KNR Constructions Limited (532942) Earnings Call Transcript & Summary

Good afternoon, friends. I welcome you all on our earnings call third quarter and 9 months ended December 31, 2019. Along with me, I have Mr. K. Jalandhar Reddy, Executive Director; Mr. K. Venkatram Rao, General Manager, Finance and Accounts; and Strategic Growth Advisers, our Investor Relations Advisers. I will start with a brief on the keynote updates on the industry and then we will discuss the economic and business performance. The macroeconomic environment continued to be subdued, resulting in slower project awarding, plenty land acquisition process and delay in grant of appointed days. During the current financial year, the project awarding activity by [ Ministry ] has been subdued with only 3,200 kilometers of projects awarded until November 2019 as against a target of 10,000 kilometers for the full year. However, the government continued its stress to boost infrastructure development. To augment India's infrastructure and create jobs, the government has launched the national infrastructure pipeline of INR 103 lakh crores infra projects [ representing ] about INR 1.70 lakh crores to NHAI for transport infrastructure and add to this in highways construction. It consists of more than 6,500 projects across sectors and are classified as per the size and stage of development. The government prosecution of MoRTH has been increased by 11% from INR 35,463 crores to INR 39,455 crores. The government has proposed to monetize at least 12 lots of highway bundles over 6,000 kilometers before 2024. The Finance Minister has proposed accelerated development of highways, which will include development of 2,500 kilometers, control at highways 9,000 kilometer of economic corridor, 2,000 kilometers of coastal and land port roads and 2,000 kilometer of strategic highways through union budget. Delhi-Mumbai Expressway and other package are -- 2 other packages would be completed by 2023 and 1 for Chennai-Bengaluru Expressway would also be started. [ Further, in order ] to accelerate funds availability for the sector. 100% tax exemption for sovereign wealth funds investing in infrastructure sector has been proposed in the Indian budget. Also, infrastructure finance companies such as IIFCL and a subsidiary of NIIF have been provided with adequate equity support amounting to INR 22,000 crores, which will enable them to learn more than INR 1 lakh crores. Now coming to the key updates of the company. We have a portfolio of 9 projects, of which 5 are HAM projects, 2 are BOT toll and 2 BOT annuity projects. We have received appointed dates for 4 HAM projects, including the appointed date for KSHIP HAM project, which we have received around [indiscernible]. Execution of the 3 HAM -- legacy HAM projects are in full swing. The percentage of physical projects have progressed as on 31st December 2019, for the 3 HAM projects is as follows: Chittor to Mallavaram is 35.2%; Ramsanpalle to Mangloor is 34.8%; and Trichy to Kallagam is 25.4%. While our fifth HAM project was [ INR 930 crores ] BPC, we have signed the conscious agreement on 6th December 2019, and financial process is in advanced stage. We have already invested INR 177 crores as equity across all our HAM projects. We have given all the details of HAM projects on Slide #26 of our investor presentation. As you all know, we already signed a share purchase agreement with Cube Highways and Infrastructure III Pte. Ltd for our 3 HAM projects that is: Trichy to Kallagam, Chittor to Mallavaram and Ramsanpalle to Mangloor projects for the divestment of our stake. As to the agreement, we will completely sell these 3 projects [ approximately for ] 2 years. We expect an aggregate investment of INR 175.3 crores in these 3 projects, which equal to 51% of the projects [ equity ] repairment. Against an investment of INR 175.3 crores, we will receive approximately INR 331.5 crores as well as share repurchase agreement. The final amount we entered was unchanged at the time of COD. Cube will invest is 49% equity of 90% of right of ways achieved during the conception in each of these projects. This deal reduces the equity investment for the company by 50%. In addition, once the project has achieved a [ COD ], 99 -- 49% of KNR stake will be sold to Cube and balance of the mandatory lock-in period of 2 years. The deal structure ensures that HAM projects now operate like the [ pure EPC ] contracts and the company would be able to free up its balance sheet and take new projects in the future. Updates on BOT projects. We are very pleased to inform you that the company has signed SPA with Cube Highways for sale of 100% stake in KNR Walayar Tollways Pvt. Ltd. BOT project for an enterprise value of INR 529.27 crores. The transaction is subject to certain conditions, including approval from lenders and NHAI. We expect the transaction to be completed within the next 2 to 3 months. Our Bihar project, that is the Muzaffarpur-Barauni Road Project, the [ toll ] revenue during the quarter has come down to INR 14.73 lakhs per day due to major repairs at [indiscernible] which is a key factor for the traffic playing on our role. Coming to the EPC projects. We have a total order book of INR 5,888 crores of [ the EPC ] components of 4 HAM projects, but which appointed date has been received is INR 2,854 crores, which is 49%. Out of the remaining order book, central government projects contributed INR 526 crores, which is 9%; and state government project contributed at INR 2,506 crores, which is 42%. In terms of order book breakup. Roads constitutes INR 4,233 crores, that is 72%. The initial project comes through INR 1,654 crores, that is 28% of the total order book. Our combined order book, including 1 HAM, NHAI HAM projects in Tamil Nadu that has not been included in the order book is for INR 6,533 crores as of December in 2099 (sic) [ 2019 ] we expect some projects to be built out of the current financial year, and we are planning an order inflow of approximately INR 1,000 crores to INR 1,500 crores the remaining part of this financial year. Now I refer to Mr. K. Venkatrama Rao, our GM, to present the results for the quarter and 9 months ended December 2019.

Thank you, sir. I hope you have gone through our results and the presentation that we have circulated and uploaded in our website. I would now present the stand-alone results for the quarter ended March 31, 2019. The total revenue stood at INR 557.9 crores in Q3 FY '20, indicating a growth of 24% year-on-year. Our EBITDA for Q3 FY '20 stood at INR 124.4 crores, indicating a growth of 38% on year-on-year with EBITDA margin of 22.3%. Adjusting for the exceptional item related to the impairment of investment of INR 6.7 crores in the Walayar Tollways, our adjusted PBT grew by 10% year-on-year to INR 65.5 crores. Our interest cost was higher during this quarter due to interest on mobilized in advance for the HAM project. Coming to results for the 9 months ended December 31, 2019. On a stand-alone basis, the total revenue stood at INR 1,568.7 crores in 9 months FY '20, indicating a growth of 10% year-on-year. Our EBITDA for 9 months FY '20 stood at INR 340.2 crores, indicating a growth of 20% year-on-year EBITDA margin up to 21.7%. Adjusting for exceptional items relating to Walayar Tollways and KNR Chidambaram, our adjusted PBT grew by 15% year-on-year to INR 218.5 crores. On balance sheet side, as of 31st December 2019, the debt on the stand-alone basis is INR 329.67 crores, including promoter loan of INR 193.33 crores and debt-to-equity stands at 0.21x. Our working capital base remained stable at 43 days. A quick summary on the consolidated performance is as follows: in Q3 FY '20, revenue grew by 25% year-on-year to INR 603.7 crores. EBITDA grew by 37% year-on-year to INR 160.9 crores. Adjusted PBT grew by 29% year-on-year to INR 73.3 crores. And 9 months FY '20 revenue grew by 13% year-on-year to INR 1,721.5 crores. EBITDA grew by 22% year-on-year to INR 435 crores. Adjusted PBT grew by 34% year-on-year to INR 236.2 crores. On the balance sheet side, the debt is -- debt on consolidated basis is INR 786.83 crores, including promoter loan of INR 193.33 crores. And debt-to-equity stand at 0.53x. With this, we now open the floor for question and answer.

[Operator Instructions] The first question is from the line of Anupam Gupta from IIFL.

I just want some clarification in the 3Q results. So you have booked some arbitration gain. So what part of that is included in revenue and what part is sitting in other income?

Well, INR 3.68 crores is including in our operating revenue and around INR 88 lakhs is including in other income.

INR 88 lakhs in other income. Okay. Secondly, what is the -- in the finance cost, you said Mobilization Advances interest is also included. So what portion incrementally came on Mobilization Advances?

It is around INR 6 crores, sir.

And what is the Mobilization Advances as of now?

It is, as of now, it is around INR 200 crores.

INR 200 crores is all interest-bearing, right?

Yes. Yes, all interest-bearing.

Okay. So this run rate of INR 14 crores should continue for the next few quarters until this Mobilization Advances gets utilized? Or how do you look at the interest cost?

Yes, sir, because this Mobilization Advances, see the NHAI is going to charge from the SPV. In turn SPV is going to charge with the EPC contractors 100%. So once it is, they will do the work and Mobilization Advances will record, then it will reduce. But we expect that it will be continuing at least 2 quarters.

At least 2 quarters. Okay. Okay. And secondly, margin should -- so margins continuously come much higher than what the normal guidance and model normal expectation is. So what should be the run rate we should take? And what is contributing to this quarter's higher margin?

It's because definitely, in this quarter, we are executing our irrigation project and HAM road projects, which are giving good margin. So if these projects are going to be continued, definitely, we can touch between 18% to 19% of EBITDA margin continuously in the future.

18% to 19% [ EBITDA ], okay. So this quarter, it was around 22%. If they exclude -- it was slightly lower if they exclude further arbitration gains, right?

Yes, yes, yes.

Okay. And just lastly, on what is your tax rate for this year?

This year, which has now [ non-IDA ] projective is very less, only INR 600 crores order book is there for [ IDA ] project only and balances in respect of [ non-IDA ]. It will be expected now this 30% will be there. This is for further period. And on -- in fact, on P&L, it will be around 25% after considering deferred tax.

For the full year, you're saying, right?

Yes. Full year.

[Operator Instructions] The next question is from the line of Sriram Srinivasan from Ksema Wealth Management.

First of all, congratulations, sir, for the [ best ] top numbers in top line. I was -- some of the -- actually have been commenting on your 4 HAM projects, right, which just impacting in our financial costs, right?

Yes. Totally 5 HAM projects. 3 is under operation.

So 3 projects are being commissioned, right?

Yes. Under execution.

Yes. On the Slide #27, actually you said that consideration of KNR 51% stake and KNR's equity contribution, right? They are 2 different things, right? The balance in between these 2 things will be consistent realization gain what we are going to get during the period of various stages, right?

Yes, well, Slide #27 --

The need in subsidy must be...

Yes. Yes, yes. This is in respect of this slide is pertaining to the what we are going to deal with that Q. So on that better than understanding this, KNR is going to put 51% of its stake in that project. And they will get this money, actually. So it is running on average around 1.8x of our investment.

Yes. So it is in the investment gain, what we are going to gain to the divestments we made on this [ previous ], right?

Yes, yes, correct.

Yes. Actually, did we [ all been shifted ] towards the new tax regime?

No, no, no. We are still following the old tax regime because we have made credit of INR 60 crores as of -- in this [ current ] balance sheet. So after initializing this net credit only, we are going to move to new tax regime.

Approximately how long it will take for us to utilize the --

I will take around 1.5 to 2 years.

So the next 2 years, we will still billing on 30% of the tax rate, right?

Yes, but because outflow would be there. Outflow is only the max outflow will be there. That is around [indiscernible]

So approximately -- okay, so what will be our tax rate for the next 2 years, we can expect, sir?

That will be the same really around 30%.

Around 30%. Apart from these operational matters in the macro front, actually, how do you see the budget actually, always, the budget is saying that 16,300 kilometers of road to be laid between the next fiscal year, right?

Yes, yes.

Yes. So among that, what will be the portion that we have been targeting? What will be the order inflow guidance for the next year?

On what, they have [indiscernible] given a guidance of around 10,000 kilometers next financial year. That is projections, they are the expectations. Yes. See they order in whatever tenders they are voting that we have to wait and see.

The next question is from the line of Prem Khurana from Anand Rathi.

Congratulations on good set of numbers. Sir, 2 questions. I wonder if you can help me understand the status, RoW status for the 2 plus 7 Magadi and Palani. Where are we in terms of land acquisition there on these 2 projects? Because I think Magadi is now going to -- go through in terms of execution from next quarter onwards.

Yes. See, Magadi is now almost over 70% land is already there, [ is ] available. And we are running the execution in the next coming quarters. We will -- we feel that the next 3 to 6 months, the entire 80% will be completed. And in Palani, yes, we are waiting for the final figure from the PDF from the site -- also the [ PDF NHA ]. The work is going on for how much land actually is available. It will be in the [ press release ] in the next 15, 20 days.

So by what is the status today as of today and then the last update that you have?

Yes, I think major portion --

[indiscernible]

Yes, yes. Almost as of -- 80% is there. And then now we are waiting for the 3 hedge final figure. This first one will get the figure, final figure. We are waiting further.

And so in Magadi, I mean, I think we've already taken an [ ADM ]. But you said that it is only around 70-odd percent line. So, are we sure that we'll get toward the balance there? How does it work -- I mean, do we have option of kind of go for descoping or delinking, if you don't get to have the balanced land there?

Where is that?

Magadi.

Magadi. Magadi.

The rental road is more than 100 kilometers. By that time, no, we are very confident that the entire 80% will be --

That was actually in [indiscernible] vacation.

Got it. And sir, just on this Walayar-Vadakkancherry. So where are we in terms of NOCs from the lenders and the NHAI?

Yes, in the case of [indiscernible] the NOCs from the vendors, we are -- it is the final stage. We hope to get everything by the next 15 days.

And which is when we'll go for the --

[indiscernible] Giving NOC. Now the entire process will be completed, we feel that in the next 15 days.

And just one last one mind, if I may, I wonder if you can help me understand, I joined a little late so sorry, if you already answered, sorry. So how much are we targeting in terms of inflows in this year and next year? Because when I look at our order backlog, and the kind of run rate that you have, we will be able to deliver growth next year. But growth beyond that, would need you to kind of add orders now because what we have seen with hybrid is generally, this take you at least 8, 9, 10 months to be able to kind of start construction activity. So if you were to add something today, which would come to contribute in FY '20 --

They have started releasing the tenders. So we hope that we are also participating in that. We were also taken by [indiscernible] but we hope that we will be -- we will -- we are sure of getting INR 1,000 crores to INR 1,500 crores of orders before this financial year.

Okay. And any number in mind for the next year?

We already know [ 2,750 ] approximately, we are -- is a guidance figure.

[indiscernible]

Any base that we have already played in which are where the better results are yet awaited?

No, no. I think almost -- they have some lower. Maybe today, I think we are not bidding 1 or 2 projects in the next 1 or 2 days. So that will be depending to get clearer.

Sir, this [ 1,559 ] that you spoke about is hybrid or EPC? What are we targeting here?

HAM only. HAM.

The next question is from the line of [indiscernible] from [ Kotak Securities ].

Sir, just on this Tamil Nadu project. A project so by, when we expect this appointed date, any time line that we are expecting?

[indiscernible] will give the financial closures by May?

Appointed date, sir.

Yes, appointed date [indiscernible] will be there and they're in the advanced stage of land acquisition. And our mobility in the next couple of months, they'll be distributing the [ test ] also.

Actually, the financial tie-up results, most of them are in an advanced stage. It will be followed by the financial [indiscernible]

And in this project also will --

Before May, we will definitely.

Before May. Okay. Because if I recollect earlier, you were targeting some by March something on this.

So basically, we entered into agreement only in the month of December. So 5 on 150 days is there. Then, let's say, it will take its time. No further article talking to the people and all that because there are some issues which they try to resolve last month. And now this will take some time.

Okay. Okay. And, sir, on this pipeline project, you said is all from the road sector? Or we are also looking at something on the irrigation side?

The next quarter, we have 2 projects that we are targeting in source.

And it is all likely that we may get 1 irrigation project, which is -- which we are not able to tell at this point of time, but we are hoping so.

And, sir last, on this [indiscernible] gains...

[indiscernible] gain only for the roads. If we get irrigation, well it's a bonus.

Okay, okay. This is all the roads that you are targeting? Okay. And sir, lastly on this stand-alone debt number, if you can just tell us?

The stand-alone debt is INR 339 crores.

Okay. So this includes INR 194 crores of promoter debt?

Yes. INR 194 crores of promoter debt.

The next question is from the line of Parikshit Kandpal from HDFC Securities.

Are we in talks with the Q4, the [ Palani ] project?

[ So we have the Srirangam ] and financial tie-up is all being done.

It takes some more time. Because what Q has already invested the interest actually to get this process. So definitely, it, we will look into. We have not to think of from that direction now.

Okay. But they have like blanket this thing then, on a case-to-case basis [indiscernible]

We have blanket approval for this.

Okay. Okay. Just on the utilization, the proceeds of the Walayar project. So when do we expect it to come? And how will it get utilized?

Actually, we expect in Walayar, we expected to get actually INR 360 crores in the -- towards the [indiscernible] business and out of that, around INR 194 crores will be the payout to the promoter and balance to wherever -- - it will be there in the company for the working capital requirement and purchase of --

1 Investment.

Yes. Our investment in HAM projects.

HAM Projects.

What is the contribution of the irrigation project in this quarter and for the 9 months, if you can tell from now?

Yes. For this quarter, irrigation project contribution is around 30%.

30%? Okay.

Yes, for 9 months, it is around 20%.

Has this -- now have you already started, work has started on this project, sir?

Not much, actually. There is a land position is there, only just 1 kilometer of land is available out of 6 kilometers. So we -- it's not.

Yes, yes. We just started.

Just started so it is not -- some land is there, so we will do some work definitely in this quarter. And next year, definitely [indiscernible] we will execute the work.

But just -- you're saying just 1 kilometer of right-of-way issue is available out of 6 kilometers? Or is there any chance that this project may not break progress or it may slow down significantly, and we may have to remove it in the future there?

Basically, all the projects will start like that only. So during the course of time, government also will step in. And because it's a [ free period ] project for the government. So they're also trying to operate the land as much as possible by talking to -- convincing to the people and all that. So it is quite possible that by the time we completed 1 kilometer, there will be availability of plans for 2 to 3 kilometers. So this quarter, there's not really a problem. And next quarter, I think by the time, there will be another couple of kilometers coming into the fold. So there should not really problem at all. That kind of vertical [indiscernible] it should not be there at all.

And are the payments and irrigation is coming on time, I mean, from these projects?

So this -- for the time being consensus are coming...

Yes, yes. Irrigation takes 60 or 90 days.

It is coming. It is coming.

And just lastly, on the CapEx, sir,, I mean, what kind of CapEx you have incurred in 9 months on irrigation and roads project, if you can just highlight that?

Last 9 months, we have invested approximately around INR 120 crores.

And out of that, irrigation will be how much?

The equipments are all common for both roads and irrigation. What -- investment is around INR 120 crores.

Because the depreciation is very high on irrigation. So I just wanted to like to -- so irrigation would be roughly how much in this INR 120 crores? If you have that number, you can give me now. Or later in the call, you can --

Probably. Yes. Yes.

[indiscernible]. Kamidi Jalandhar here. During that irrigation versus the road, you can say around INR 45 crores to INR 55 crores. INR 55 crores is on the irrigation side, and INR 45 crores is on the roadside because recently, we have started mobilizing on this [indiscernible] road wherein around 65% land is given on that, the appointed date is taken. The term of 80% is revised to 65%. So there, the mobilization is going on. And the [ margin ] mobilization is going towards the Palani also. Palani, we are expecting in another couple of months. Maybe they are expecting by April and they would like to complete the land acquisition, 80%. So it can take place. So the mobilization is on for that also. And the [ HAM ] project, no, [ HAM ] projects, which is taken from Navayuga, that is also getting mobilized and it'll, sooner or later, it has started already. 1 month ago, it is started.

But for next year, you don't need to invest too much in the irrigation segment, right? I mean, next year, CapEx will be largely on the road.

It depends. Actually, these projects are -- we are planning all these projects if they're given -- in time [indiscernible] All. We are completing by next March, we want to complete everything, all these projects. Meanwhile, if we get any project, we may have to, a little bit, mobilize on that because the completion of these projects and if you start-up, that project may not match.

So just talking about CapEx and next, how much CapEx, it will do--

Maybe it is all -- there are a lot of tenders, which are now on board. By March end, we will be knowing on which we will [ build one ] if we are able, then we will have to mobilize.

Okay. But outside south, we are not building anything? And as of now, I mean, it doesn't look like that we're willing too much outside south?

Yes. Actually, fortunately, I have been focused on that expressway Delhi-Mumbai, then the southern part there, there is likely where projects are coming down, even Madhya Pradesh I'm focusing now but not beyond Madhya Pradesh-- I have not focused because we had with their experience in UP, Bihar and all that. We did -- we are just trying to stay away or otherwise, our prices -- price -- the bid price has come more. So we have avoided a bit. It's not that the study is not there. We are studying those projects also. When there is a comfort then we will reach it.

The next question is from the line of Ashi Shah from Centrum Broking.

Sir, for Chittor and Trichy, we have almost invested our share of equity. And Ramsanpalle also we are almost invested. So where do we expect to start drawing equity from Q1? I know you said that it is after 90% land acquisition. So where are we on the land acquisition part? If you can just share that.

Actually, the [indiscernible] is concern, that is Trichy-Kallagam. We have around 90% land there. So there should not be an issue as and when it requires. If it comes to the Ramsanpalle and Mangloor project, there another -- we are short of 4%, 5% only. I think this week, we are solving by proactiveness of our own. We are trying to give some crop compensation and they acquired. So by this month end, we'll be finishing that 90% portion there. [ Throughput ] is concerned, it is almost 98% available. So as and when we require the equity, we can ask them to invest. And that through [indiscernible], recently, we have applied 50% grant also from NHAI. We have done 50% of the project cost.

Yes.

Sir, secondly, in the -- and on the Trichy and the Chittor HAM projects, what one sees is that the execution for the quarter did not probably ramp up as much as one would have thought. The Ramsanpalle saw a very good execution, but these 2 -- probably the ramp-up was lesser than what one would have thought.

Trichy and Chittor, yes?

Chittor. Yes. Yes. I mean, sir...

Chittor has ramped up very good because the second milestone, we are able to achieve 35% by this month-end or March 15, I think. March 11 is the date of third milestone -- second milestone, wherein we are supposed to do 35%, but we have already submitted a 50% build. So we are much ahead there. If you come to Trichy, concerned, yes, there is some issue because initially, the land -- they have given the appointed date, but the appointed date is given 3 months before the -- our announced date. So we had some issues. So there is some [ EOT ], which we have asked and around 80 days of [ EOT ] is getting there. But however, we are quite confident that we'll achieve the third milestone in line with it.

Sure. Sir, lastly, what is the cash balance as on December?

It is around INR 8 crores.

Around INR 8 crores?

Yes. Yes.

The next question is from the line of Parvez Akhtar Qazi from Edelweiss Securities.

Congratulations for a good set of numbers. Sir, a couple of questions from my side. What is the kind of order intake that we are targeting for next year? That's FY '21.

Yes, sir, FY '21, we are targeting around INR 2,000 crores. You would like to add as a order to this. And mostly, we are focusing in irrigation and some urban development projects as well also on the HAM projects. Partially, we would also like to bid on some Mumbai-Delhi Expressway. But I think [ 1,500 ] is the ideal target that we have right now. It is quite possible that we can achieve. We are confident of achieving.

So what is the kind of revenue growth that we expect, I mean, based on current order book for next year?

So actually, next year concerned, the projections we have given around 10% to 15% growth. We have already announced, sir. So definitely, over the -- this year or next year will be 15% over the --

Around 2,750, we'll touch next year.

Venkat, sorry, I got slightly confused by the tax rate. So you said tax rate for FY '20 and '21 will be 25% or 30%?

Because of if you consider after deferred tax, the effective tax report is going to reflect in the P&L. It will be around 25%. But if you see only current tax, it will be go up to maximum tax rate that is around -- between 30% to 33%.

Sure. And lastly, as far as equity is concerned, I mean, for the existing 3 HAM projects, we are more or less then. But for the 2 other HAM projects, what is the kind of equity that we need to put in FY '21 and '22?

[ Per case ] it's actually, total equity government is around INR 122 crores. For that, actually, we might have to put around 70%. That is around INR 70 crores -- INR 80 crores. That is -- might be in next year, not definitely -- not in this year. It will be there in the next year. And for Palani project, equity requirement is also around INR 90 crores. So around INR 45 crores, we have to put in the next year. To put together, around INR 120 crores, INR 125 crores equity requirement will be there for these 3 projects in next year.

The next question is from the line of Jiten Rushi from Bank of Baroda Capital Markets.

Sir, just want -- I want revenue breakup of order backlog for the projects, which are not part of the presentation. So can you give me the breakup of your order backlog for irrigation for the end of [indiscernible ] projects, which are not part of the order backlog?

Yes, you tell service project you want...

So I can just start with the irrigation project of Megha and Navayuga?

Okay. So this -- for this Mallanna Sagar, that is Megha, you mean, that is around INR 655 crores. And for this, Navayuga, it is INR 847 crores.

And sir, on the roadside, all the projects of Chidambaram, Salem Flyover [ and the ] Arunachal Pradesh project and the Bangalore Polachi project.