Revenue growth of road developers in EPC segment may halve in FY20: CRISIL

Road developers in the engineering, procurement and construction (EPC) segment could see their revenue growth halve in the ongoing fiscal and the next, Crisil Ratings said on Wednesday.

The decline would be largely due to slower awarding of projects and delayed receipt of 'appointed date' - which is the kickoff date for start of a project - from the National Highways Authority of India (NHAI), Crisil said in a statement.

"Road developers...could see revenue growth halve in fiscals 2020 and 2021 to 15 per cent, compared with 30 per cent in fiscal 2019," it said.

The NHAI awarded a whopping 7,400 km in fiscal 2018, which slowed down the following year to about 2,200 km. In the current fiscal and the next, awarding is expected to be 4,000 km a year, Crisil said.

"The delay in declaring appointed dates for the projects awarded, on the other hand, is primarily due to issues in land acquisition. Crisil's analysis of 119 hybrid annuity model (HAM) projects shows almost 30 per cent of these have not received appointed dates more than a year after these were awarded," Crisil Ratings Senior Director Sachin Gupta said.

The slowdown, however, is unlikely to impact the credit profiles of the EPC players primarily because of three reasons.

As of last fiscal, these companies had a healthy order book of Rs 2 lakh crore, which is at over three times their revenue in fiscal 2019 and provides high revenue visibility for the next two years.

The other reason is these companies have kept a check on their debt levels while pursuing growth. At the consolidated level, the capital structure was robust as on March 31, 2019, with a gearing of 0.55 time, compared with 0.80 time as on March 31, 2015.

The improvement was largely due to focus on awarding through EPC and HAM routes, which entail lower equity requirement. Additionally, renewed interest from global funds has given a fillip to the sector, and divestment of project special purpose vehicles through infrastructure investment trusts or asset level sale has supported the improvement in capital structure.

Third reason for a likely low impact on credit profile of EPC companies is while a delay in receipt of appointed date may lead to a delay in recognising revenue for some of the projects, there is an assurance that a project, once started, would not be stalled.

This is because the NHAI notifies the appointed date only when majority of the land (80 per cent for HAM projects) is procured. Thus, once a project is under construction, there is limited risk of delays due to non-availability of land and thereby minimal impact on credit profile of EPC companies.