Mid-sized engineering, procurement, construction firms to see 15% revenue growth this fiscal: Crisil

Strong order books and better operational preparedness in the second year of the Covid will swell the top line for over 600 Crisil-rated mid-sized enterprises in the engineering, procurement, and construction (EPC) sector by 15 per cent this fiscal, the rating agency said on Tuesday. The expected growth will be up from around 10 per cent fall last fiscal. The aggregate revenue of these 600 companies (with revenue less than Rs 1,000 crore in the previous FY) in road construction, commercial and industrial buildings, irrigation, and allied activities was estimated to be Rs 70,000 crore for the last fiscal year.

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However, the performance of these EPC companies is likely to be curbed in the first quarter of the current fiscal year sequentially as the country fights the second Covid wave along with challenges such as the slowdown in project execution and labour migration. Nonetheless, the impact will be less severe from last year given that “activities had ground to a halt amid a nation-wide lockdown in the first quarter of last fiscal,” Crisil said. Importantly, the government had exempted the construction sector from lockdowns so far this fiscal even as on-site stay arrangements for labourers and pandemic-related precautions have reduced migration to around 20 per cent this year so far, it added. Further, most project sites are in non-urban locations, which have been less impacted by the pandemic compared with the urban areas.

Nonetheless, representative of construction companies differed from the projected growth. “There seems to be a misconception as everything seems to be in a downturn. The labour is not available while the prices for steel, cement, etc., have been going up without any reason. What you will do with the order book if nothing is moving at the site. Practically, it is not only 20 per cent of workers that are going back. There is a mass labour movement from cities like Mumbai. But it is true that businesses are more prepared this year from last year and there can be some changed behaviour,” Raju John, Director General, Builders’ Association of India told Financial Express Online.

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The EPC segment has witnessed increased backing from the government. For instance, projects awarded by the National Highways Authority of India and the Ministry of Road Transport and Highways had increased to around 10,500 km last fiscal year from 8,500 km in the fiscal year 2020. Moreover, projects worth Rs 111 lakh crore were announced under the National Infrastructure Pipeline and would be carried out over five fiscals through 2025. While industrial capital expenditure was deferred and real estate projects had slowed last fiscal year, the commercial construction activity is likely to revive this year.

“At over 2.5x of last fiscal’s revenue, order books were at their highest – at the beginning of any fiscal – since 2015, which offers high revenue visibility. The current operating rate of 70% should also help the sector gain growth momentum in the rest of this fiscal,” said Rahul Guha, Director, CRISIL Ratings. Operating profitability for EPC companies is also expected to stabilise at the historical average of 11 per cent in the medium term. “Last fiscal, despite a sharp rise in prices of key raw materials such as bitumen, steel, diesel and petrol, pass-through clauses had limited the contraction in operating margin to 100 basis points (bps), with operating profitability estimated at around 10 per cent,” Crisil added.