Lockdown will dent road contractors' sales, margins: CRISIL SME Tracker

Developers will face labour shortages as large numbers of workers have migrated back to their home towns
The extended lockdown to contain the Covid-19 pandemic is expected to dent both top lines and operating margins of small and medium enterprise (SME) road contractors in the engineering, procurement and construction (EPC) segment in the current fiscal (FY 2021).

Construction was gathering pace after a protracted monsoon when the pandemic halted all activity. Our research indicates that despite easing of lockdown restrictions from April 20, normalcy is unlikely to return any time soon.

Developers will face labour shortages as large numbers of workers have migrated back to their home towns. They will also have to grapple with non-availability of raw material and delays in obtaining clearances.

State roads account for 65-70 per cent of SME EPC road contractors’ revenue. The budgeted state road capex for FY 2021 was already 0.5 per cent lower than the revised FY 2020 estimates. Now, state funds are likely to be diverted towards the health and social sectors, with road capex spends declining further. Rural road projects, mostly executed directly by SME EPC contractors, will also face headwinds.

National highway projects, usually executed by larger players, with only a small proportion sub-contracted to SME EPC contractors, will also see a fall in the pace of construction.

April and May, crucial for road construction before the monsoon sets in, will be lost amid lockdown restrictions. As a result, SMEs, which account for about half of EPC road revenues, are expected to see a 12-13 per cent year-on-year negative growth in revenue in FY 2021. This, together with liquidity challenges, stretched working capital, and uncertainty in payments for under-construction projects, is expected to beat down their margins by 200-250 basis points, too.

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