1. Govt push, improving execution double order inflows in EPC sector

Govt push, improving execution double order inflows in EPC sector

A strong government push, specifically on roads and urban infrastructure, coupled with improving execution has resulted in more than a doubling in order inflows over FY15 to FY17 for engineering, procurement and construction (EPC) focused companies, according to analysts at Credit Suisse.

By: | Mumbai | Published: July 6, 2017 7:23 AM
Rohan Suryavanshi, director, strategy & planning, Dilip Buildcon, told FE that the company is on course to beat its guidance estimates for FY18 with respect to the top-line forecasts.

A strong government push, specifically on roads and urban infrastructure, coupled with improving execution has resulted in more than a doubling in order inflows over FY15 to FY17 for engineering, procurement and construction (EPC) focused companies, according to analysts at Credit Suisse. Order inflows for a sample of 11 companies doubled to Rs 60,000 crore in FY17 from Rs 29,000 crore in FY15, a report by the brokerage noted. Dilip Buildcon, J Kumar Infra, Ashoka Buildcon, Gayatri Projects, NCC and Simplex are among the companies that have seen a sharp pick-up in orders with most of these concentrated in the roads and metro sectors.

Rohan Suryavanshi, director, strategy & planning, Dilip Buildcon, told FE that the company is on course to beat its guidance estimates for FY18 with respect to the top-line forecasts. “Historically, we’ve outperformed our guidance and FY18 should be no different,” he said.

In FY17, the company reported revenues of Rs 5,000 crore of which about Rs 100 crore was earned as an early completion bonus for projects completed ahead of time. In total, the company constructed 2,500 lane km, by far the most number of kilometres constructed, compared to any other company.

In particular, for the roads sector, the introduction of the developer-friendly business model called the hybrid annuity model (HAM) in January 2016 seems to have done the trick. Projects awarded under HAM formed over 50% of the total road projects awarded in FY17. The near-term pipeline of road projects to be awarded, are also all driven by HAM.

However, according to analysts at Credit Suisse, while order inflows have doubled over FY15 to FY17, revenues for FY17 are up only 25% compared to FY13-FY15. This implies that the “revenue growth momentum is ahead of us,” the analysts wrote in a research paper, noting that execution has not yet picked up even though ordering has increased.

In the roads sector, for FY18, what with the project awarding targets set at 25,000 km by the ministry of road transport and highways (MoRTH), the order pipeline is expected to be very strong. Hence, most developers have provided guidance, stating large order inflows. Alok Deora, analyst at IIFL Wealth, believes this should spell impressive growth for most developers during the next few years.

“The FY17 construction of 22 km per day could have been even better but for the land acquisition hurdles. For the government to achieve its target of 41 km per day this year, it is critical to address this key challenge,” Deora said.

Moreover, urban infrastructure is also emerging as a large opportunity with urban infrastructure improvement becoming a political showcase. “Opportunities are arising in mass rapid transport (metros), roads and water supply. We believe that the rough annual size of this opportunity is in the range of about `30,000 crore every year,” the analysts at Credit Suisse, noted.

  1. No Comments.

Go to Top