ICRA Projects Strong Growth for Indian Construction in FY2025
ICRA anticipates a healthy revenue growth of 12-15% for Indian construction entities in FY2025, driven by a robust order book and the government's focus on infrastructure. This projection is supported by the Government of India's increased capital expenditure of ₹11.1 trillion in the FY2025 revised budget estimates. ICRA maintains a stable outlook for the sector, citing steady operating income growth, moderate leverage, and solid coverage metrics.
Chintan Lakhani, Vice President and Sector Head - Corporate Ratings at ICRA, noted that the aggregate order book-to-sales ratio for ICRA's sample set of companies remained stable at 3.3x as of March 2024, indicating strong medium-term revenue growth prospects. While some construction entities faced challenges with road sector orders in FY2024 due to muted awarding from the Ministry of Road Transport and Highways, diversification into segments like drinking water, metro projects, and railway station development has helped sustain their order books.
Over the past five years, the order book of ICRA’s sample construction companies has ranged between 3.3x and 4.0x of operating income, supported by the government’s increased capital outlay towards the infrastructure sector. Transportation and building segments continue to dominate the order book, though their combined share has declined to 62% in FY2024 from 77% in FY2020, with an increased proportion of orders in mining, water, and energy sectors.
The moderation in prices of key commodities like steel supported the earnings profile of construction entities during FY2024; however, rising steel prices could impact this fiscal year. Despite intense competition in EPC and hybrid annuity model projects, operating margins are expected to remain stable at around 11% in FY2025, supported by operating leverage benefits.
ICRA expects the cash conversion cycle to elongate, with no further extensions in Atmanirbhar Bharat scheme-related relaxations beyond March 2024. Consequently, debt levels are expected to increase to support enhanced working capital requirements, but operational leverage benefits are anticipated to keep the interest cover at around 4.0 times in FY2025.
