Road EPC companies set for 15% topline growth in FY18: Crisil

According to ratings agency, credit profiles of EPC companies have shown a sharp turnaround

The road ministry's efforts to improve the financial health of road companies in the country have paid off. According to ratings agency Crisil, credit profile of road engineering, procurement and construction (EPC) companies have shown a sharp turnaround.

The Crisil report added that these road EPC companies are set for 15% topline growth in current financial year.

"Driven by the Ministry of Road Transport and Highways (MoRTH) and the National Highways Authority of India (NHAI), over 80% of the highway projects in the past three years have been bid out under the hybrid - or engineering, procurement, construction (EPC) - model. Not surprisingly, 50 road EPC companies rated in the investment-grade by Crisil, have benefited from the trend and delivered 20% compounded annual growth in revenue in the past three years," the report said.

According to the report, better working capital management and capital structure, sharp focus on execution and judicious bidding has led to a significantly improved credit ratio, with the ratio of upgrades to downgrades in the sector improving to 2.0 in the last financial year, up from 0.11 in financial year 2015- 2016.

The trend is expected to continue for current financial year. "Crisil-rated companies are expected to maintain their revenue growth momentum this financial year, fuelled by a strong order book of Rs 85,000 crore (as of FY17 end), and expected order-book-to-revenue ratio of three times this financial year, which provides good topline visibility," said Sachin Gupta, Senior Director, Crisil Ratings.

The combined order book of these 50 companies is likely to touch Rs one lakh crore this financial year, driven largely by increased government spending in the roads sector, the report said.

However, the trend may hold true only for pure road EPC companies. " In contrast, many large diversified EPC players are yet to wade out of the credit profile morass they entered in the past because of aggressive bidding, leveraged balance sheets, policy bottlenecks and a sluggish economy," the Crisil report said.

Crisil also expects the interest coverage ratio or (ICR) for road EPC companies to further improve. "Along with healthy revenue growth, Crisil-rated players have maintained a comfortable capital structure, with aggregate gearing of close to 0.5 times. And despite scaling up in business, what helped them control borrowings was efficient working capital management, lower capex, and policy support for build-operate-transfer projects. That has brought about a gradual improvement in key credit metrics such as interest coverage at four times in financial year-2016-2017, which is expected to rise to five times this financial year," the report said.