India Ratings maintains neutral outlook on construction sector for FY25

NEW DELHI: India Ratings and Research (Ind-Ra) has maintained a neutral outlook on the construction sector for FY25, while maintaining a deteriorating sub-sector outlook for roads engineering, procurement and construction (EPC).

Ind-Ra expects EPC players to post a healthy performance in FY25, albeit with a moderation in the revenue growth rate, accompanied with a modest uptick in operating margins while maintaining adequate liquidity buffers.

"The neutral sector outlook is backed by an expectation of 10%-12% year-on-year revenue growth in FY25. Order inflows are likely to pick up in H2 FY25, led by supportive government budgets along with expectation of acceleration of private sector’s capex. Margins are expected to modestly pick-up with credit metrics improving further," said Krishan Binani, director, Corporate Ratings, Ind-Ra.

Despite the continued focus on capex by the central government and 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 Q1 FY25.

After the 30% CAGR growth over FY20-FY24, the centre’s own capex is projected to grow at 17% in FY25, following the trend of lower spends 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.

Ind-Ra expects a further margin expansion of 30-50 bp year-on-year in FY25, if the raw material prices remain range bound; however, the margins would still be 30bp lower than that pre-covid level.

The company expects new order inflows to start from late Q2 FY25. Tenders announced, which remained muted in 9M FY24 (down 1% year-on-year), picked up pace in Q4 and grew 25% year-on-year in FY24.

Ind-Ra believes the liquidity profile of EPC sector entities in FY25 will remain adequate, based on a cash flow from operations improvement, coupled with the debt likely to be tied-up for the proposed capex.

There could be an increase in the working capital requirements due to the withdrawal of exemption such as monthly billing and bank guarantee exemptions provided to EPC contractors under Atmanirbhar Bharat.

Banks have been continuing to apply caution in the form of tightened sanctioning terms with increased collateral requirements while enhancing or extending bank lines to EPC players on account of volatility in the sector and the risks arising from borrowers failing to deliver on contractual obligations.