CRISIL SME Tracker: Small EPC contractors stuck in the realty rut

The health of EPC (engineering, procurement and construction) contractors, especially from the SME segment, is unlikely to improve significantly in the near term, given that a majority of their orders are driven by the real estate sector, where a prolonged lull is showing no signs of ending.

SMEs account for more than three-fourths of the EPC market.

Over the past three years, the real estate industry has been affected by regulatory changes such as the Goods and Services Tax, Real Estate Regulatory Act, and the thrust on affordable housing. The impact of these has been clearly visible in the reduced order books of many EPC players.
 

That, and muted demand, have meant that developers have reduced new launches and are focussing on completing on-going projects. That, by extension, has meant curbed business for EPC contractors. In the past one year alone, new launches in the top four cities (Bengaluru, MMR, NCR and Pune) have almost halved.

Also, since EPC SMEs operate in the highly competitive contracting and sub-contracting segment, their operating margins are relatively low at 8-9 per cent. And in the past three years, their receivables (in days) have gone up significantly from two to two-and-a-half months, because of delayed payments from developers.

EPC SMEs have to also offer extended credit periods to project developers, and maintain deposits with them as a guarantee for timely execution of projects. Consequently, their working capital requirements will remain high.

The upshot is that it is going to be a tough haul for EPC SMEs.