The rating agency Icra expects the Indian construction entities to maintain healthy revenue growth in FY2025e with a projected year-on-year (YoY) growth of 12 to 15 per cent in this fiscal, aided by an adequate order book position and the government’s thrust on infrastructure activity. This is reflected in the increase in the central government's total capital expenditure to Rs 11.1 trillion in the FY2025 revised budget estimates (RBE), which augurs well.
The rating agency maintained a stable outlook for the sector with steady growth in operating income, moderate leverage, and comfortable coverage metrics.
Chintan Lakhani, Vice President and Sector Head- Corporate Ratings, Icra said, "The aggregate order book-to-sales ratio of ICRA's sample set of companies remained stable at 3.3x as of March 2024 (3.4 times during March-2023), thereby indicating healthy revenue growth prospects over the medium term. Certain construction entities have witnessed pressure on road sector-related order inflows in FY2024, in the backdrop of muted order awarding from the Ministry of Road Transport and Highways.
However, Lakhani added that the diversification into other segments like drinking water, metro segment, or railway station development has helped them sustain their order book. Icra expects the revenue growth to remain healthy at 12 to 15 per cent in FY2025.
Over the past five years ending March 2024, the order book of Icra’s sample construction companies has remained between 3.3x – 4.0x of operating income, supported by the Government’s increased capital outlay towards the infrastructure sector. Transportation (roads, metro, airport, bridges, flyovers) and building (residential, commercial, mixed-use, industrial) segments continue to dominate the order book; however, their combined share has declined to 62 per cent in FY2024 from 77 per cent in FY2020.
The proportion of orders in mining, water, and energy has increased over the same period. The moderation in prices of some of the key commodities such as steel, supported the earnings profile of entities in the construction sector during FY2024; however, steel prices have started inching upwards and could be a spoilsport in the current fiscal.
The intense competition in engineering, procurement and construction and hybrid annuity model projects awarded by the NHAI/ the Ministry of Road Transport and Railways continues to remain high; however, it is relatively moderate in segments like sewage and drinking water. Notwithstanding the heightened competition, the operating margins, supported by operating leverage benefits, are expected to largely remain stable at around 11 per cent ± 25bps in FY2025e.
