Construction Companies to Witness 20% CAGR till 2020: CRISIL | CORPORATE ETHOS

Construction Companies to Witness 20% CAGR till 2020: CRISIL

By: | July 26, 2018
Construction companies

Jul 26: Construction companies are set to clock a 20% compound annual growth in revenue till 2020, as per a CRISIL study of 66 companies it rates in the investment grade in this sector. These companies account for more than 80% of the debt in over 300 companies that CRISIL rates in this sector. The buoyancy in growth will be driven by the government focus and spending on road construction.

Fiscal 2018 was particularly frenetic, with 17,000 km road projects, the highest ever in a year, being awarded by both the Ministry of Road Transport and Highways and NHAI. Pace of construction, at 27 km per day, was twice that of fiscal 2014. And over 90% of these contracts were based on hybrid annuity (HAM) and EPC models.

Construction is expected to accelerate to 32 km per day by 2020 given NHAI’s sharp focus on award of projects under the Bharatmala programme. More than half of these are expected to be under HAM.

“We expect topline growth for these companies to sustain at 20% in this fiscal and the next two, backed by strong order-books,” said Sachin Gupta, Senior Director, CRISIL Ratings. “Together, these companies are estimated to have an order book of Rs 1.3 lakh crore last fiscal, which, at over 3 times the revenues of these companies in fiscal 2018, provides high revenue visibility.”

CRISIL’s analysis shows HAM projects being awarded over the next two years will need about Rs 70,000 crore of funding through an optimal mix of debt and equity.

For this, players will have to raise an additional Rs 12,000 to 15,000 crore of equity to invest in new HAM projects, given the limited playing field and fast pace of project awards anticipated. But this shouldn’t pose an issue because the market sentiment for the sector is positive and therefore, private equity interest is high.

Says Sushmita Majumdar, Director, CRISIL Ratings, “To maintain growth in order book and credit profiles, companies will need to raise funds either by selling HAM assets, or through the capital market, or from private equity funds. We are already seeing evidence of this.”

In the past 2-3 years, this sector has seen over Rs 12,000 crore being raised through divestment of road assets.

Funding of debt, however, may prove to be more challenging, particularly in today’s scenario, given that 11 public sector banks are under Prompt Corrective Action Plan, and sectoral and borrower exposure limits are stringent. The gap, however, could be met through innovative structures and capital market borrowings.

CRISIL believes growth, and hence improvement in credit profiles, of road construction companies will sustain over the medium term, given the Bharatmala programme and subject to continued prudence in bidding, low gearing and healthy working capital management.