The rating agency expects operations of these companies to stabilise after monsoon as migrant workers return to project sites.
Road-building engineering, procurement and construction (EPC) companies are likely to see an 8-10 percent decline in their revenue in the financial year 2020-21 with the COVID-19 pandemic-driven lockdowns severely curtailing activity, CRISIL Ratings has said.
Overall, most sectors barring telecom, consumer facing segment and pharma are expected to see their earnings take a hit during the year.
"With lower awarding by the National Highways Authority of India (NHAI) in the last two fiscals, revenue growth was expected to taper to some extent. However, this fiscal, the slowdown in execution due to lockdowns and the resultant labour shortage is expected to push revenue growth into negative territory," said CRISIL.
The ratings agency compared that degrowth in FY21 with a 17 percent growth between fiscals 2017 and 2020. It analysed more than 300 CRISIL-rated EPC companies with rated debt of Rs 51,000 crore.
Given the lockdown, these companies had no execution and hence no income in April (when there was a complete nationwide lockdown barring essential services).
"But these companies had to meet their fixed costs which are primarily employee and establishment costs. These account for around 12 percent of the topline, and with sites operating at around 50 percent efficiency in most of May, too, it would mean operating margins would decline around 200 bps to around 12 percent this fiscal," the rating agency.
The nationwide lockdown started on March 22, as a result of which companies halted operations from that day till the end of FY20. The government allowed gradual re-opening of the economy in the second half of May.
"Typically, in EPC projects, maximum execution and billing is done in March. However, the lockdown that began from March 22 halted work in the crucial last days of last fiscal and has continued to do so this fiscal,” Sachin Gupta, Senior Director at CRISIL Ratings said.
The pick-up in execution and mobilisation after the lifting of the lockdown would be gradual. The upshot would be revenue degrowing 8-10 percent and margins for EPC companies being hit by around 200 bps in fiscal 2021, Gupta said.
According to CRISIL, operations of these companies are likely to stabilise after monsoon as migrant workers return to project sites. "The trajectory of recovery will therefore depend on the time taken to contain the pandemic," the report said.
"The slowdown is unlikely to materially impact the credit profiles of these companies, primarily because of their robust balance sheets. Efficient management of working capital and liquidity, though, will be the key to tide over the current situation."
To their credit, these companies have kept a check on their debt levels while pursuing growth, it added.
At a consolidated level, as on March 31, 2020, their capital structures were robust, with gearing at 0.5 time, compared with 0.80 time as on March 31, 2015, CRISIL said.
Despite incremental funding requirements of their underlying build-operate transfer and hybrid annuity model (HAM) projects, gearing is expected to remain healthy at 0.65 time as on March 31, 2021, it added.
The reason for the low leverage is two-fold. Firstly, after 2015, NHAI projects have been predominantly awarded through the EPC and HAM routes, entailing lower equity requirements given the authority’s contribution to project cost.
Secondly, divestment of road assets to infrastructure investment trusts and global equity funds have helped improve the capital structure. The ensuing low leverage provides resilience in these times of subdued operating performance.
Sushmita Majumdar, Director, CRISIL Ratings, said as much as 90 percent of the debt of the 300 CRISIL-rated road EPC companies has an investment grade rating – BBB category and above.
"Their order books remain strong at around 2.2x of their last year's revenues and liquidity is also stable, with bank limit utilisation averaging around 70 percent," she added.Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.