‘Credit profiles of road firms show turnaround’

The road ministry's efforts to improve the financial health of road companies seem to have paid off. According to rating agency CRISIL, the credit profiles of road engineering, procurement and construction (EPC) companies have shown a sharp turnaround.

The CRISIL report added these road EPC companies are set for 15 per cent revenue growth in current financial year. "Driven by ministry of road transport and highways and National Highways Authority of India, over 80 per cent of highway projects in the past three years have been bid out under the hybrid or EPC model,” the report said.

“Not surprisingly, 50 road EPC companies rated investment-grade by CRISIL have benefitted from the trend and delivered 20 per cent compound annual growth in revenue in the past three years," the report said.

According to the report, better working-capital management and capital structure, sharp focus on execution and judicious bidding have led to a significantly improved credit ratio, with the ratio of upgrades to downgrades in the sector improving to two in the last financial year, up from 0.11 in 2014-15.

The trend is expected to continue for the current financial year. "CRISIL-rated companies are expected to maintain their revenue growth momentum this financial year, fuelled by a strong order book of ~85,000 crore (as of FY17-end), and expected order-book-to-revenue ratio of three this financial year, which provides good revenue visibility," said Sachin Gupta, senior director, CRISIL Ratings.

The combined order book of these 50 companies is likely to touch ~1 lakh crore this financial year, driven largely by increased government spending in the roads sector, the report said.

However, the trend may hold true only for pure-road EPC companies. "In contrast, many large diversified EPC players are yet to wade out of the credit profile morass they entered in the past because of aggressive bidding, leveraged balance sheets, policy bottlenecks and a sluggish economy," the CRISIL report said.

CRISIL also expects the interest coverage ratio for road EPC companies to further improve. "Along with healthy revenue growth, CRISIL-rated players have maintained a comfortable capital structure, with aggregate gearing of close to 0.5 times. And despite scaling up in business, what helped them control borrowings was efficient working-capital management, lower capital expenditure, and policy support for build-operate-transfer projects. That has brought about a gradual improvement in key credit metrics such as interest coverage ratio at four in 2016-17, which is expected to rise to five this financial year," the report said.