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ICRA projects that the Indian construction sector will continue its strong revenue growth trajectory in FY2025, with year-over-year growth of 12–15% after an outstanding 18–20% revenue increase in FY2024. The government’s emphasis on infrastructure development is demonstrated by its increased capital expenditure allocations, which in the FY2025 budget estimates (BE) reached Rs 11.1 trillion (+16.9% YoY), which is encouraging for the sector’s prospects. Because of the sector’s excellent coverage indicators, moderate leverage, and consistent increase in operating income, ICRA continues to maintain a stable outlook.
“The aggregate order book-to-sales ratio of ICRA’s sample set of companies stood at around 3.9x as of December 2023 (compared to 3.4 times during March-2023), thereby indicating a healthy revenue growth prospect over the medium term,” stated Ashish Modani, vice president and co-group head of corporate ratings at ICRA, in further detail. Because of the high base and some tapering in execution momentum in Q1 FY2025 amid the Parliamentary Elections, ICRA anticipates the revenue growth in FY2025 to remain solid at 12–15% on a YoY basis, but significantly lower than the 18–20% revenue expansion assessed for FY2024e.
The Central Government’s increased capital outlay towards the infrastructure sector has supported the order book growth of ICRA’s sample construction companies over the past five years ending in March 2023, with a CAGR of around 27%. The companies’ order books remain between 3.3x and 4x of billing. Over 55% of the order book is still made up of the transportation (roads, metro, airport, bridges, flyovers) and building (residential, commercial, mixed-use, and industrial) segments. But there has also been a noticeable increase in the proportion of mining, water, and energy/power projects in recent years.
The construction industry is expected to benefit from the moderate pricing of some of the major commodities during FY2024, like steel, which gives industry players some respite. Though it is generally moderate in segments like sewage and drinking water, the level of competition in engineering, procurement, and construction projects awarded by the NHAI / the Ministry of Road Transport, railways, and metro segments is still considerable. ICRA expects generally stable commodity prices and benefits from operating leverage to maintain the overall profitability of the construction sector firms in FY2025, notwithstanding the high overall competition intensity.
In FY2025, industry players should anticipate to see an increase in operating margins of 25-50 basis points to 11.5%–12.0%, driven by the benefits of operating leverage and the expectation of relatively stable commodity prices. Nonetheless, there is still significant competition in a few divisions of the building industry. Thus, in the medium run, overall profitability will continue to be below pre-Covid levels (14%+).
Contractors received assistance during the Covid-19 pandemic through the Atmanirbhar Bharat initiative, which was launched by MoRTH in June 2020 (in the form of monthly billing frequency, decreased bank guarantee requirements, etc.). The final extension concluded in March 2024. It is anticipated that in FY2025, as this arrangement expires, the working capital requirement will rise. However, Modani continued, “coverage metrics are anticipated to be comfortable, with interest cover probably staying above four times.
Group Media Publication
Construction, Infrastructure and Mining
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