ICRA expects operating leverage to help buffer growing competitive pressure in the construction sector, with margins remaining stable in FY2025.

ICRA forecasts Indian construction firms to sustain solid revenue growth in FY2025e, with a projected YoY growth of 12–15 percent this fiscal year, aided by an acceptable order book position and the government’s focus on infrastructure development. This is seen in the increase in the Government of India’s (GoI) overall capital spending to ₹11.1 trillion in the FY2025 revised budget estimates (RBE), which bodes well. ICRA maintains a stable outlook for the industry, citing consistent increases in operating income, moderate leverage, and adequate coverage criteria.

Giving more insights on this, Chintan Lakhani, Vice President and Sector Head, Corporate Ratings, ICRA, says, “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, diversification into other segments like drinking water, metro segments, or railway station development has helped them sustain their order book. ICRA expects revenue growth to remain healthy at 12-15 percent in FY2025”.

Over the past five years, ending March 2024, the order book of ICRA’s sample construction companies has remained between 3.3x and 4.0x of operational income, owing to the government’s increasing capital investment in the infrastructure sector. The transportation (roads, metro, airport, bridges, flyovers) and building (residential, commercial, mixed-use, industrial) categories continue to dominate the order book; however, their combined share has dropped to 62 percent in FY2024 from 77 percent in FY2020. Over the same period, the proportion of orders for mining, water, and energy has climbed.

The reduction in prices of some major commodities, such as steel, boosted the profitability profile of construction companies in FY2024; nevertheless, steel prices have begun to rise and could be a spoilsport in the current fiscal year. The NHAI / the Ministry of Road Transport and Railways continue to award engineering, procurement, and construction projects with hybrid annuity models; however, competition in categories such as sewage and drinking water remains very mild. Despite increased competition, operating margins are estimated to remain constant at 11 percent ± 25bps in FY2025e, thanks to leverage benefits.

“ICRA expects the cash conversion cycle to elongate, with no further extensions in Atma Nirbhar Bharat scheme-related relaxations beyond March 2024. Consequently, the debt levels are expected to increase to support the enhanced working capital requirements. However, the corresponding operational leverage benefits are anticipated to keep the interest cover at ~4.0 times in FY2025e,” Lakhani added.