ICRA expects the construction industry in India to maintain a healthy revenue growth momentum in FY2025 with a projected YoY growth of 12-15% in FY2025 after witnessing a stellar 18-20% revenue growth in FY2024e. The Government’s thrust on infrastructure is reflected in its increase in capex allocations to Rs 11.1 trillion (+16.9% YoY) in FY2025 budget estimates (BE), which augurs well for the sector. ICRA maintains a Stable outlook on the sector with steady growth in operating income, moderate leverage, and healthy coverage metrics.
Giving more insights on this, Mr. Ashish Modani, Vice President and Co-Group Head - Corporate Ratings, ICRA, said: "The aggregate order book-to-sales ratio of ICRA's sample set of companies stood at around 3.9x as of December 2023 (compared to 3.4 times during March-2023), thereby indicating a healthy revenue growth prospect over the medium term. ICRA expects the revenue growth in FY2025 to remain healthy at 12-15% on a YoY basis, albeit slightly lower than the 18-20% revenue expansion assessed for FY2024e, owing to the high base and some tapering in execution momentum in Q1 FY2025 amid the Parliamentary Elections”.
Over the past five years ending March 2023, the order book of ICRA’s sample construction companies has increased at a CAGR of ~27%, remaining between 3.3x and 4x of billing, supported by increased capital outlay towards the infrastructure sector by the Central Government. The transportation (roads, metro, airport, bridges, flyovers) and building (residential, commercial, mixed use, industrial) segments continue to account for over 55% of the order book. However, the share of projects in mining, water and energy/power has also witnessed healthy growth in the recent years.
The moderation in prices of some of the key commodities during FY2024, such as steel, provides some respite to industry participants and augurs well for the construction sector. The competitive intensity in engineering, procurement, and construction projects awarded by the NHAI / the Ministry of Road Transport, railways, and metro segments continues to remain high; however, it is relatively moderate in segments like sewage and drinking water. Despite the high overall competitive intensity, ICRA anticipates relatively stable commodity prices along with operating leverage benefits to support the overall profitability of the construction sector entities in FY2025.
Industry participants are likely to witness 25-50 bps expansion in operating margins in FY2025 to 11.5%-12.0%, in the backdrop of operating leverage benefits and expectations of relatively stable commodity prices. However, intense competition in some of the construction sector segments remains a challenge. The overall profitability, therefore, will continue to remain below pre-Covid levels (14%+) in the medium term.
The Atmanirbhar Bharat scheme, introduced by MoRTH in June 2020, provided relief to contractors during the Covid-19 pandemic (in the form of monthly billing frequency, lower bank guarantee requirements, etc.). It was last extended till March 2024. With the expiry of this scheme, the working capital requirement is expected to increase in FY2025. Nonetheless, the coverage metrics is expected to remain comfortable with interest cover likely to remain above four times.
