NEW DELHI : Successful order fulfillment will increase revenues for road engineering, procurement and construction (EPC) companies by 15% this fiscal year, up from 5% in the last pandemic-plagued fiscal year, the agency said on Tuesday. Crisil notation.

In its report on the road sector, the agency said that although companies’ revenues may increase, operating profitability will moderate by 100 to 150 basis points year on year due to the surge in commodity prices. and growing competition.

Despite this, the credit profiles of these players will remain stable, supported by their healthy order books, their well-managed balance sheets, their prudent management of working capital and their regular cash accumulations.

A CRISIL Ratings analysis of 18 major EPC road developers, with cumulative revenue of ??65,000 crore, indicates as much.

“With fewer restrictions on construction activities in Wave 2, the execution of the road project was not as badly affected as in Wave 1. This was manifested in healthy 37% year-over-year revenue growth in the first half of this fiscal year, albeit on a significantly weak basis compared to last fiscal year. While overall sales are expected to increase by 15% in this fiscal year, operating margins are expected to slow to 14% from 15.3% in the previous fiscal year, mainly due to a sharp increase in the prices of inputs such as bitumen, steel, cement and fuel, “said Anuj Sethi, senior manager, CRISIL Ratings Ltd.

Admittedly, road EPC contracts generally include price indexation clauses which to a certain extent mitigate the impact on the margin. However, contractual indexations are linked to index prices and the actual increase in commodity prices may be greater, which will affect profitability.

In addition, increasing competition and aggressive tendering due to the relaxation of tender criteria will increase pressure on profitability.

Going forward, Crisil said, a third wave of the pandemic is unlikely to materially disrupt performance, as players have vaccinated a significant proportion of their workforce and put systems and processes in place. to overcome labor and supply chain challenges. In addition, restrictions on construction activities are unlikely to be severe here.

Despite the pandemic, allocations to national highways increased 23% from the previous year to 10,965 km. This tax allocation, again, was 4,900 km until October and is expected to be around 11,000 km in a full year. As a result, the order book / revenue ratio of EPC players is high at 3.4 times.

Anand Kulkarni, Director of CRISIL Ratings Ltd, said: “Sound order fulfillment and regular accruals will support the credit profiles of road EPC players. Additionally, careful management of working capital and monetization of assets have helped companies deleverage and strengthen their balance sheets over the years. We expect modest improvement in key credit indicators, with total external liabilities to equity and interest coverage ratio at 1.2x and 3.8x this year, compared to 1.3x and 3.4x, respectively, previous year. “

That said, the working capital cycle and liquidity of EPC actors have also been supported by government initiatives under Atmanirbhar Bharat, such as extending the construction schedule, monthly bill payments instead of those based on milestones, reducing performance safety and granting the moratorium. . Therefore, the ability of these players to maintain adequate liquidity once these benefits are withdrawn remains controllable, according to the report.

In addition, the increasing competitive intensity in the industry may not be fully reflected in the pressures on margins in the current fiscal year. Therefore, the incremental squeeze in margins and its impact on credit profiles going forward will be one to watch.

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