Companies

Diversified EPC companies to see revenue spurt this fiscal; Margins to moderate

Hyderabad | Updated on July 26, 2021

The companies to rebound with 20% revenue growth

Strong order books and improved project execution, supported by the Centre’s thrust on infrastructure spending will help large and diversified engineering procurement and construction (EPC) companies rebound with a revenue growth of over 20 per cent this fiscal.

While operating margins may moderate slightly due to higher cost of inputs, particularly steel, an improvement in the working capital position and strong balance sheets should support credit profiles, according to a CRISIL Ratings study of eight large and diversified EPC companies. These are into civil infrastructure, transportation, power, and oil and gas, among others, with aggregate revenue of ₹1.5 lakh crore and represent infrastructure activity in the country.

These companies have logged aggregate revenue declines of 4 and 6 per cent in 2020 and 2021 fiscals, because of weak economic growth and the Covid-19 pandemic, respectively.

Manish Gupta, Senior Director, CRISIL Ratings, said in a statement: “Project execution in the second wave of the pandemic was impacted, but not as much as the first wave because of less-stringent restrictions. Also, this time around, companies were better prepared to manage labour and supply chains.”

“With lockdowns progressively easing, execution has picked up from the second quarter. That will strengthen through this fiscal, the way it did in the last fiscal. We expect this to boost revenue by 20 per cent this fiscal, to well over the fiscal 2019 level.”

Another good augury for the medium term is that order books are already at a multi-year high and the flow of orders will continue to be strong because of government thrust to infrastructure.

The National Infrastructure Pipeline will provide EPC players ₹80 lakh crore opportunity through fiscal 2025 across sectors such as transport, water and sanitation, social infrastructure and power.

Naveen Vaidyanathan, Associate Director, CRISIL Ratings, “Amid strong revenue growth, operating margins may moderate by 20-40 basis points to 9.3-9.5 per cent this fiscal as over 85 per cent of the costs of EPC companies are variable in nature, and prices of key inputs such as steel are likely to increase. This will have to be absorbed in the case of fixed-price contracts, which account for a fourth of all contracts, while for the remaining, it will be passed on with a lag.”

The conversion of operating profits to cash flows is critical for the sector given its high working capital requirement, the CRISIL report stated.

Published on July 26, 2021

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