Revenue growth for road engineering, procurement, and construction (EPC) companies is projected to slow to 5-7 per cent next fiscal year due to a decrease in national highway project awards, according to Crisil. The report said that despite this slowdown, the credit profiles of these companies are expected to remain stable, supported by consistent operating profitability and robust balance sheets.
Crisil Ratings senior director Manish Gupta noted that revenue growth will be affected this fiscal year and the next, following a compound annual growth rate of 13 percent over the past five years.
MoRTH project awards drop from 12,500 km to 8,000 km
The Ministry of Road Transport and Highways (MoRTH) awarded an average of 12,500 km of projects between fiscal years 2022 and 2023. However, this number fell to 8,581 km last fiscal year and is anticipated to be modest at 8,000 km this fiscal year.
This decline is attributed to procedural delays in project cost approvals, restrictions related to election codes of conduct, and transition issues as the government considers adopting the build-operate-transfer (BOT) toll model alongside the existing EPC and hybrid annuity model (HAM).
Raw material prices drop 5-17%
Nevertheless, the sector may see some relief as key raw material prices, such as steel and bitumen, have decreased by 5-17 percent from their peaks in fiscal year 2023.
Given that most projects are awarded on a fixed-price basis, this should help maintain operating profitability at 13-14 percent despite increased competitive pressure during project awards.
“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,” it said.
Crisil Ratings expects cash accruals to remain stable. Looking ahead, while the Cabinet Committee on Economic Affairs has recently approved highway projects totaling 936 km, the timely approval and awarding of additional projects will be crucial for the sector’s performance.