EPC road firms need more project awards and work orders to push their topline

The revenue growth of road engineering, procurement and construction (EPC) companies is expected to be impacted this fiscal and the next, largely because of lower project awards. Many experts opine that revenue growth of EPC companies is expected to moderate to 5-7 per cent next fiscal. This can be attributed to lower national highway awarding on their order books. A recent study by CRISIL Ratings echoed similar sentiments on the completion of a study on 120 road EPC companies. Meanwhile, the credit profiles of these companies will remain stable, supported by steady operating profitability and strong balance sheets, the study finds. Their revenue growth will be impacted this fiscal and the next – after a compound annual growth rate of nearly 13 per cent over the past five years. This will be on account of lower project awards. It is pertinent to note that the Ministry of Road Transport and Highways (MoRTH) had awarded an average of close to 12,500 km projects between fiscals 2022 and 2023 but the number dropped to 8,581 km last fiscal and is seen modest at close to 8,000 km this fiscal. Quite significantly, going forward, while highway projects with a total length of 936 km were approved by the Cabinet Committee on Economic Affairs recently, timely approval of additional projects and their awarding will be timely boosts for the sector.

As an effective alternate, some companies are looking to diversify their order books to sectors like transmission, metros, railways, water supply and irrigation. The extent of this will also be crucial in supporting their credit profiles. There are actually multiple reasons for this slowdown, which spans 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 books of road construction companies is declining to nearly two times of 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.

There would, however, be some respite as prices of major raw materials, steel and bitumen in particular, are down 5-17 per cent from their peaks in fiscal 2022. Since most projects are awarded on fixed-price basis, this will keep operating profitability steady at 13-14 per cent even after factoring in increased competitive intensity at the time of awarding of these projects. Consequently, cash accrual is expected to be stable. Going by the Crisil study, 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 nearly 0.65 times expected for this fiscal and the next. As a result, credit risk profiles are expected to remain resilient. The bottom line is that EPC companies working in the road sector need more project awards or work orders to push their topline.