The landscape of road construction companies in India is on the brink of transformation. With the upcoming fiscal year set to witness a significant shift in the growth trajectory of these firms, the national highway sector is brimming with opportunities, albeit amidst challenges.
Current Financial Projections
According to recent reports, especially from the rating agency Crisil, the income of Engineering, Procurement, and Construction (EPC) companies engaged in road engineering is expected to grow at a modest rate of 5% to 7% in the next fiscal year. This growth forecast, however, is hindered by a decrease in the allocation of national highway projects, which directly impacts their order books.
Despite this slowdown in revenue growth—compared to a robust annual growth rate of 13% over the past five years—Crisil notes that the credit quality of these companies is likely to remain stable. Senior Director at Crisil, Manish Gupta, indicated that operational profits and strong balance sheets will continue to support their creditworthiness.
Highway Development Plans
The Ministry of Road Transport and Highways had allocated an average of 12,500 kilometers of projects between the fiscal years 2021-22 and 2022-23. However, this number saw a decline, dropping to 8,581 kilometers last fiscal year and projected to further decrease to 8,000 kilometers in the ongoing fiscal year. The drop in project allocations can be attributed to procedural issues related to project cost approvals and the implementation of the Model Code of Conduct ahead of elections, among other factors.
The government is currently considering various models for future projects, including EPC and Hybrid Annuity Models (HAM), and is also deliberating on the ‘Build, Operate, Transfer’ (BOT) toll model to reinvigorate highway development.
Projected Relief for Companies
On a hopeful note, road construction companies anticipate some relief on the cost front. Key raw materials such as steel and bitumen have seen price reductions of 5% to 17% compared to their peak levels during the fiscal year 2022-23. Since most projects are awarded on a fixed price basis, operational profits are expected to stabilize at around 13% to 14%.
Conclusion: A Path Forward
While growth may slow down, the road ahead holds promise for construction companies as the government seeks to revitalize the highway sector. Maintaining stability in costs, boosting project allocations, and employing innovative funding models will be crucial for sustainable growth in this sector.
Key Statistics
| Fiscal Year | Project Allocation (in km) | Annual Revenue Growth Rate |
|---|---|---|
| 2021-22 & 2022-23 | 12,500 | N/A |
| 2022-23 | 8,581 | 13% |
| 2023-24 (Projected) | 8,000 | 5%-7% |
