Road construction firms revenue to rise 15%, higher input cost and competition to weigh on profit margin: Crisil

Road engineering, procurement and construction (EPC) companies are expected to see a 15% rise in revenue in fiscal year 2022, helped by strong order execution, according to a report from Crisil. The report said that last year the revenue rose approximately by 5% only due to lockdown restrictions.

However, operating profit will soften by 100 to 150 basis points on a yearly basis due to soaring raw material prices and increasing competition. Meanwhile, the credit profiles of the companies will remain stable supported by their healthy order books, strong balance sheets, prudent working capital management and steady cash flow, the report noted.

“With fewer restrictions on construction activities during the second wave, road project execution was not impacted as severely as during the first wave. This has manifested in healthy revenue growth of ~37% on-year in the first half of this fiscal, albeit on a significantly weak base of last fiscal,” said Anuj Sethi, Senior Director, Crisil Ratings. He added that operating margins are likely to moderate to ~14% from 15.3% last fiscal, primarily because of a sharp increase in prices of inputs such as bitumen, steel, cement and fuel.

The report said that road EPC contracts will normally have clauses with respect to price escalation that mitigate the margin impact to an extent. However, the contractual escalations are linked to index prices and the actual increase in raw material prices can be steeper, which will affect profitability. Furthermore, high competition and cut-throat bidding will weigh on profitability of these companies.

Despite the pandemic, awarding of national highway contracts rose 23% year-on-year to 10,965 km in the last fiscal. This fiscal year awarding was ~4,900 km till October and is expected to be around 11,000 km for the full year. Consequently, the order book-to-revenue ratio of EPC players stood strong at 3.4 times.

The report pointed out that the working capital cycle and liquidity of EPC players were also supported by government initiatives under Atmanirbhar Bharat. This included extension of construction time period, monthly bill payments instead of milestone-based ones, reduction of performance security, and grant of moratorium.

Therefore, the ability of these players to maintain adequate liquidity after these benefits are withdrawn remains to be monitored in the coming months, Crisil noted.