ICRA predicts robust construction growth in 2025

According to ICRA, the Indian construction industry is expected to rise by 12 to 15 percent in FY2025 due to steady order books and government infrastructure investment.

Despite a predicted YoY rise of between 12 and 15 percent in current fiscal year, ICRA anticipates that the Indian construction industry will continue to grow its income in FY2025e, supported by the government’s emphasis on infrastructure development. The good news is that the Government of India (GoI) has increased its total capital expenditure to Rs 11.1 trillion in the FY2025 revised budget estimates (RBE). With consistent increase in operating income, reasonable leverage, and comfortable coverage criteria, ICRA keeps a stable view for the industry.

“The aggregate order book-to-sales ratio of ICRA’s sample set of companies remained stable at 3.3x as of March 2024 (3.4 times during March 2023), thereby indicating healthy revenue growth prospects over the medium term,” states Chintan Lakhani, Vice President & Sector Head – Corporate Ratings, ICRA, in further detail. In the context of the Ministry of Road Transport and Highways’ sluggish order awarding, several construction organisations have seen pressure on order inflows relating to the road sector in FY2024. They have been able to maintain their order book, though, by diversifying into new markets like drinking water, the metro area, and railway station development. ICRA anticipates that in FY2025, revenue growth would stay robust at 12–15 percent.

The government’s increasing capital expenditure in the infrastructure sector has sustained the order book of ICRA’s sample construction companies, which has stayed between 3.3x and 4.0x operational income over the past five years ending in March 2024. The order book is still dominated by the transportation (roads, metro, airport, bridges, flyovers) and building (residential, commercial, mixed-use, and industrial) segments; however, their combined share has decreased from 77 percent in FY2020 to 62 percent in FY2024. During the same time period, the share of orders in the mining, water, and energy sectors has increased.

The profitability profile of companies in the construction sector was aided by the stabilisation of several major commodity prices during FY2024, such as steel; however, steel prices have begun to creep upward and could be a spoilsport in the current fiscal year. The NHAI and the Ministry of Road Transport and Railways continue to award projects with highly competitive engineering, procurement and construction, and hybrid annuity models; in contrast, the competition is somewhat mild in areas like as drinking water and sewage. Despite the increased competition, operating margins are predicted to mainly stay steady at 11 percent ± 25bps in FY2025e thanks to the benefits of operating leverage.

“ICRA anticipates an extension of the cash conversion cycle, with no more relaxations relating to the Atmanirbhart Bharat plan beyond March 2024. It is therefore anticipated that debt levels would rise in order to meet the increased working capital needs. But in FY2025e, the associated operational leverage gains are expected to maintain the interest cover at about 4.0 times, according to Lakhani.

For more details , visit : https://www.icra.in/

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