Road construction firms to see 15 pc rise in revenue in FY22 high input prices to impact profit

New Delhi, Dec 7 (FN Agency) Riding high on government’s focus on infrastructure building, the road engineering, procurement and construction (EPC) firms are expected to see their revenue swelling by 15 per cent in the current financial year, a report said on Tuesday. However, their profit margins could be impacted due to the rising input cost, said rating and research firm Crisil.

The research firm expects operating profitability of these construction companies to moderate by 100-150 basis points on-year due to a spike in raw material prices and intense competition. With financial health of the companies to be strong aided by robust order pipeline, well-managed balance sheets, prudent capital management and steady cash inflow during the year, their credit profiles are set to remain stable. Anuj Sethi, Senior Director, CRISIL Ratings said that 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 per cent on-year in the first half of this fiscal, albeit on a significantly weak base of last fiscal. While overall revenue is expected to grow 15 per cent this fiscal, operating margins are likely to moderate to 14 per cent from 15.3 per cent last fiscal, primarily because of a sharp increase in prices of inputs, such as bitumen, steel, cement and fuel,” said Sethi.

The projection is based on Crisil’s analysis of 18 large road EPC developers, with cumulative turnover of Rs 65,000 crore. The report noted that road EPC contracts typically have price escalation clauses that mitigate the margin impact to an extent but contractual escalations are linked to index prices and the actual increase in raw material prices can be steeper, which will affect profitability. The road and highways sector has seen intense competition as a result of easing bidding criteria. Consequently, bidding has become aggressive. On the outlook of the sector, Crisil said that a possible third wave of the pandemic is unlikely to disrupt performance materially as the players have vaccinated a significant proportion of their work force and have put in place systems and processes to navigate through labour and supply chain challenges. “Furthermore, restrictions on construction activities are unlikely to be severe hereon,” it said. Even as pandemic affected most sectors badly, the road building sector remained least-impacted. National Highway awarding increased 23 per cent on-year last fiscal to 10,965 km. This fiscal again, awarding was 4,900 km till October and is expected to be around 11,000 km full year. “Consequently, the order book-to-revenue ratio of EPC players stands strong at 3.4 times,” the report added.