Strong order execution and steady cash accruals will swell the revenue of road engineering, procurement and construction (EPC) companies by 15 per cent this fiscal, compared to 5 per cent in the pandemic-marred last fiscal, said Crisil Ratings. However, margins will moderate by 100-150 basis points on-year due to surging raw material prices and increased competition.
“With fewer restrictions on construction activities during the second wave, road project execution was not impacted as severely as during the first wave. This has manifested in healthy revenue growth of 37% on-year in the first half of this fiscal, albeit on a significantly weak base of last fiscal. While overall revenue is expected to grow 15% this fiscal, operating margins are likely to moderate to 14% from 15.3% last fiscal, primarily because of a sharp increase in prices of inputs such as bitumen, steel, cement and fuel," said Anuj Sethi, Senior Director, CRISIL Ratings.
Road contracts typically have price escalation clauses that mitigate the margin impact to an extent. However, the contractual escalations are linked to index prices and the actual increase in raw material prices can be steeper, which will affect profitability.
The increasing competition and the aggressive bidding due to relaxation in bidding criteria will add to profitability pressures.
A possible third wave of the pandemic is unlikely to disrupt performance materially as the players have vaccinated a significant proportion of their work force and have put in place systems and processes to navigate through labour and supply chain challenges. Furthermore, restrictions on construction activities are unlikely to be severe hereon, said Crisil Rating in a note.
Despite the pandemic, national highway awarding increased 23 per cent on-year last fiscal to 10,965 km. This fiscal, again, awarding was 4,900 km till October and is expected to be around 11,000 km full year. Consequently, the order book-to-revenue ratio of EPC players stands strong at 3.4 times.
“Healthy order execution and steady accruals will support the credit profiles of road EPC players. Further, prudent working capital management and asset monetisation have helped companies de-leverage and strengthen their balance sheets over the years. We expect modest improvement in key credit metrics, with the total outside liabilities to net worth ratio and interest coverage at 1.2 times and 3.8 times this fiscal compared with 1.3 times and 3.4 times, respectively, last fiscal," said Anand Kulkarni, Director, CRISIL Ratings.
