MANAGEMENT DISCUSSION & ANALYSIS

Macro-Economic Perspective

Indian economy has shown signs of revival during FY15. Current account deficit and elevated inflation, both impediments to higher growth, have declined considerably. The new government changed the base year for calculation of economic growth from FY05 to FY12 and also introduced the concept of Gross Value Added at the aggregate and sector levels apart from revising industry groups. As per the Central Statistical Office (CSO), based on the new series, real GDP growth rate for FY15 is 7.3% as against the revised FY14 GDP growth of 6.9% (from 4.7% as per the old series).

The revival process is expected to gain momentum in FY16 with the policy environment turning more favourable in recent months for higher economic activity. The government's clear focus on simplifying procedures for doing business in India, bringing in a straightforward and transparent taxation system, relaxation of FDI in few sectors, allowing auction of coal mines to the private sector, and closing allocations in the telecomm sector at a fast pace are welcome changes. Resolving of structural bottlenecks and faster clearances for projects in infrastructure and industry are also expected to facilitate investment. Based on the new methodology, as per the CSO estimates, real GDP growth rate is expected to be in the region of 8-8.5% in FY16. The International Monetary Fund (IMF) brdicts that India will emerge as the fastest growing major economy in the world, with growth expected to rise to 7.5% in FY16.

Infrastructure Creation

The inadequacy of quality infrastructure in India has undeniably hampered the pace of economic growth. Cognizant of the brssing need to improve infrastructure creation because of its strong forward and backward multiplier effect on the economy, the Budget 2015 includes a number of much-needed measures that should encourage increased activity and investment in India's infrastructure sector.

As per the budget, investment in infrastructure will go up by Rs.70,000 crore in the year 2015-16, over the brvious fiscal period. In an aim to improve the environment for private infrastructure investment, the budget announced the creation of a 'National Investment and Infrastructure Fund' with annual inflows of Rs. 20,000 crore. The Fund will be expected to invest in public sector infrastructure finance companies which, in turn, will be able to leverage their higher credit rating to access domestic and international debt markets.

The budget also announced tax free bonds for investing in rail, road and irrigation projects through public private partnership (PPP) models. Apart from deploying public money for the development of infrastructure projects, the government also intends to revisit the brsent PPP (Public Private Partnership) mechanism to remove the shortcomings so as to attract increased private participation.

Further, Rs. 25,000 crore has also been allotted to the Rural Infrastructure Development Fund.

India has the second largest road network in the world spanning a total of 4.9 million km. Roads in India transport over 60 per cent of all goods and 85 per cent of total passenger traffic. The roads and bridge infrastructure industry is expected to be worth US$ 19.2 billion by FY17. The National Highways account for 1.9 per cent of the total road network in India. Source: <http://www.ibef.org/industry/roads-brsentation>

Prospects for the Indian road sector seem bright with the renewed thrust by the brsent government to accelerate road creation. The planned allocation to the road transport and highways ministry stands at Rs. 42,913 crore in 2015-16, an increase of Rs. 14,031 crore or 48% from the brvious year. The sector also stands to benefit from improvement in traffic and hope for lower interest rates in FY16.

Source: <http://articles.economictimes.indiatimes> .com/2015-02-28/news/59612991_1_road-ministry-finance-minister-arun-jaitley-roads-sector

In FY15, the government was able to achieve 8,000 km of road construction from 3,621 km in FY14. Source: <http://zeenews>. india.com/news/india/we-will-lay-more-than-30-km-of-highways-per-day-gadkari_1603318.html  Increased emphasis is also

being given to achieve a sharp step-up in project awarding, especially under the engineering, procurement and construction (EPC) mode as road construction firms are still showing tepid response to built-operate-transfer (BOT) formats. In FY15, NHAI awarded 3100 km of road projects out of which 2400 km was on EPC basis and balance 700 km was on BOT basis. In contrast, in FY14, only 1400 km of road projects were awarded through the EPC mode. Project awarding is expected to pick up greater pace with the government's strong resolve to clear land acquisition issues, environmental clearances, land financing etc. NHAI is targeting to award about 9,000 kilometres in FY16. About 50 percent of it will be either in BOT or hybrid annuity mode and the remaining 50 percent in EPC mode. The hybrid annuity mode is a mix of EPC and BOT formats, with the government and the private companies sharing the total project cost in the ratio of 40:60 respectively.

Source: <http://articles.economictimes.indiatimes.com/2015-04-15/news/61179983_1_epc-mode-11-projects-28-projects>

Source:<http://www.moneycontrol.com/news/economy/expect-to-award-9000-km-road-projectsfy16-nhai_1344723>. html?utm_source=ref_article

The Ministry of Road Transport and Highways (MORTH) is also considering to develop 1231 highway projects of total 37000 km in order to improve the road infrastructure with an investment of Rs. 3.5 lakh crore. The government is also planning to build 5600 km of roads along the borders and coastal areas under the 'Bharat Mala' project at an estimated cost of Rs. 56,000 crore. Source: <http://indianexbrss.com/article/india/india-others/road-financing-models-searching-for-new-ways/>

In India, there is an immense need to provide irrigation to mitigate risk to the farmer since a large majority of the farm lands are rain-fed. Besides reducing dependence on the monsoons, irrigation facilities also help to bring more land under cultivation, reduce instability in output levels, create job opportunities, make available electricity and transport facilities, control floods and brvent droughts.

With an aim to improve irrigation facilities and ensure effective water management, the government has made an allocation of Rs. 5300 crore under the Pradhan Mantri Krishi Sinchai Yojana (PMKSY) in FY16 to support micro-irrigation, watershed development.

Company Overview

KNR Constructions Limited (KNRCL) is among the leading infrastructure companies of India. Over the years, since its incorporation in 1995, through exemplary track performance of constructing landmark infrastructure projects in record time, KNRCL has moved to a special echelon. KNRCL's strength lies in its ability to provide EPC services across various fast growing sectors namely construction and maintenance of roads, highways, flyovers and bridges. Its clientele in the road segment includes National Highway Authority of India (NHAI), state governments and private companies. The Company is also an established player in irrigation and water management segments.

KNRCL has forayed into infrastructure projects independently as well as through collaborations. Its excellent track record of execution has made it the brferred partner for executing road projects. Collaboration with like-minded companies has enabled KNRCL to undertake high-value projects and increase its geographic brsence.

KNRCL has successfully completed 5,888 km of projects across 12 states in India. In-house specialised and construction equipment as against leasing the same and the services of skilled personnel are the Company's key differentiators enabling its imbrssive performance.

Leveraging its experience and expertise in the construction business, the Company is well-positioned to foray into new business areas while strengthening existing business activities.

Major Achievements during the Year

During the year under review, KNRCL has been awarded a number of projects which further strengthens its position as a leading provider of construction services across the infrastructure space. At brsent, the order book stands at about Rs. 1318.13 crore with Rs. 174.79 crore coming through private concessionaires and about Rs. 1143.34 crore from various government organisations.

Opportunities

Thrust on infrastructure development: The government has given a renewed thrust to infrastructure projects in recent months to reduce infrastructure supply-demand gap. Measures include speedy resolving of issues which have stymied such ventures and creating a benign environment which will facilitate private and foreign investment. KNRCL, a leading player in the infrastructure space is well-positioned to benefit from the government's focus on sectors like roads highways & flyovers, water management and urban infrastructure.

Sharp revival in EPC mode: The government has shown a keen intent to grant road projects under the EPC mode. KNRCL, with its proven track record in the EPC sphere will be looking at leveraging this opportunity to the fullest.

Maintenance & Upgrades: High traffic density in recent years has necessitated the need for road expansion and regular upgrades. Domain expertise in road construction provides sustainable growth opportunities for KNRCL.

Risk and Risk Mitigation

Competition Risk - NHAI / EPC projects face competition from larger players. Any aggressive bidding environment may lead to price cut and low operating margins. To mitigate this risk, where required, KNRCL enters into mutually beneficial partnership with larger players, both domestic and international. This strategic collaboration facilitates financial and technical synergies and enables the Company to compete effectively for projects.

Slow-down in Road Sector: Slowdown on part of the government to award road projects could impact growth prospects. However, this risk is eliminated to a great extent as the brsent government has taken focused steps to ensure that infrastructure creation moves at a brisk pace.

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. KNRCL with its vast experience of project management, balanced capital structuring and efficient cost control measures is well geared to mitigate this risk. Further, KNRCL owns most of the construction and mining equipment enabling it to expedite execution and sustain margins.

Raw-material Risk-- Increases in the cost of raw materials, particularly steel and cement, or their unavailability over the tenor of the contract can impact schedules and profit margins. To mitigate this risk, 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 KNRCL 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. To mitigate these risks, the Company ensures that it considers the possibility of a higher interest rate and includes it in the cost of a project before bidding for it. Despite this, KNRCL is open to resorting to interest rate hedging in case the need arises.

Regulatory Risk - Infrastructure projects require strict adherence to government regulations and requirements. 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. To mitigate this risk, KNRCL has a strong regulatory compliance mechanism in place.

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. 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.

Discussion on financial performance and operational performance:

1. Turnover: The Gross Sales of the Company increased from Rs. 834.79 crore in FY 14 to Rs. 876.13 crore, clocking a growth of about 5%.

2. Share Capital: The Company has not allotted any shares during the year under review and the paid up share capital as on 31st March 2015 is Rs. 2812.35 Lakhs divided in to 2,81,23,460 Equity Shares of Rs. 10/- each.

3. Reserves and Surplus: The Reserves and Surplus of the Company has gone up from Rs. 485.20 crore to Rs. 541.08 crore in FY15 on account of profit made during the year.

4. Net worth: The Company's Net Worth increased from Rs. 510.64 crore to Rs. 567.42 crore mainly on account of internal generation of profit.

5. Secured / unsecured loans: There was an increase of loans from Rs. 90.72 crore to Rs. 96.30 crore.

6. Fixed Assets: The Company's Fixed Assets (Gross Block) increased by Rs. 22.97 crore in FY15 from Rs. 525.25 crore to Rs. 548.22 crore which have been acquired for execution of new contracts awarded to the Company during the year.

7. Provision for Tax: The Company has provided for a sum of Rs. (0.71) Crore as current year tax including wealth tax.

8. Net Profit: The Company's Net Profit after Tax and extraordinary expenses during the year was Rs. 73.01 crore as compared to Rs. 60.98 crore in FY14.

9. Dividend: The Board of Directors has recommended a divided of Rs. 1.00 per share (being 10 %) and total payout works out to Rs.3.38 crore (including dividend tax).

10. Earning Per Share (EPS): The Company's EPS has increased to Rs.25.96 in the current year from Rs. 21.68 in the brvious year.

Human Resources Development and Industrial Relations

Human Resources play a critical role in organisational success. At KNRCL, all HR policies and practices are aligned with the overall organisational strategy. In order to achieve operational excellence and maintain a competitive edge, the Company invests in building and nurturing a strong talented pool by instituting best practices with respect to its employees. During the year, industrial relations remained cordial, with a strong spirit of bonhomie and camaraderie brvailing among the rank and file of employees. The Company employed a total of 530 employees during the year.

Cautionary Statement

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