Higher government spending on infrastructure in FY24 will propel engineering, procurement, and construction companies to hit revenue growth of 17-20 per cent, taking their profit to the pre-Covid level, a report said on Tuesday.
In the Budget 2023-24, the government has increased the outlay for capital expenditure (capex) on infrastructure sector by 33 per cent from Rs 7.5 lakh crore to Rs 10 lakh crore.
Forecasting higher revenue and thicker bottom-line, rating agency Crisil in a report also placed their credit outlook positive citing improving debt metrics.
The optimism is supported by the expected strong order inflows due to the government thrust on infrastructure in the latest budget.
Profitability of large EPC (engineering, procurement, and construction) companies is seen improving and reaching pre-pandemic levels of 10-10.5 per cent next fiscal compared to 9-9.5 per cent this fiscal, with commodity prices easing.
With healthy order books and recovery in profitability, debt metrics will also improve next fiscal as higher order inflows will boost their top-line to the tune of 17-20 per cent in fiscal 2024, up from 13-15 per cent estimated this fiscal, said the report which is based on an analysis of 80 EPC companies with aggregate revenue of Rs 2.33 lakh crore.
The revenue growth of most of the EPC players is driven by the rise in capital outlay by the Centre, public sector undertakings and states for the infrastructure segment and the corresponding construction intensity in each of the infrastructure segments.
According to Mohit Makhija, a senior director with the agency, focus on the infrastructure space has increased with investments in roads and railways, which is expected to grow 21 per cent and 15 per cent on year, respectively, supported by the Centre’s as well as states’ capital outlay. This, along with healthy execution, will lead to higher revenue growth of 17-20 per cent for players in the sector next fiscal. Roads and railways will continue to outperform other EPC segments.
With infrastructure investments continuing to grow and focus on the National Infrastructure Pipeline (NIP) through investments in roads (contributing 23 per cent of NIP), railways (16 per cent), power (22 per cent), irrigation (9 per cent), EPC firms are seeing healthy order inflows. As a result, their order book-to-revenue ratio is expected to remain healthy at 3.5-4 times over the medium term, leading to better revenue visibility.
According to Gautam Shahi, a director with the agency, higher revenue growth and softening commodity prices will help operating profitability recover to the pre-pandemic level next fiscal. Prices of key inputs such as steel, which have fallen 22 per cent from their peak in March 2022, and should decline another 9-11 per cent next fiscal. This will support recovery in operating profitability, especially for fixed-price contracts that account for 25-30 per cent of the sample companies’ revenue.