Moderation in overall revenue growth for road-building engineering, procurement and construction (EPC) companies will be limited to 5-8 per cent this fiscal despite a 16 per cent de-growth logged in the first half.
Various road EPC companies, whose operations were impacted because of Covid-19-led lockdowns, have seen good revenue recovery since the second quarter, with order booking riding strong on steady awarding by government agencies and operations back to near normal, according to Crisil.
The pullback in revenue growth, together with continued prudent working capital management and healthy balance sheets, will help keep credit quality of road EPC companies stable.
An analysis of 15 large road EPC developers, which have a cumulative annual turnover of ₹ 60,000 crore and account for about 65 per cent of the sector’s revenue, indicates this.
Infra focus
This fiscal has seen a step-up in project awards by the Ministry of Road Transport and Highways and the National Highways Authority of India, reflecting the government’s focus on infrastructure. The pace of awarding has doubled, reaching 7,200 km as of December. This has supported the already-strong order book of road EPC companies, which recently was almost three times their fiscal 2020 revenue, providing good revenue visibility for the near-to-medium term.
Issues around availability of labour and raw material have largely been resolved, and most developers are now operating at pre-pandemic levels, up from 70 per cent of pre-pandemic levels at the end of June. Revenue growth for the June quarter had plunged 33 per cent on-year due to the pandemic-led disruption in operations.
Green shoots
Anuj Sethi, Senior Director, Crisil Ratings Ltd, said, “Road EPC companies usually book 60 per cent of their revenue in the second half of the fiscal, and this augurs well for revenue recovery. Further, operating profitability of the sample set remained healthy at 14.5 per cent in the first half of fiscal 2021, down only marginally by 70-80 basis points over fiscal 2020, because of their sharper focus on cost reduction. This trend is expected to sustain in the second half as well, despite increasing steel prices.”
Working capital pressures have also largely abated. The working capital cycle was a tad constrained in the first half because of higher inventory pile-up due to slower execution. Liquidity pressure was averted by an increase in supplier credit period.
Seven players in the sample set availed of moratorium between March and August 2020, and additional Covid-19 lines to support liquidity.
Priyanka Patawari, Associate Director, CRISIL Ratings, says, “Credit profiles of the sample set of road EPC players are expected to remain stable given minimal impact on business performance, and their healthy capital structure.”
Large road EPC players are likely to see revenues recover and log a 15-20 per cent growth in fiscal 2022, supported by their strong order books.