in physical infrastructure such as roads, water, power, and urban sectors. Recognising this, the Government of India (GOI) and many state Governments have launched several initiatives in the past decade to modernise and improve the transport infrastructure. In the Union Budget 2021, an investment of 1,18,101 Crore (USD 16.20 billion) has been allocated towards road transport and highway sector. (Source: https://www.ibef.org/industry/infrastructure-sector-india.aspx)

Outlook

With a total of 5.89 million kilometres, India boasts of the second-largest road network in the world. This road network transports 64.5% of all goods in the country, as well as 90% of Indias total passenger traffic. Highway construction in India increased at an impressive CAGR of 21.44% between FY16-FY19. In October 2020, the foundation stone was laid in Tripura for nine national highway projects with a total length of approximately 262 kms worth around 2,752 Crore (USD 371.13 million). NHAI, the nodal authority for building highways across the country, has set a target of awarding 4,500 km of projects in FY21. The Central Government approved construction of the 158-kms ring road worth 10,000 Crore (USD 1.37) in Telangana. In January 2021, the Government of India and New Development Bank (NDB) signed two loan agreements for USD 646 million for upgrading the state highway network and district road network in Andhra Pradesh. The NHAI awarded 1,330 km of highways in the first half of 2020-21, which was 1.6x of the total awards in 2019-20 and 3.5x of that in 2018-19, indicating the rapid growth in highway constructions. The NHAI has set a target of awarding 4,500 km of projects in 2020-21. In December 2020, the MoRTH proposed to develop an additional 60,000 kms of

national highways (in the next five years), of which 2,500 kms are expressways/access-controlled highways; 9,000 kms are economic corridors; 2,000 kms are coastal and port connectivity highways; and 2,000 kms are border road/strategic highways. A total of 200,000 km of national highways is expected to be completed by 2022.

 

(Source: https://www.ibef.org/industry/roads-india.aspx)

COMPANY OVERVIEW

KNRConstructionsLimitedhascarvedanicheintheinfrastructure development with 10 under-construction, operational HAM, BOT, Annuity projects in addition to sizable value of EPC irrigation projects and flyover projects. Major thrust areas of KNRCL, in both EPC and BOT segment, continue to be construction of national, state highways, flyover, dams, reservoirs, water infrastructure, bridges and urban development. With 11,620 million (Gross Block) of advanced modern machinery, KNRCL could navigate timely project execution cycles. Besides, robust collection mechanisms and prudent financial planning has further ensured near zero debt levels. Further, monetisation of KNR Walayar Toll Projects Limited has strengthened the liquidity of KNRCL and poised to take advantage of new infrastructure opportunities in HAM, EPC, irrigation and flyover projects.

KNRCL is poised to complete 3 HAM projects of NHAI in 2021- 22 and proceed with monetisation.

Order book

KNRCLs outstanding order book position as on March 31,2021 is 71,179 million which includes EPC road projects and EPC from captive HAM projects worth 40,088 million and irrigation projects worth 31,091 million. The composition includes 74% of government contract, which includes 62% from State Government , 3% from Central Government and balance 9% from private players and the balance 26% of the Order book is from captive HAM projects. 43,229 million worth of orders which were awarded and waiting for Appointed date are not included in the order book, with that the Order Book will stand at 1,14,408 million. The Company has a book to bill ratio of 3.50XLTM revenue.

Major projects awarded during the year 2020-21

Sr. No. Client	Description of the Project	Awarded value (In million)
1. KNR-HES JV (Telangana Irrigation)	Kaleshwaram Project- Link - N - Parallel Conveyor System - Package No.3 - Excavation of Gravity Canal from Km 0.00 to Km 15.825 to carry 333 cumecs discharge of water from Delivery Cistern at Chinnagundevelly (Village) to Fore Bay at Thukkapur (Village)	6,955.40
2. KNR-NAVAYUGA- NCC JV (Telangana Irrigation)	11 Kaleshwaram Project - Parallel Conveyor System - Package No.4 Lifting of 333 CUInCCS of water from Forebay at Thukkapur (Village) to Sri Komuravelli Mallanna Sagar comprising construction of Forebay, Open Pump House, Pressure main and Delivery cistern etc at Tukkapur (Village)	16,007.80
3. Office of the Superintending Engineer (H) Projects Circle, Coimbatore	Construction of Elevated Highway along Avinashi Road in Coimbatore City from Golwins to Uppilipalayam Km 147/100 - 157/200 of SHU-52	10,334.10
4. The Project Director, CKICP, PIU, Chennai - 25.	Upgrading Cheyyur-Vandavasi-Polur Section of SH 115 including ECR Link (OD) Cheyyur-Panayur Road to two lane with paved shoulders and construction of bypasses for Vandavasi town and Chetpet town and one realignment for Maruthadu village and maintenance of entire project stretch design length of 109.273 km for 7 years in the state of Tamil Nadu on EPC mode	5389.55
5. NHAI	Four-laning of Bangalore-Mangalore Section including 6 – lane flyover at Kalladka Town on EPC basis in the State of Karnataka	9,829
6. NHAI	Six laning of Ramanattukara Junction to start of Valanchery bypass Section in the state of Kerala on Hybrid Annuity Mode under Bharatmala Pariyoiana	17,450
7. NHAI	Six laning from start of Valanchery Bypass to Kappirikkad on Hybrid Annuity Mode in the state of Kerala under Bharatmala Pariyojana	15,950

OPPORTUNITIES & THREAT

Infrastructure is the backbone for economic upliftment of the country. The Government has announced Under Phase-I of the Bharatmala Pariyojana highway development programme in addition to various other programmes to give impetus to economy. With the strong balance sheet and execution capacity KNRCL is at an advantageous position to bring greater prosperity.

RISK MANAGEMENT

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 and half 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 partnerships and joint ventures with quality players.

This facilitates synergies both in the financial and technical arenas and enables it to compete with the larger players.

Slowdown in the 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, extensive significant 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 of the contract can impact schedulesandprofitmargins.

 

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. It also has 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, fueled by inflation, can decreaseprofitmargins.

 

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 unpredictabilityoftrafficgrowth.

 

Risk Mitigation: The Companys operational toll-based BOT project caters to traffic plying between South Bihar and North

Bihar stretches. 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

 

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.

Pandemic Risk

Coronavirus (COVID-19) brought disruption to infrastructure sector during the operational phase due to unavailability/ shortage of staff due to public health measures and/or sickness, supply chain disruption and Government action, e.g. lockdown in the project area.

 

Risk Mitigation:

We ensured workers safety through social distancing, compulsory mask and sanitisation. We held mass-vaccination camp for staff and also built quarantine facility at the project. We ensured avoiding gathering of workforce at work point. We further issued COVID-19-related notices claiming extension of time (force majeure claim) and cost consequences (as a change of law, government risk/action or political force majeure claim), potential relief under the contract, notifications to lenders under information covenants in finance documents, consideration of efficacy of time limits on claims notification and of termination rights based on COVID-19. We leveraged full technological capabilities of project management platforms to facilitate remote working and make digital capital products and cloud collaboration the standard in projects. We also revisited procurement strategy and considered whether delaying certain procurement activities (commodities, fuel, service providers and subcontractors) to yield more competitive pricing.

FINANCIAL HIGHLIGHTS Revenues

The total income from the operations posted by the Company on standalone basis for the year ended March 31, 2021, is

27,026.29 Million as against 22,442.39 Million during the same period in the last financial year thereby recording an increase in turnover of 4,583.90 Million (about 20%).

Profits

EBITDA increased from 4,870.67 Million for the year ended March 31, 2020 to 5,358.36 Million in the current year ended March 31, 2021. EBITDA on turnover has stabilised at 19.83 %.

The net profitafter tax for the current year ended March 31, 2021 is

2,441.77 Million (9.03%) as against 2,252.23 Million (10.04%) in the corresponding previous year ended March 31, 2020.

Net Worth

The Net Worth has gone up from 16,238.84 Million to

18,678.31 Million in the current year thereby recording an increase of about 15.02%. Earnings per Share has gone up from

8.01 to 8.68 in the current year.

Loan Funds

The Debt-Equity ratio has decreased from 0.12 to 0.00 more as Details of significant compared to the immediately previous financial year) in key financial ratios, networth along with detailed explanation:

During the year on a standalone and consolidated basis there was no significant financialratios, net worth change the compared to previous year except Deb-Equity Ratio, which is due to the Company has repaid its entire un secured loan of Promotors from the proceedings of sale stake in KNR Walayar Tollways Private Limited

HUMAN RESOURCES

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 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 2162 employees during the year.

Cautionary statement

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