Knowledge Marine & Engineering Works Ltd Q2 FY2024 Concall Summary

Key Takeaways

• H1 revenue grew 36% sequentially to INR 106.9 crores, with EBITDA margins holding at 34% and PAT margins expanding to 23% from 19%.
• International expansion is now real, not just a plan: a Bahrain sand-mining contract added INR 450 crores to the order book, and a second independent international contract was won in Myanmar.
• The receivables spike to INR 160 crores was a timing issue, not a collection problem: INR 107 crores was received after quarter-end, tied to JV partner settlement mechanics.
• The company can now bid solo for INR 300 crore+ dredging contracts, removing a structural dependency on JV partners after completing a landmark rock-dredging project.
• What to watch next quarter: Whether the first Bahrain vessel commences operations on schedule in late December, the pace of conversion from the INR 1,100 crore domestic pipeline, and any concrete revenue guidance management has so far declined to provide.

International Expansion: Bahrain & Myanmar

• Bahrain entry is a business-model shift: the contract generates revenue from sale of dredged sand, not from dredging services, turning a waste-disposal cost into a product sold into the local market.
• Order book impact: the Bahrain contract alone added approximately INR 450 crores over five years, with only a single vessel committed initially.
• Cautious ramp-up: management is mobilizing one vessel first, will assess the market over two quarters, and sees demand for a second and third vessel but will raise debt only if expansion proceeds.
• Vessel timeline: the first vessel, purchased for close to USD 5 million, is sailing from Bulgaria to Bahrain and should arrive during the third week of December to start operations.
• Margin ambition: starting at 35% EBITDA margin, management expects to increase margins once it captures adjacent Bahrain businesses like land reclamation.
• Myanmar second win: secured an independent contract from Myanmar Port Authority for dredging and enhancement of the Yangon River Channel, distinct from the earlier Government of India collaboration at Sittwe Port.
• Sittwe Port execution: the first year of capital and maintenance dredging was successfully completed, with a project value of INR 248 crores and dredging quantity of 1.67 crore cubic metres.

Sujay Kewalramani: "am considering right now, 35% margin going forward. But this is just a start. There are several other businesses in Bahrain in terms of land reclamation, not just selling off land, but other businesses, which we will be able to capture once we enter the market."

Order Book & Pipeline

• Current pipeline crossed INR 1,300 crores, with management expecting a greater than 50% success rate as it has historically achieved.
• Domestic pipeline: INR 1,100 crores in bidding, of which INR 450 crores has already translated into orders. Inland waterway and sand-mining orders in India remain under government consideration.
• Conversion bottleneck: government decision-making is the pacing factor, with tenders at various stages and some World Bank funded with two-stage processes. No challenge exists from the contractor or bidder side.
• New eligibility unlocked: after completing the INR 78 crore Mangrol rock-dredging project and receiving a work completion certificate for a INR 250 crore single order, the company is now qualified to bid independently for contracts of INR 300 crores and above, with volumes exceeding two million cubic metres.
• JV partner no longer required: going forward, the company will not need a JV partner to bid for large contracts, a structural improvement in its competitive position.
• Inland waterways opportunity: the Government of India signed an MOU with Amazon to move cargo between Patna and Calcutta; the company has already submitted bids for dredging on that stretch.
• Dredge material reuse in India: the government began exploring beneficial use of dredge material with IIT three months ago. If studies confirm suitability, bids for such projects may follow, though the timeline is uncertain.

Sujay Kewalramani: "they are looking for a concept wherein you provide the services for free but you generate the revenue from it whatever you can. So, they are not yet so aggressive on sharing of revenue from the dredge material because that market still needs to be explored properly."

Financial Performance & Quality

• H1 FY24 revenue of INR 106.9 crores represented 36% sequential growth, with EBITDA of INR 36.1 crores (34% margin, up 4% YoY and 7% sequentially) and PAT of INR 24.4 crores (23% margin, up from 19%).
• Receivables spike explained: receivables rose to INR 160 crores because two major projects were executed with JV partner Sahara Dredging and funds could not be received from the debtor. Payables also rose because the company did not pay JV partners. INR 107 crores was subsequently received and a substantial amount paid to creditors.
• Seasonal cost pattern: H1 (monsoon period on both Indian coasts) sees most dredgers facing downtime for repairs, so H2 typically delivers better numbers with lower costs due to decreased standby costs.
• Revenue is currently 100% recurring, with no one-time projects in hand after the Mangrol Fishing Harbor project was completed. Management could not provide a historical or projected split when asked.
• Margin by business line: small craft yields 25% to 30% EBITDA margin (low risk, plain vanilla, some competition), while dredging yields 35% to 40% EBITDA margin (less competition, higher risk). Capital dredging carries higher margins than maintenance dredging, though most current contracts are maintenance.
• Domestic and international margins are the same, close to 35%.
• Vessel utilization: Bahrain operations are planned for 290 days out of 365; most other vessels will exceed 300 days, with the balance reserved for bad weather, breakdown, repair, maintenance and dry docking.

Fleet, Capex & Market Position

• Fleet growing to 16 vessels with the construction of two tugs for Mumbai Port and one high-speed patrol boat for Paradip Port.
• Capex plan: approximately INR 60 crores to be spent in the next year, split between constructing three vessels for two existing orders and acquiring vessels for upcoming orders, funded from internal accruals or debt.
• Long-term fleet ambition: a goal of 40 or more vessels within the next 10 years.
• Market share target: aim to capture 10% of the maintenance dredging market, which management estimates will take another three to four years.
• Competitive landscape: typically 2 to 3 bidders per government tender, with small domestic players as the usual competitors rather than Adani Port always.
• Main board listing: the company will complete three years on the SME exchange on 21 March, after which it can move to the NSE main board. Management intends to complete the migration before the end of this financial year.
• Project-based JVs under exploration: the company is evaluating a contract on the East Coast of India with companies including ITD Cementation.

Sujay Kewalramani: "Before the end of this financial year, we'll be doing it, because there are certain guidelines by NSE that we should complete three years on the SME exchange before listing on NSE Main Board which we will complete on 21st of March, and then we'll be in a position to move on to the main board."

Guidance & Commitments

Key Metrics