Revenues Of Road EPC Firms May Contract 8-10 Percent In FY21: Crisil

The revenue of road-building engineering, procurement and construction (EPC) companies is expected to contract by 8-10% this fiscal with the covid-19 pandemic-driven lockdowns severely curtailing activity, credit ratings agency Crisil said in a report. Between fiscals 2017 and 2020 there was a 17% growth in this segment.

With lower awarding by the National Highways Authority of India (NHAI) in the last two fiscals, revenue growth was expected to taper to some extent. However, this fiscal, the slowdown in execution due to lockdowns and the resultant labour shortage is expected to push revenue growth into negative territory, the report said.

“Typically, in EPC projects, the maximum execution and billing is done in March. However, the lockdown that began from March 22 halted work in the crucial last days of last fiscal and has continued to do so this fiscal,” Sachin Gupta, senior director, Crisil Ratings, said.

“The pick-up in execution and mobilisation after the lifting of the lockdown will be gradual. The upshot would be revenue de-growing 8-10% and margins for EPC companies being hit by 200 basis points (bps) in fiscal 2021.”

Given the effects of the lockdown, these companies had no execution and hence no income in April, but had to meet their fixed costs which are primarily employee and establishment costs. These account for about 12% of the topline.

With sites operating at roughly 50% efficiency in most of May, too, it would mean operating margins would decline by about 200 bps to around 12% this fiscal. Operations are likely to stabilise after monsoon as migrant workers return to project sites. The trajectory of recovery will therefore depend on the time taken to contain the pandemic, the report added.

Thers companies have kept a check on their debt levels while pursuing growth. “At a consolidated level, as on March 31, 2020, their capital structures were robust, with gearing at 0.5 time, compared with 0.80 time as on March 31, 2015. And despite incremental funding requirements of their underlying build-operate transfer and hybrid annuity model (HAM) projects, gearing is expected to remain healthy at 0.65 time as on March 31, 2021,” the agency reported.

The reason for the low leverage is two-fold. NHAI awards post 2015 have been predominantly through the EPC and HAM routes, entailing lower equity requirements given NHAI’s contribution to project cost.

Secondly, divestment of road assets to infrastructure investment trusts (InvITs) and global equity funds have helped further improve the capital structure. The ensuing low leverage provides resilience in these times of subdued operating performance.