Road EPC companies' revenue to contract 8-10 pc in FY21 due to COVID-19: CRISIL Ratings

Revenue of road building engineering, procurement and construction (EPC) companies is expected to contract 8-10 per cent this fiscal as the COVID-19 pandemic-driven lockdowns severely curtailed their activity, CRISIL Ratings said on Tuesday.

Revenue of road building engineering, procurement and construction (EPC) companies is expected to contract 8-10 per cent this fiscal as the COVID-19 pandemic-driven lockdowns severely curtailed their activity, CRISIL Ratings said on Tuesday. There was a 17 per cent growth between fiscals 2017 and 2020 based on an analysis of over 300 CRISIL-rated EPC companies with rated debt of Rs 51,000 crore, CRISIL Ratings said in a statement.

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, it said. CRISIL Ratings Senior Director Sachin Gupta said, "Typically, in EPC projects, 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." "The pick-up in execution and mobilisation after the lifting of the lockdown will be gradual. The upshot would be revenue degrowing 8-10 per cent and margins for EPC companies being hit by about 200 basis points (bps) in fiscal 2021," he added, 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, the statement said.

"These account for about 12 per cent of the topline, and with sites operating at about 50 per cent efficiency in most of May, too, it would mean operating margins would decline about 200 bps to around 12 per cent this fiscal," it said. The rating agency said 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.

It said the slowdown is unlikely to materially impact the credit profiles of these companies, primarily because of their robust balance sheets. Efficient management of working capital and liquidity, though, will be key to tide over the current situation. To their credit, these companies have kept a check on their debt levels while pursuing growth, it said.

At a consolidated level, as on March 31, 2020, their capital structures were robust, with gearing at 0.50 time as compared with 0.80 time as on March 31, 2015, the statement said. It attributed two reasons for low leverage of the companies.

"Firstly, 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," CRISIL Ratings said. The ensuing low leverage provides resilience in these times of subdued operating performance, it added.

Sushmita Majumdar, Director, CRISIL Ratings said, "As much as 90 per cent of the debt of the 300 CRISIL-rated road EPC companies analysed has an investment grade rating – BBB category and above. Their order books remain strong at around 2.2x of their last year's revenues and liquidity is also stable, with bank limit utilisation averaging about 70 per cent." "Even assuming the receivable cycle stretching by an additional 1-1.5 months, they are adequately placed to weather the current situation, thus keeping their credit profiles stable. But the remaining 10 per cent may see some credit pressure because of liquidity pressures," she added..

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