Ind-Ra Holds Neutral Outlook for Construction Sector in FY25

Ind-Ra Ratings: India Ratings and Research (Ind-Ra) maintains a neutral stance on the construction sector for the fiscal year 2025 (FY25), but highlights a deteriorating outlook for road engineering, procurement, and construction (EPC). Despite this, Ind-Ra projects healthy performance from EPC players in FY25, albeit with a moderated revenue growth rate and slight uptick in operating margins, backed by sufficient liquidity buffers.

Krishan Binani, Director of Corporate Ratings at Ind-Ra, notes that the neutral outlook is supported by expectations of a 10 per cent-12 per cent year-on-year revenue growth in FY25. This growth projection is driven by anticipated order inflows gaining momentum in the latter half of FY25, driven by government budgets and a projected uptick in private-sector capital expenditure. Margin improvement is also anticipated, contributing to enhanced credit metrics.

Slowdown in Order Execution

However, Ind-Ra anticipates a slowdown in order execution pace for the EPC sector in FY25, attributable to elections in the first quarter. Despite continued capital expenditure focus by the central government and potential rebounds in state and private spending, the historical trend of reduced spending during election years is expected to influence order execution.

Key sectors such as civil construction, power (especially transmission & distribution), water, and metro are forecasted to propel revenue growth in FY25, while roads and railways may experience sluggish growth. Modest margin expansion is projected contingent upon stable raw material prices.

Ind-Ra also expects new order inflows to kick off post the second quarter of FY25, once elections conclude. Despite robust revenue growth, order book visibility has remained stable, with tendering activity accelerating in FY24.

On the liquidity front, Ind-Ra predicts adequate liquidity profiles for EPC sector entities in FY25, supported by improved cash flows from operations and debt tied-up for proposed capex. However, increased working capital requirements and cautious lending practices from banks could pose challenges.

Despite risks such as prolonged higher interest rate cycles and global economic slowdown, Ind-Ra maintains cautious optimism about the EPC sector's performance in FY25.