India Ratings and Research (Ind-Ra) has published the FYE21 edition of its credit news digest on India’s engineering procurement and construction (EPC) sector.

Orer book revenue visibility increased to 3.1x on the revenues of FY21 (FY20: 2.5x) due to higher order allocations in almost all segments. Ind-Ra expects the roads, buildings, railways and irrigation related segments to see major order inflows in FY22, backed by rich budgetary allocations.

In FY21, the revenue as reported by the top 18, listed construction companies (excluding Larsen & Toubro Limited (L&T: ‘IND AAA’/Stable)) declined 3% yoy as against the decline of 4% yoy estimated by Ind-Ra (FY20: 0%), majorly due to the impact of COVID-19 led disruptions, multiple intermittent lockdowns and shutdown of construction activities in 1QFY21.

Ind-Ra estimates construction companies to see revenue growth of 15%-20% yoy in FY22, led by strong orderbooks; however, the same may be impacted on account of the second pandemic wave and the anticipated third covid wave in FY22.

EBIDTA margin declined by 110bp and 11% yoy in FY21, on account of a lower scale in operations and the incremental costs incurred by EPC companies to manage the lockdown related issues coupled with super cycle of commodity prices. Ind-Ra expects EBITDA margin to decrease by around 100bp yoy for FY22, as any increase in order book execution would be dented by a sharp increase in commodity prices coupled with higher competition.

 Figure 1


As per data from Projects Today, the value of the project tenders announced during 4QFY21 was up by 24% yoy to INR2.33 trillion. The tenders announcement was led by roads (accounting for 46%), water & irrigation works (22%) and building segments (17%). Cumulatively, the tenders announced in FY21 were 38% higher than the total tenders announced in FY20. Tenders were led by road (39%), water (25%), building (17%), mining (7%) and railways (7%). 

Although the overall awards of orders (above INR2.5 billion) declined 24% yoy in 1HFY21, it grew significantly around 239% yoy in 2HFY21. The orders awarded stood at INR1,349 billion at 4QFY21 (3QFY21: INR1,110 billion; 4QFY20: INR450 billion), resulting in a significant rise in their order books thereby improving their revenue visibility. Major order awards in 4QFY21 were led by mining (39%), roads (37%), railways and metros (10%), water (6%) and other industrial segments (8%). Ind-Ra expects the order inflows in roads, railways & metros, water & irrigation segments to drive the sector demand forecast for FY22, based on the higher budgetary allocations in the finance budget. 

For the period of 4QFY21, a fair bit of competition was seen in segments such as railways & metro, mining, roadways (highest L1 vs L2 gap). Other infra (airport, ports), other industrial (oil&gas, chemical, telecom) and building segments had a low L1 vs L2 gap.

 Figure 2


Furthermore, Ind-Ra in its
1HFY21 construction tracker had introduced a competitiveness index to measure bidding competitiveness among the large project awarded during the quarter. This is basis the number of bidders for the projects awarded and the difference in L1 and L2 quoted prices. This is measured on a scale of 1-5, 1 reflecting low and 5 reflecting high competitiveness. Competitive index for 4QFY21 was 2.92 (3QFY21: 2.28), indicating an increase in level of competition due to bid bonds criteria revision by government.

1QFY21

2QFY21

3QFY21

4QFY21

FY21

Competency index

2.08

2.36

2.28

2.92

2.56

Source: Ind-Ra

 

Ind-Ra in its FY22 construction outlook has revised the sector outlook to improving from negative, based on the rich budgetary allocations which would result in huge order inflows coupled with better execution rates.




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