Road engineering, procurement and construction (EPC) companies are expected to report a moderation in revenue growth to 5-7 per cent next fiscal, as lower national highway awarding weighs on their order books, stated a report by CRISIL Ratings. That said, it added, the credit profiles of these companies will remain stable, supported by steady operating profitability and strong balance sheets.
CRISIL Ratings studies over 120 road EPC companies to release the findings.
“The revenue growth will be impacted this fiscal and the next – after a compound annual growth rate of ~13 per cent over the past five years. This will be on account of lower project awards. The Ministry of Road Transport and Highways (MoRTH) awarded an average of ~12,500 km projects between fiscals 2022 and 2023, but the number dropped to 8,581 km last fiscal and is seen modest at ~8,000 km this fiscal,” said Manish Gupta, Senior Director, CRISIL Ratings.
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The slowdown, it said, will be caused by reasons spanning from procedural issues linked to the approval of cost estimates of projects and restrictions under model code of conduct before elections to transition-linked issues as the government explores build-operate-transfer (BOT) toll model for future projects in addition to its currently dominant modes of EPC and the hybrid annuity model (HAM).
Consequently, the order books of road construction companies are seen declining to around 2.0 times their annual revenue by the end of this fiscal from 2.3 times at the end of last fiscal and 2.6 times in fiscal 2023. This, in turn, will slow their revenue growth in this fiscal and the next, the report maintained.
However, there would be some respite as prices of key raw materials — steel and bitumen —are down 5-17 per cent from their peaks in fiscal 20223. Since most projects are awarded on fixed-price basis, this will keep operating profitability steady at 13-14 per cent even after factoring in increased competitive intensity at the time of awarding of these projects. Consequently, cash accrual is expected to be stable.
“The balance sheets of road EPC companies have strengthened over the past few fiscals because of healthy cash accrual and deleveraging through asset monetisation and equity raising. This is reflected in low leverage, as seen in comfortable total outside liabilities to tangible net worth ratio of ~0.65 time expected for this fiscal and the next. Consequently, credit risk profiles are expected to remain resilient,” said Anand Kulkarni, Director, CRISIL Ratings.
Going forward, CRISIL said, while highway projects with a total length of 936 km were approved by the Cabinet Committee on Economic Affairs recently, timely approval of additional projects and their awarding will be essential for the sector. Meanwhile, some companies are looking to diversify their order books to sectors such as transmission, metros, railways, water supply and irrigation. The extent of this will also be crucial in supporting their credit profiles, it concluded.
From: financialexpress
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