Revenue of road EPC companies to fall 8-10% this fiscal: Crisil

Our Bureau Mumbai | Updated on June 23, 2020

The revenue of road-building engineering, procurement and construction (EPC) companies is expected to contract 8-10 per cent in this fiscal year with the Covid-19 pandemic-driven lockdowns severely curtailing activity, according to a study by Crisil Ratings.

That compares with 17 per cent growth between fiscal years 2017 and 2020, according to an analysis of over 300 Crisil-rated EPC companies with rated debt of ₹51,000 crore.

With fewer awards by the National Highways Authority of India (NHAI) in the last two fiscal years, revenue growth was expected to taper to some extent. However, this fiscal, the slowdown in execution due to lockdowns and the resultant labour shortage is expected to push revenue growth into negative territory.

“Typically, in EPC projects, maximum execution and billing is done in March. However, the lockdown that began from March 22 halted work in the crucial last days of the last fiscal and has continued to do so this fiscal. The pick-up in execution and mobilisation after the lifting of the lockdown will be gradual. The upshot would be revenue de-growing (contracting) 8-10 per cent and margins for EPC companies being hit by about 200 bps in fiscal 2021,” Sachin Gupta, Senior Director at Crisil Ratings, said.

Given the effects of the lockdown, these companies had no execution and hence no income in April, but had to meet their fixed costs (primarily employee and establishment costs). These account for about 12 per cent of the topline, and with sites operating at about 50 per cent efficiency in most of May, too, it would mean operating margins would decline 200 bps to around 12 per cent this fiscal.

Operations are likely to stabilise after the monsoon, as migrant workers return to project sites. The trajectory of recovery will therefore depend on the time taken to contain the pandemic.

The slowdown is unlikely to materially impact the credit profiles of these companies, primarily because of their robust balance sheets. Efficient management of working capital and liquidity, though, will be the key to tide over the current situation.

Capital structures

To their credit, these companies have kept a check on their debt levels while pursuing growth. At a consolidated level, as on March 31, 2020, their capital structures were robust, with gearing at 0.5 times, compared with 0.8 times as on March 31, 2015.

And despite incremental funding requirements of their underlying build-operate transfer and hybrid annuity model (HAM) projects, gearing is expected to remain healthy at 0.65 time as on March 31, 2021.

The reason for the low leverage is two-fold. Firstly, the NHAI awards post 2015 have been predominantly through the EPC and HAM routes, entailing lower equity requirements given the NHAI’s contribution to project cost.

Second, divestment of road assets to infrastructure investment trusts (InvITs) and global equity funds has helped further improve the capital structure. The ensuing low leverage provides resilience in these times of subdued operating performance.

“As much as 90 per cent of the debt of the 300 Crisil-rated road EPC companies analysed has an investment-grade rating: BBB category and above. Their order books remain strong at around 2.2 times of their last year’s revenues and liquidity is also stable, with bank limit utilisation averaging about 70 per cent. Even assuming the receivable cycle stretching by an additional 1-1.5 months, they are adequately placed to weather the current situation, thus keeping their credit profiles stable. But the remaining 10 per cent may see some credit pressure because of liquidity pressures,” Sushmita Majumdar, director at Crisil Ratings, said.

Published on June 23, 2020

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