A pick-up in project awards in the roads sector, driven by both the new hybrid annuity model (HAM), and engineering, procurement and construction (EPC) projects, has vastly improved the order book position of EPC-focussed road developers. Pending orders for a list of 50 EPC companies grew two-fold from Rs 41,000 crore in fiscal 2014 to Rs 85,600 crore in 2017. This year, they are likely to see an order inflow of Rs 48,000 crore with their combined order book likely to touch Rs 1 lakh crore, according to date sourced from Crisil.
Sushmita Majumdar, director, Crisil Ratings, told FE: “While new order inflow is expected at Rs 48,000 crore, a portion of the outstanding order book in FY17 is also expected to get executed in FY18. Hence, the order book at the end of FY18 is expected to be at least Rs 1 lakh crore.”
Over the last three-four years, the projects awarded under the build-operate-transfer (BOT) model has reduced sharply. While all projects awarded in 2013 were under the BOT route, this reduced to just 20% in FY14 till FY16 and it is estimated that it will further come down to 10% in FY17. The budgetary allocation for highways rose by 11% to Rs 64,000 crore for the current fiscal. This, in turn, is expected to keep the orders flowing in for road EPC companies over the medium term, sustaining revenue growth momentum.
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Even at the end of FY16, a clutch of seven contractors that were active in bagging EPC contracts recorded a combined order book of a whopping Rs 50,600 crore — levels never seen before. The last high was in FY12, when the order books of these seven contractors was at Rs 36,200 crore. In fact, the average construction order book to sales for road companies which used to hover at 1.5 times revenue, already stands at 2.5-3 times the revenues. “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,” Majumdar said.
The order flow and revenue growth of these companies over the last three-four years have also resulted in an improved credit ratio — or ratio of upgrades to downgrades — at 2.0 in FY16, up from 0.11 in FY14.