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India’s engineering, procurement and construction (EPC) companies are expected to witness a rise in revenue and EBITDA margin in FY24, helped by Indian government’s continued capital expenditure and a moderation in commodity prices, according to rating agency India Ratings and Research (Ind-Ra).
Excluding infrastructure behemoth Larsen & Toubro, the EPC sector comprising of 18 listed companies saw a revenue growth of 20% YoY Q3FY23, with broadly stable margins. The order book was most flat on a yearly basis, providing a healthy revenue visibility of about 2.8x. Ind-Ra expects revenue growth to continue in Q4FY23, leading to the top line rising 16%-17% YoY in FY23.
However, Ind-Ra expects the EBITDA margins to have bottomed out in Q2/Q3FY23, although the improvement hereon is likely to be gradual than earlier expected. The highways sector has seen margin pressures amid slower-than-expected project execution. On the positive side, ordering activity has picked up in the past two months, the report said.
Rise in Revenue
The sector posted a revenue growth of 20% YoY and 11% QoQ in Q3FY23. Overall, the listed EPC companies is likely to grow at 16%-17% in FY23, Ind-Ra said in its report.
The revenue growth momentum in Q3FY23 was led by KEC International, Power Mech Projects, Ashoka Buildcon, Welspun Enterprises, and ITD Cementation as all these companies registered more than 30% YoY growth. Meanwhile, NCC and HG Infra also grew faster than the sector.
However, road construction companies such as G R Infraprojects, KNR Constructions, PNC Infratech, Dilip Buildcon, and civil construction focused players such as Ahluwalia Contracts and PSP Projects grew slower. Techno Electric & Engineering Company revenue was lower on a yearly basis on account of supply chain constraints.
Margin Improvement
Ind-Ra expects EBITDA margins of EPC sector to improve in the coming quarters, although the rise is likely to be gradual, provided there is no further increase in raw material prices and level of competition. The EBITDA margins were broadly flat quarter-on-quarter at 10.7% for the sector in Q3FY23, due to continued raw material price volatility and slower seasonal execution. In some cases, impact of legacy contracts also weighed on the margins. The margins however were 30bp higher year-on-year, indicating bottoming out.
Among the companies which led margin improvement QoQ were: NCC, Kalpataru Power Transmission, Welspun Enterprises, PSP Projects, HG Infra Engineering (on account of bonus), and Capacite Infrastructure Projects. ITD Cementation and KEC International saw its margin improve on account of low base.
Majority of road players such as Dilip Buildcon, KNR Constructions, PNC Infratech and Ashoka Buildcon witnessed deterioration in margin quarter-on-quarter.
Transmission and Distribution players such as KEC International, Kalpataru Power Transmission, and Techno Electric & Engineering Company witnessed subdued margins YoY, although marginal improvement was seen in the first two firms. Civil construction company showed a mixed performance.
Steady Order Book
The order book in Q3FY23 rose steadily at 1% QoQ, however, the order book grew significantly by 24% YoY. Almost all companies indicated a healthy bidding activity and it is expected to grow their order books in the fourth quarter of the current fiscal, according to the rating agency.
The road sector has seen a muted order inflow initially, but the same has picked up in the recent quarter with awards of 8,400km compared to 10MFY22 (6,883 km) and 10MFY21 (7,696km). Overall, order book visibility was flat at 2.8x QoQ, but marginally rose year-on-year by from 2.6x.
Companies which saw improved order book visibility YoY were KEC International, PNC Infratech, HG Infra Engineering, Dilip Buildcon, Ahluwalia Contracts, PSP Projects, ITD Cementation, and Techno Electric & Engineering Company Limited.
Nonetheless, companies like IRB Infrastructure, G R Infraprojects, KNR Constructions, and J Kumar Infraprojects have seen their order book cover shrinking YoY in Q3FY23.
Financial Cost
The EPC sector continues to face headwinds from increased financial cost due to the sharp increase in raw material prices and interest rate hikes since FY22, resulting in 7% QoQ rise in interest cost, the rating agency said.
Except a few companies such as J Kumar Infraprojects and Ashoka Buildcon, almost all companies witnessed a quarter-on-quarter increase in interest costs. However, on a yearly basis, the sector has witnessed a 18% decline in overall interest cost due to company-specific deleveraging on account of either asset sales or fundraising through equity.
Among the companies which saw a sharp reduction in YoY interest costs were IRB Infrastructure, G R Infraprojects, PNC Infratech, Dilip Buildcon and J Kumar Infraprojects, while increases were seen in KEC International Limited, Kalpataru Power Transmission, NCC, Power Mech, HG Infra Engineering, Ashoka Buildcon, Welspun Enterprises, ITD Cementation and Capacite Infraprojects.
The interest coverage ratio increased to 3.4x in Q3FY23, reflecting both QoQ and YoY improvement. Ind-Ra noted that credit metrics are likely to improve further in Q4FY23 as profitability increases and normalisation of working capital cycle on expected year-end payments.