Driven by the Ministry of Road Transport and Highways (MoRTH) and the National Highways Authority of India (NHAI), over 80% of the highway projects in the past three years have been bid out under the hybrid – or engineering, procurement, construction (EPC) – model.
 

Not surprisingly, 50 road EPC companies rated in the investment-grade by CRISIL, have benefited from the trend and delivered 20% compounded annual growth in revenue in the past three years. This, along with better working capital management and capital structure, sharp focus on execution, and judicious bidding has led to a significantly improved credit ratio – or a ratio of upgrades to downgrades – at 2.0 last fiscal, up from 0.11 in fiscal 2014. 80% of these companies have revenues below Rs. 1000 cr.

CRISIL expects these companies to grow their revenues by 15% this fiscal, building on the gains so far and benefiting from government spending on infrastructure.
 

In contrast, many large diversified EPC players are yet to wade out of the credit profile morass they entered in the past because of aggressive bidding, leveraged balance sheets, policy bottlenecks and a sluggish economy.
 

Says Sachin Gupta, Senior Director, CRISIL Ratings: “CRISIL-rated companies are expected to maintain their revenue growth momentum this fiscal, fuelled by a strong order book of Rs 85,000 crore (as of fiscal 2017 end), and expected order-book-to-revenue ratio of 3 times this fiscal, which provides good top line visibility.”
 

The combined order book of these 50 companies is likely to touch Rs 1 lakh crore this fiscal, driven largely by increased government spending in the roads sector.
 

Says Sushmita Majumdar, Director, CRISIL Ratings, “Given their demonstrated project execution capabilities and prudent management policies, CRISIL-rated companies are expected to run a tight ship in the medium term. But the timely availability of ‘right of way’ and other approvals would be critical to the pace of project execution over the medium term.”
 

Along with healthy revenue growth, CRISIL-rated players have maintained a comfortable capital structure, with aggregate gearing of close to 0.5x. And despite scaling up in business, what helped them control borrowings was efficient working capital management, lower capex, and policy support for build-operate-transfer projects. That has brought about a gradual improvement in key credit metrics such as interest coverage at 4x in fiscal 2017, which is expected to rise to 5x this fiscal.
 

Overall, CRISIL believes CRISIL-rated EPC players will sustain the improvement in their credit profiles over the medium term, given strong and diversified order books and proven execution capabilities. Continued prudence in bidding, low gearing and healthy working capital management would be key. The government’s thrust on the infrastructure sector and policy measures will come in handy, too.