Road contractors set for a decline in margins: CRISIL

The operating profitability of road EPC (engineering, procurement and construction) contractors is expected to decline by 200-250 basis points (bps) according to CRISIL.

Margins will be a decadal low this fiscal but despite the fall, the credit profiles of road EPC players will remain stable. This is supported by deleveraged balance sheets, prudent working capital management, and steady cash accrual, with strong awarding in the past two fiscals supporting revenue growth.

The CRISIL analysis covers 20 EPC players, which constitute 70% of the road sector revenue.

According to Aniket Dani, Director, CRISIL Research, the limited competition in HAM projects had supported healthy profit margins of road EPC players between fiscals 2018 and 2021.

"The changes in bid eligibility criteria and smaller package sizes have intensified competition, especially last fiscal," Dani said.

According to CRISIL, the average bid premiums nosedived to around 4% last fiscal from approximately 16% earlier.

CRISIL assess that the Proposed changes in networth eligibility criteria and additional performance security for abnormally low bids may moderate the competitive intensity.

"The intensified competition and steep surge in the prices of key raw materials — steel, bitumen and cement — had shrunk the operating margins of road EPC players by 200 bps fall last fiscal," CRISIL said.

Raw material cost forms 45-50% of overall cost of road EPC players.