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Revenue Of Road Construction Companies To Grow 15% This Fiscal: CRISIL

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Strong order execution will swell the revenue of road engineering, procurement and construction (EPC) companies by 15% this fiscal, compared with 5% in the pandemic-marred last fiscal, CRISIL has stated.

 
Revenue Of Road Construction Companies To Grow 15% This Fiscal: CRISIL

Operating profitability, though, will moderate by 100-150 basis points on-year due to surging raw material prices and increasing competition.

Even so, credit profiles of these players will remain stable, supported by their healthy order books, well-managed balance sheets, prudent working capital management, and steady cash accruals.

A CRISIL Ratings analysis of 18 large road EPC developers, with cumulative turnover of Rs 65,000 crore, indicates as much.

Says Anuj Sethi, Senior Director, CRISIL Ratings Ltd, "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."

To be sure, road EPC 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. Furthermore, increasing competition and the aggressive bidding due to relaxation in bidding criteria will add to profitability pressures.

Going forward, 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.

 

Despite the pandemic, national highway awarding1 increased 23% 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.

Says Anand Kulkarni, Director, CRISIL Ratings Ltd, "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 networth 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."

Read more about: construction
Story first published: Thursday, December 9, 2021, 10:57 [IST]
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