Road developers’ revenue growth to be in the range of 5-7 per cent in next two years

MUMBAI: Revenue growth of road developers (engineering, procurement and construction) companies is expected to be in the range of 5-7 per cent in next two years. Weighed down by lower national highway awards this fiscal. However, it will continue to have steady operating profits and strong balance sheets, keeping their credit profiles stable.

Road developers have clocked an average 13 percent revenue growth each year in the past five years.

A study of over 120 road EPC companies rated by CRISIL Ratings indicates as much as the government has been awarding a record number of new projects. But this is past now given the reduction in new awards as the government is focusing more on maintaining the existing roads than building new ones, according to a Crisil Ratings report based on the balance sheets of 120 EPC companies.

According to Manish Gupta, a senior director with the agency, the revenue growth will be impacted this fiscal and the next, after a compound annual growth rate of 13 per cent in the past five years. This is on account of lower project awards and thus revenue growth will moderate to 5-7 per cent this and next fiscal.

The road transport and highways ministry has awarded an average of 12,500 km projects between fiscals 2022 and 2023, but the number dropped to 8,581 km last fiscal and is seen modest at 8,000 km this fiscal. So far this fical, the government has approved only 936 km of new highway projects.

There are multiple reasons for this slowdown spanning from procedural issues linked to the approval of cost estimates and restrictions under the model code of conduct before the general elections to transition-linked issues as the government explores build-operate-transfer toll model for future projects in addition to its current dominant modes of EPC and the hybrid annuity models.

Consequently, the order books of road developers are seen declining to 2x their annual revenue by the end of this fiscal from 2.3x at the end of last fiscal and 2.6x in fiscal 2023. This, in turn, will slow their revenue growth in this fiscal and the next, he said.

But prices of key raw materials such as steel and bitumen are down 5-17 per cent from their peaks in fiscal 2023. Since most projects are awarded on fixed-price basis, this will keep operating profitability steady at 13-14 per cent even after factoring in increased competitive intensity at the time of awarding of these projects. Consequently, cash accrual is expected to be stable.

According to Anand Kulkarni, a director with the agency, the balance sheets of road EPC companies have strengthened over the past few fiscals because of healthy cash accruals and deleveraging through asset monetisation and equity raising.