Revenue Growth Estimate for Construction Players Reduced in FY25: ICRA
The construction sector, particularly road players, faced challenges in Q1 FY2025 due to the Model Code of Conduct and an extended monsoon period. This, coupled with milestone-based billing in Q2 FY2025 (replacing the previous monthly billing system), resulted in modest revenue growth of around 1.5% year-on-year (YoY) for ICRA's sample set of 19 companies (with a combined turnover of ₹1.28 trillion in FY2024).
ICRA expects a pickup in execution pace in H2 FY2025, projecting operating income (OI) to grow 8-10% YoY in FY2025 and 10-12% in FY2026, though this is lower than the long-term CAGR of approximately 15% observed from FY2018 to FY2024. In contrast, the sector had experienced robust YoY growth of 22% and 19% in FY2023 and FY2024, respectively.
Giving more insights on this, Suprio Banerjee, Vice President and Co-Group Head - Corporate Ratings, ICRA, said: “The fresh order inflows were modest in H1 FY2025, mainly due to the impact of the General Elections and the monsoons. Though the order-awarding activity has picked up from Q2 FY2025 onwards, the order inflows in FY2025e are likely to trail those seen in FY2024. Order inflows in the road segment have remained muted during the last four quarters; however, in other segments like urban transportation (including metro), drinking water and sewage treatment projects, the inflows remain healthy. Within the various sub-segments, because of a relatively moderate order book, the entities focused on Central Government road projects are expected to witness pressure on revenue in FY2025, thereby dragging the overall growth rate.”
The competition has remained high across sub-segments like railways, road as well as urban infrastructure in recent years. Particularly, road projects awarded by the MoRTH/NHAI have witnessed greater competitive pressure, which is also reflected in the majority of the bids awarded at a sizeable discount compared to the authority’s base price. The competition for other sectors (Metro, Railways, and Water Supply & Sanitation) has also increased, with new entrants trying to diversify their order book. Owing to the heightened competition, the operating margins of the industry moderated from ~12% during FY2022 to 11.1% in FY2024, and ICRA projects them to remain range-bound around 10.5% - 11.0% in FY2025e and FY2026e.
“The cash conversion cycle is expected to sustain at the current levels, given that the expiry of the Atmanirbhar Bharat relief measures have already elongated the working capital cycle for the players in FY2025. While debt levels are expected to increase to support the higher working capital requirements, the corresponding operational leverage benefits are anticipated to keep the interest cover adequate at around 3.6-3.9 times in FY2026e. Given the moderate leverage and satisfactory debt coverage metrics, ICRA maintains a Stable outlook on the construction sector,” Banerjee reiterated.
