Strong balance sheets supported by healthy accrual will keep credit profiles stable
Revenue growth of road engineering, procurement and construction (EPC) companies is expected to moderate to 5-7% next fiscal, as lower national highway awarding weighs on their order books. That said, the credit profiles of these companies will remain stable, supported by steady operating profitability and strong balance sheets.
A study of over 120 road EPC companies rated by CRISIL Ratings indicates as much.
Says Manish Gupta, Senior Director, CRISIL Ratings, "The revenue growth will be impacted this fiscal and the next - after a compound annual growth rate of ~13% over the past five years (chart in annexure). This will be on account of lower project awards. The Ministry of Road Transport and Highways (MoRTH) awarded an average of ~12,500 km projects between fiscals 2022 and 2023, but the number dropped to 8,581 km last fiscal1 and is seen modest at ~8,000 km this fiscal."
There are multiple reasons for this slowdown spanning from procedural issues linked to the approval of cost estimates of projects and restrictions under model code of conduct before elections to transition-linked issues as the government explores build-operate-transfer (BOT) toll model for future projects in addition to its currently dominant modes of EPC and the hybrid annuity model (HAM).
Consequently, the order books2 of road construction companies is seen declining to ~2.0 times their annual revenue by the end of this fiscal from 2.3 times at the end of last fiscal and 2.6 times in fiscal 2023. This, in turn, will slow their revenue growth in this fiscal and the next.
However, there would be some respite as prices of key raw materials - steel and bitumen -are down 5-17% from their peaks in fiscal 20223. Since most projects are awarded on fixed-price basis4, this will keep operating profitability steady at 13-14% even after factoring in increased competitive intensity at the time of awarding of these projects. Consequently, cash accrual is expected to be stable.
Says Anand Kulkarni, Director, CRISIL Ratings, "The balance sheets of road EPC companies have strengthened over the past few fiscals because of healthy cash accrual and deleveraging through asset monetisation and equity raising. This is reflected in low leverage, as seen in comfortable total outside liabilities to tangible net worth ratio of ~0.65 time expected for this fiscal and the next. Consequently, credit risk profiles are expected to remain resilient."
Going forward, while highway projects with a total length of 936 km were approved by the Cabinet Committee on Economic Affairs5 recently, timely approval of additional projects and their awarding will be essential for the sector. Meanwhile, some companies are looking to diversify their order books to sectors such as transmission, metros, railways, water supply and irrigation. The extent of this will also be crucial in supporting their credit profiles. |
