Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Industry / Infrastructure/  Road contractors set for a 200 bps decline in margins: Crisil
BackBack

Road contractors set for a 200 bps decline in margins: Crisil

The credit profiles of road EPC players will remain stable, supported by deleveraged balance sheets, prudent working capital management, and steady cash accrual, with strong awarding in the past two fiscals supporting revenue growth, the Crisisl report said

Photo: MintPremium
Photo: Mint

Aggressive bidding and high raw material prices will drag down the operating profitability of road EPC (engineering, procurement and construction) contractors by 200-250 basis points (bps) to a decadal low this fiscal, ratings agency Crisil said in a report. 

The credit profiles of road EPC players, however, will remain stable, supported by deleveraged balance sheets, prudent working capital management, and steady cash accrual, with strong awarding in the past two fiscals supporting revenue growth, the Crisisl report based on an analysis of 20 EPC players, which constitute 70% of the road sector revenue, said. 

The National Highways Authority of India (NHAI) awarded 6,300 km last fiscal, up 30% on-year, of which 55% was under the hybrid annuity model (HAM). Relaxation in bidder financial and technical capacity criteria led to peak HAM awarding of 3,500 km in fiscal 2022, up from 2,600 km in the previous fiscal. 

Additionally, to fast-track construction by awarding to a larger pool of players, package sizes were pruned 30% in the past two fiscals compared with order sizes during fiscals 2016-20. As a result, mid-sized regional players won 40% of HAM awards in fiscals 2021 and 2022, vis-à-vis ~25% during fiscals 2016-20. 

Aniket Dani, Director, Crisil Research, says, “Limited competition in HAM projects had supported healthy profit margins of road EPC players between fiscals 2018 and 2021. 

The changes in bid eligibility criteria and smaller package sizes have intensified competition, especially last fiscal. Average bid premiums nosedived to 4% last fiscal from 16% earlier. Proposed changes in networth eligibility criteria and additional performance security for abnormally low bids may moderate the competitive intensity." 

The intensified competition and steep surge in the prices of key raw materials — steel, bitumen and cement — had shrunk the operating margins of road EPC players by 200 bps fall last fiscal. Prices of these key raw materials surged 26%, 60% and 4% respectively in the previous fiscal and are expected to remain elevated this fiscal as well. Raw material cost forms 45-50% of overall cost of road EPC players and hence the margins will remain sensitive to any significant increase in prices. Though a large number of contracts have built-in escalation clauses, these kick in with a lag. An expected moderation in input prices may improve margins next fiscal. However, the improvement will be restricted to 100 bps with execution of aggressively bid contracts, Crisil said.  Anand Kulkarni, Director, Crisil Ratings, says, “Despite the declining profitability, the balance sheets of road EPC players will remain healthy. Revenue will grow 13-15% this fiscal, backed by robust order books, as reflected in the order book to revenue ratio of over 3 times. Healthy accrual and limited debt will support comfortable leverage, with total outside liabilities to networth ratio seen ~1.1 times this fiscal. Hence, the credit profiles of players should remain stable despite the current headwinds." 

Competitive pressures notwithstanding, moderation in input prices will remain critical for profitability and accruals. A prolonged Russia-Ukraine war and its impact on commodity prices may affect credit profiles and will bear watching. 

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Industry News, Banking News and Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 29 Jun 2022, 06:49 PM IST
Next Story footLogo
Recommended For You
Infrastructure Stocks
₹18.38-2.39%
₹3,706.11.83%
₹266.251.6%
Switch to the Mint app for fast and personalized news - Get App