Knowledge Marine & Engineering Works Ltd Q4 FY2023 Concall Summary

Key Takeaways

• Revenue tripled, margins compressed: FY23 revenue hit INR201.5 crores, up 230% YoY, but EBITDA margin fell to 34.1% from 53% as dry docking and subcontracting costs bit.
• The order book is a government-timing story: INR1,100 crores in bids await government decisions, with INR150 crores executable from the current book in FY24; management expects at least half the bids to convert.
• Fleet build-out is conditional on wins: Up to eight dredgers could be added this year, but capex of INR60-90 crores is gated on contract awards first, a discipline that protects the balance sheet.
• Sand mining is the new adjacency: The company is making a serious push into sand mining domestically and internationally, targeting contracts of five to 20 years that would add long-duration, sustainable revenue.
• What to watch next quarter: Whether the Mangrol receivable clears after Gujarat elections, the pace of bid conversion from the INR1,100 crores pipeline, and any sand mining contract announcement.

Revenue & Profitability

• Top-line surge: Revenue grew 230% to INR201.5 crores, the highest ever, driven by consistent execution despite high inflation.
• Profit growth lagged revenue: PAT rose 126.2% to INR47.2 crores, a slower pace than revenue because of margin compression in the second half.
• Cash conversion was exceptional: Cash flow from operations reached INR36.1 crores, with an EBITDA-to-CFO conversion ratio of 190%, reflecting strong working capital management.
• Balance sheet stays net cash positive: The group holds INR41.30 crores in net cash with minimal long-term debt, having repaid debt proactively ahead of contract completion.
• Revenue has multiplied since IPO: Revenues and profits are up almost six to seven times each in two years, a trajectory management attributes to breaking entry barriers via joint ventures and securing a INR100 crores contract that doubled in size as the vessel performed well.

• Cost structure is fuel-heavy: Fuel consumes 25% of turnover, crew wages and subcontracting another 30%, employee cost just 4-5%, other expenses 5%, leaving EBITDA in the 30-40% band.

Kewalramani: "It will always remain between 30% to 40%. I have been consistent about it. 40% is on the upper side, 30% is on the lower side. This is because we only bid for orders which give us these margins. We do not chase orders which are below these margins."

Order Book & Bid Pipeline

• Current executable book: INR150 crores is executable and receivable from the existing order book in FY24, with INR120-140 crores of that falling in H1.
• Bid pipeline is deep: INR1,100 crores in outstanding bids breaks down into INR400 crores of IWAI river dredging (World Bank funded, multi-level scrutiny), INR425 crores of sand mining, INR70 crores of small craft, and INR275+ crores from private players.
• Conversion expectation: Management expects at least 50% of the bid book to be awarded, translating to INR130-150 crores executable over and above the current order book in FY24.
• The bottleneck is government decision-making, not competition: Delays stem from World Bank funding requirements and multiple scrutiny levels on IWAI projects; the company has not lost any orders and cannot influence the timeline.
• Eligibility upgrade incoming: After completing a single order of INR250 crores, the company becomes eligible to bid for contracts up to INR310 crores, expanding the addressable pipeline.
• Mangrol receivable tied to administrative process: INR55.8 crores in trade receivables is high because the Mangrol Fishing Harbour contract value increased midway and site dimensions changed due to local fishermen demands, triggering a revised administrative approval. The process was slowed by Gujarat elections but is 85% complete, with approval and payment expected in July 2023.

Kewalramani: "In Inland Waterway, the process is taking time because these are World Bank funded projects and required several levels of scrutiny. So there is no way we can interfere or even ask the government when the decision making is going to take place."

Fleet Expansion & Capex

• Conditional dredger additions: The company could add up to eight dredgers by year-end for contracts worth INR400 crores, but dredgers are already identified and investment will only follow contract awards.
• Capex is gated and measured: FY24 capex is planned at INR60-90 crores, including cutter suction dredgers, with a 50% hit rate on the eight-dredger pipeline assumed. If all eight materialize, debt will be taken; otherwise, internal accruals and the net cash position suffice.
• No equity dilution planned: Management explicitly ruled out equity dilution in the current year; any further expansion or capex will be funded through debt.
• New vessels already deployed: River Pearl 11 (hopper barge, INR3.50 crores) and River Pearl 12 (backhoe dredger, INR2.25 crores) were added and deployed at Mangrol Port. River Pearl 10 (10-ton bollard pull tug) is under construction and scheduled for a seven-year deployment at Vadinar Offshore Terminal starting FY24.
• Fleet ambition is decade-scale: The target is 50 or more vessels within 10 years, up from the current fleet, supporting a top-line goal of at least INR1,000 crores within the decade and a 10% share of the INR10,000 crores per annum dredging market.
• Small craft will be built in-house: The INR70 crores small craft business will be constructed internally rather than purchased, a build-not-buy approach.

New Business: Sand Mining & Inland Waterways

• Sand mining is the strategic adjacency: The company has made serious attempts to enter sand mining both domestically and internationally, targeting contracts of five to 20 years that promise long-term, sustainable revenue. Some contracts are expected in the current year.
• Inland waterways expansion underway: Bids have been placed for various stretches in the Ganga and Brahmaputra rivers with IWAI and DCI, spreading the company beyond its coastal dredging core.
• Namami Ganga is an entry-barrier opportunity: The company is actively exploring the project and asking the government to break it into parts of INR300-500 crores or 0.38-0.4 crore cubic meters per stretch. No other Indian contractor is qualified single-handedly for this work because they lack the dredging experience, creating a moat.
• Joint venture discussions active: The company is exploring a single-window system with the government and is in discussions with L&T, ITD Cementation and others to go forward as a joint venture, which would unlock larger contract eligibility.
• International business is selective: Maldives was explored but paused because it did not offer required margins relative to the investment needed. Additional business is being explored in Myanmar (regular dredging) and Bahrain (sand mining), though management declined to provide sizing, saying details would come "very soon."

Kewalramani: "It's an entry barrier and no other Indian contractor is also qualified single-handedly because they don't have such kind of dredging experience."

Competitive Moat & Strategy

• Data is the proprietary advantage: The company has collected data along the Indian coast, Bangladesh, Myanmar and Maldives over 17-18 years through its own surveys, procured data from survey agencies, interactions with employers over 30 years, and public-domain sources, all cross-matched.
• Experience compounds the data edge: While any competitor could theoretically collect similar data over 20 years, they would lack the first-hand operational experience that turns data into bid-winning insight.
• Margin discipline is structural: The company only bids for orders yielding 30-40% EBITDA margins and does not chase lower-margin work. Management noted margins could exceed 40% if contracts were secured directly from the employer rather than through intermediaries.
• Ship building is captive-only: The company builds ships only for itself, not for third parties, because investing in that business does not yield margins comparable to dredging. It will wait for contracts offering those margins or further government subsidy before expanding.

Kewalramani: "Anybody, who is interested and is continuously collecting this data over the last 20 years, will have. But they won't have the first-hand experience that we've had as well."

Contracts & Milestones

• Mangrol Fishing Harbour: A INR67.85 crores capital dredging contract from Dredging Corporation of India, plus an additional work order of INR16.50 crores, both secured in the quarter.
• Veraval Fishing Harbour: A second consecutive fishing harbour development order in Gujarat, this one from RKEC Projects Limited.
• Myanmar international contract: Over 75% of the first international contract at Sittwe, a strategic port for the Government of India, is complete; the remainder is expected before FY24 end.
• Port extensions secured: A two-year extension from Vishakhapatnam Port Authority for a pilot launch (vessel River Pearl 3) and an extension from Shyama Prasad Mukherjee Port in Kolkata.
• Preferential issue placed: INR39.60 crores was raised from marquee investors via a preferential issue of 565,000 equity shares at INR700 per share.
• Main board migration planned: The company intends to move to the main board in the current year.

Guidance & Commitments

Key Metrics