1. Home
  2. Construction
  3. Indian construction sector estimation by ICRA

Indian construction sector estimation by ICRA

Indian construction sector estimation by ICRA

After a remarkable 18–20 percent revenue rise in FY2024e, ICRA projects that the Indian construction sector will continue to develop at a robust rate in FY2025, with a forecast YoY growth of 12–15 percent.

The government’s emphasis on infrastructure is seen in the FY2025 budget estimates (BE), where capital allocations have increased to ₹ 11.1 trillion (+16.9 percent YoY), which bodes well for the industry. Because of the sector’s excellent coverage indicators, moderate leverage, and consistent increase in operating income, ICRA continues to maintain a stable outlook.

Giving more insights on this, Ashish Modani, Vice President & Co-Group Head, Corporate Ratings, ICRA, says, “The aggregate order book-to-sales ratio of ICRA’s sample set of companies stood at around 3.9x as of December 2023 (compared to 3.4 times during March 2023), thereby indicating a healthy revenue growth prospect over the medium term. ICRA expects the revenue growth in FY2025 to remain healthy at 12–15 percent on a YoY basis, albeit slightly lower than the 18–20 percent revenue expansion assessed for FY2024e, owing to the high base and some tapering in execution momentum in Q1 FY2025 amid the Parliamentary Elections”.

The Central Government’s increased capital outlay towards the infrastructure sector has supported the order book growth of ICRA’s sample construction companies over the past five years, ending in March 2023, with a CAGR of around 27 percent. The companies’ order books remain between 3.3x and 4x of billing. Over 55 percent of the order book is still made up of the transportation (roads, metro, airport, bridges, flyovers) and building (residential, commercial, mixed-use, and industrial) segments. But there has also been a noticeable increase in the proportion of mining, water, and energy/power projects in recent years.

The construction industry is expected to benefit from the moderate pricing of some of the major commodities during FY2024, like steel, which gives industry players some respite. Though it is generally moderate in segments like sewage and drinking water, the level of competition in engineering, procurement, and construction projects awarded by the NHAI and the Ministry of Road Transport, railways, and metro segments is still considerable. ICRA expects generally stable commodity prices and benefits from operating leverage to maintain the overall profitability of the construction sector firms in FY2025, notwithstanding the high overall competition intensity.

Given the advantages of operating leverage and the expectation of relatively stable commodity prices, industry participants could anticipate seeing a 25–50 bps increase in operating margins in FY2025, to 11.5–12.0 percent. Nonetheless, there is still significant competition in a few divisions of the building industry. For the medium run, therefore, overall profitability will stay below pre-Covid levels (14 percent+).

“The Atmanirbhar Bharat scheme, introduced by MoRTH in June 2020, provided relief to contractors during the COVID-19 pandemic (in the form of lower monthly billing frequency, lower bank guarantee requirements, etc.). It was last extended until March 2024. With the expiration of this scheme, the working capital requirement is expected to increase in FY2025. Nonetheless, the coverage metrics are expected to remain comfortable, with interest coverage likely to remain above four times,” Ashish Modani added.

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


Cookie Consent

We use cookies to personalize your experience. By continuing to visit this website you agree to our Terms & Conditions, Privacy Policy and Cookie Policy.