Construction companies may witness slower revenue growth for FY25: ICRA

The credit ratings agency is expecting the execution pace of the Indian construction entities to pick in H2 FY2025

Revenue of the Indian construction companies for the financial year 2024-25 (FY25) is estimated to grow at 8-10 per cent, slower in comparison to a growth of 12-15 per cent during previous years, according to ICRA.

 

The agency is estimating the operating income of construction companies to grow at 10-12 per cent YoY in FY26, still lower than the long-term compound annual growth rate of about 15 per cent between FY18 and FY24. 

 

Previously, in FY23 and FY24, the construction entities had witnessed a YoY growth of 22 per cent and 19 per cent, respectively.

 

The slowdown is on the back of the Model Code of Conduct in the first quarter of FY25 (Q1 FY25), an elongated monsoon period, and milestone-based billing (against monthly billing till March 2024) in the second quarter of FY25. The above-mentioned factors affected the construction activity, primarily that of road companies.

   

The slowdown was also reflected in the modest revenue growth of about 1.5 per cent on a year-on-year (YoY) basis in the first half of FY25 (H1 FY25) for ICRA's sample set of 19 construction companies with a combined turnover of Rs 1.28 trillion in FY24.

 

The credit ratings agency is expecting the execution pace of the Indian construction entities to improve in H2 FY2025.

 

Suprio Banerjee, vice president and co-group head, Corporate Ratings, ICRA, said, “Order inflows in the road segment have remained muted during the last four quarters; however, in other segments like urban transportation (including metro), drinking water, and sewage treatment projects, the inflows remain healthy. Within the various sub-segments, because of a relatively moderate order book, the entities focused on Central Government road projects are expected to witness pressure on revenue in FY25, thereby dragging the overall growth rate.”

 

As per ICRA, road projects awarded by the Ministry of Road Transport and Highways/National Highways Authority of India have witnessed greater competitive pressure, reflected in the majority of the bids being awarded at a sizeable discount compared to the authority’s base price.

 

The competition for other sectors (metro, railways, and water supply & sanitation) has also increased, with new entrants trying to diversify their order book. Owing to the heightened competition, the operating margins of the industry moderated from 12 per cent during FY22 to 11.1 per cent in FY24. ICRA is estimating the margins to remain range-bound around 10.5-11.0 per cent in FY25e and FY26e.

 

However, the ratings agency has maintained a ‘stable’ outlook for the sector amid “moderate leverage and satisfactory debt coverage metrics.”

 

According to Banerjee, “The cash conversion cycle is expected to sustain at the current levels, given that the expiry of the Atmanirbhar Bharat relief measures has already elongated the working capital cycle for the players in FY25.  While debt levels are expected to increase to support the higher working capital requirements, the corresponding operational leverage benefits are anticipated to keep the interest cover adequate at around 3.6-3.9 times in FY26e.”