The construction sector in India is expected to see a steady performance in FY25, particularly in the engineering, procurement, and construction (EPC) segment. Ind-Ra has forecasted a neutral outlook for the sector, with a 10 per cent-12 per cent year-on-year revenue growth expected. Order inflows are anticipated to increase in the second half of the fiscal year, driven by government budgets and private sector capital expenditure. Margins are expected to improve slightly, with credit metrics also showing signs of improvement.
However, concerns exist regarding the roads’ EPC sub-sector, which may face a deteriorating outlook. The pace of order execution within the EPC sector is likely to moderate in FY25, especially in the first quarter due to upcoming elections. Despite the central government’s emphasis on capital expenditure and expected resurgence in state and private spending, the growth in order execution may be slower than anticipated.
Revenue growth in FY24 exceeded expectations, with a significant increase likely reaching 17 per cent-18 per cent. The civil construction, power, water, and metro sectors are expected to lead revenue growth in FY25, while roads and railways may experience slower growth. Margin expansion of 30-50 basis points year-on-year is anticipated in FY25, with improved credit metrics expected due to increased profitability and a stable working capital cycle.
New order inflows are predicted to start in late 2QFY25, following the conclusion of elections. Tendering activities may slow down in 1QFY25 due to the upcoming elections, with momentum expected to pick up from June 2024 onwards. The liquidity profile of EPC sector entities is expected to remain adequate in FY25, supported by improvements in cash flow from operations and proposed capital expenditure financing. However, increased working capital requirements due to the withdrawal of exemptions provided under Atmanirbhar Bharat could pose challenges.
Banks are likely to maintain cautious lending practices to EPC players, with tightened sanctioning terms and increased collateral requirements due to sector volatility. Despite this, there has been some improvement in liquidity profiles in 9MFY24, with rising recoveries and an increase in non-fund-based limits across the sector. Overall, while there are concerns in the roads’ EPC sub-sector, the construction sector as a whole is expected to see modest growth and improvements in margins and credit metrics in FY25.
