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Despite the continued focus on capex by the central government and the likely rebound in state and private spending, Ind-Ra expects the EPC sector’s pace of order execution to moderate in FY25, given the elections in 1QFY25. After the 30% CAGR growth over FY20–FY24, the centre’s own capex is projected to grow to 17% in FY25, following the trend of lower spending in an election year. Acceleration in sector-specific private sector capex and continued growth in state spending are likely to partially offset the lower central spend. That being said, the revenue growth in the past two years has exceeded Ind-Ra’s expectations, with the FY24 revenue growth likely to have been 17%–18% as against Ind-Ra’s 14%–16% estimate (FY23: 16%–17% yoy vs. 12%–15% estimate). For the purpose of this report, Ind-Ra has considered its entire portfolio of rated EPC companies, excluding Larsen & Toubro Ltd. (‘IND AAA’/Stable) due to its large scale and diversified operations, which would have skewed the analysis.
While noting a worsening sub-sector forecast for roads engineering, procurement, and construction (EPC), India Ratings and Research (Ind-Ra) has reiterated a neutral assessment on the construction sector for FY25. EPC businesses are expected to perform well in FY25, however, revenue growth rates are expected to moderate, according to Ind-Ra. The agency anticipates sufficient cash buffers in addition to a slight increase in operating margins. According to Krishan Binani, Director of Corporate Ratings at Ind-Ra, “a 10%–12% annual revenue growth is anticipated in FY25, which supports the neutral sector outlook. It is anticipated that order inflows will grow in the second half of FY25 due to government budgets and the acceleration of private sector capital expenditures. It is anticipated that margins will slightly increase, enhancing credit metrics even further.”
While the growth in the roads and railroads sector may be slow, the subsectors of civil construction, power (particularly transmission & distribution), water, and metro are expected to lead the revenue growth in FY25. There might have been a slight, less-than-anticipated margin recovery in FY24 following two years of declining margins in FY22 and FY23. If raw material costs stay range bound, Ind-Ra anticipates a further 30–50bp year-over-year margin expansion in FY25; that being said, the margins would still be 30bp below the pre-covid level. Furthermore, given the improved profitability in the context of a steady working capital cycle, the credit metrics should improve. The interest coverage ratio grew to 3.9x in FY25 (from 3.1x in FY23 and 3.5x in FY24), and the net leverage
After the elections are over, Ind-Ra anticipates that new order inflows will begin in late QFY25. The number of tenders awarded in the last two years has increased significantly (FY24: 17% yoy), which has maintained order book visibility despite the rapid expansion in revenue. Announced tenders, which decreased by 1% year over year in 9MFY24, became more active in 4Q and increased by 25% year over year in FY24. The general elections are scheduled for 1QFY25, hence, there may be a lull in the tendering process. As in previous years, tender announcements and awards are expected to begin in the second quarter of 2024 and gain steam starting in June of the same year.
Given the expected debt tied up for the anticipated expenditure and an improvement in cash flow from operations, Ind-Ra anticipates that the liquidity profile of EPC sector firms in FY25 will remain satisfactory. The removal of exemptions like monthly billing and bank guarantee exemptions granted to EPC contractors under Atmanirbhar Bharat may result in an increase in the working capital requirements. Because of the volatility in the industry and the risks associated with borrowers not meeting their contractual obligations, banks have been cautiously increasing the collateral requirements and tightening the terms of their bank lines to EPC players. In 9MFY24, Ind-Ra’s liquidity profile showed some improvement, with an increase in.
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