Infrastructure push will prop up EPC road contractors: CRISIL SME Tracker

National highway projects are executed by larger players, with a small proportion sub-contracted to SME EPC road contractors
Small and medium enterprises (SMEs) engaged as road contractors in the engineering, procurement and construction (EPC) segment are expected to see revenues rebound by 10-15 per cent year-on-year (YoY) in the current fiscal year (FY22), benefitting from sharper government focus on infrastructure to revive the economy and the low base of last fiscal, which had logged a 5-10 per cent decline.

 

Higher spending by states, which account for 60-65 per cent of SME revenues, will lead the improvement. States have announced 25 per cent YoY growth in their budget estimates for roads this fiscal year.

 

The second wave of Covid-19 does pose a downside risk to the estimates, with funds diverted towards health care expenditure and momentum slowing in April and May as labour availability at construction sites was only 65-75 per cent. However, we expect the pace to pick up again after the monsoon.

 

Operating margins, too, are expected to rebound to FY20 levels as construction and revenue growth pick up, after having declined 100-200 bps last fiscal due to fixed costs incurred by the players.      

 

As things stand, SMEs account for 35-45 per cent of the roads and highways sector overall.

 

National highway projects are executed by larger players, with a small proportion sub-contracted to SME EPC road contractors. In this segment, the policy push, coupled with steps under Aatmanirbhar Bharat to ease liquidity, had enabled the contractors to make up for the time lost during the nationwide lockdown, and construction was 30 per cent higher YoY by the end of FY21.

 

We expect the momentum to continue this fiscal, riding on higher award of national highway stretches.

 

At the other end, rural road projects, awarded under the centrally-sponsored Pradhan Mantri Gram Sadak Yojana or state schemes such as Mukhya Mantri Gram Sadak Yojana, are mostly executed directly by SME EPC road contractors, and should also witness a revival.



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