Moderation in overall revenue growth for road-building engineering, procurement and construction (EPC) companies will be limited to 5-8% this fiscal despite a 16% de-growth logged in the first half. This is because the players whose operations were impacted because of Covid-19-led lockdowns, have seen good revenue recovery since the second quarter, with order booking riding strong on steady awarding by government agencies and operations back to near normal.

The pullback in revenue growth, together with continued prudent working capital management and healthy balance sheets, will help keep credit quality of road EPC companies stable.

Crisil Ratings Ltd’s analysis of 15 large road EPC developers, which have a cumulative annual turnover of ~Rs 60,000 crore and account for ~65% of the sector’s revenue, indicates this.

This fiscal has seen a step-up in project awards by the Ministry of Road Transport and Highways and the National Highways Authority of India, reflecting the government’s focus on infrastructure. The pace of awarding has doubled, reaching ~7,200 km as of December. This has supported the already-strong order book of road EPC companies, which recently was almost 3 times their fiscal 2020 revenue, providing good revenue visibility for the near-to-medium term (see annexure).

Also, issues around availability of labour and raw material have largely been resolved, and most developers are now operating at pre-pandemic levels, up from 70% of pre-pandemic levels at the end of June. Revenue growth for the June quarter had plunged 33% on-year due to the pandemic-led disruption in operations.

Says Anuj Sethi, Senior Director, Crisil Ratings Ltd, “Road EPC companies usually book ~60% of their revenue in the second half of the fiscal, and this augurs well for revenue recovery. Further, operating profitability of the sample set remained healthy at ~14.5% in the first half of fiscal 2021, down only marginally by 70-80 basis points over fiscal 2020, because of their sharper focus on cost reduction (see annexure). This trend is expected to sustain in the second half as well, despite increasing steel (an input in road construction) prices.”

Working capital pressures have also largely abated. The working capital cycle was a tad constrained in the first half because of higher inventory pile-up due to slower execution.

Liquidity pressure was averted by an increase in supplier credit period. In addition, government initiatives such as extension of construction deadlines, reduction of performance security (from 5-10% to 3% for all existing projects and those being awarded up to December 31, 2021), and simplification of the payment structure for ongoing projects of contractors to monthly basis (till June 30, 2021) from a milestone basis earlier have been helpful in managing liquidity. Also, seven players in the sample set availed of moratorium between March and August 2020, and additional Covid-19 lines to support liquidity.

Says Priyanka Patawari, Associate Director, Crisil Ratings Ltd, “Credit profiles of the sample set of road EPC players are expected to remain stable given minimal impact on business performance, and their healthy capital structure. Total outside liabilities to total tangible net worth ratio is expected to sustain at 1.5x this fiscal, with continuing prudent management of working capital. However, interest coverage ratio is expected to witness a moderation to ~3x from ~3.5x in fiscal 2020 due to lower operating profits.”

Large road EPC players are likely to see revenues recover and log a 15-20% growth in fiscal 2022, supported by their strong order books. With profitability remaining steady, their credit profiles would sustain as well. That said, while operations at most project sites have stabilised, the ability of road EPC players to sustain the growth momentum and manage liquidity amid the continuing pandemic will remain a key monitorable.