Profitability bottoms out, to rise this fiscal on steady input prices; stable debt to keep credit profiles healthy
Diversified engineering, procurement and construction (EPC) companies are set to grow their revenue 12-14% this fiscal, driven by healthy order books with a mix of domestic and international orders, and steady pace of execution in the infrastructure sector. That follows an average annual growth of 10% in five fiscals through 2024.
A CRISIL Ratings analysis of 13 large and 162 small and mid-sized diversified EPC companies, with estimated aggregate revenue of ~Rs 3.5 lakh crore last fiscal (one-third of India's total construction investment), indicates as much.
Healthy awarding and capital outlay for the infrastructure segments by both the Center and the states have led to strong revenue growth and sustenance of healthy order book (estimated at 3.2-3.5 times the fiscal 2024 revenue as of March 2024) for diversified EPC companies over the past three fiscals.
The government push for infrastructure growth, along with increase in public-private partnerships, will play a key role in supporting domestic revenue growth this fiscal, while companies having diversification into other geographies will support overseas revenue growth. For the record, the share of overseas orders has increased to ~25% of the current order book from ~15% five years back.
Says Gautam Shahi, Director, CRISIL Ratings, "Overall investment in the infrastructure sector is likely to grow 12-14% this fiscal, driven by continued momentum in the budgetary outlay by the Centre and states and pick-up in the private sector. The share of private investments is expected to increase to ~12% this fiscal from ~9% estimated last fiscal, driven by revival of the build-operate-transfer mode in the roads sector and increased private participation in the capacity additions in power segment."
The operating margin, which declined to 8.0-8.5% over the past three fiscals from early double-digits in the previous fiscals, is estimated to have bottomed out with near completion of the low-margin, competitively bid legacy orders. The margin is expected to improve to 8.5-9.0% this fiscal, driven by steady prices of inputs such as steel and cement, and execution of high-margin overseas orders, even as high competition in some sectors may be a drag.
Working capital cycle, though high, has been steady in the past five fiscals, and is expected to remain so.
Says Snehil Shukla, Associate Director, CRISIL Ratings, "Overall, credit metrics are expected to remain stable this fiscal amidst healthy operating performance and moderate debt. Net debt for the sample set, which remained steady despite near doubling of revenue over the past three years, is likely to remain stable this fiscal, too, as cash accrual should be adequate for capex, equity investments and incremental working capital requirements."
The TOL/TNW and interest coverage ratios are projected at 1.55-1.6 times and ~4.0 times, respectively, for this fiscal, compared with ~1.60 times and 3.6-3.8 times, respectively, estimated last fiscal. |
