Construction sector eyes steady growth in FY25; Private capex holds key to outlook: Ind-Ra report

Hyderabad (Telangana) [India], May 3 (ANI): India Ratings and Research (Ind-Ra) has forecasted a steady performance for the construction sector in FY25, with a focus on the engineering, procurement, and construction (EPC) segment. However, concerns loom over the roads' EPC sub-sector, signalling a deteriorating outlook.
According to Krishan Binani, Director of Corporate Ratings at Ind-Ra, the neutral outlook stems from expectations of a 10 per cent-12 per cent year-on-year revenue growth in FY25.
He anticipates a pickup in order inflows in the latter half of the fiscal year, driven by supportive government budgets and an expected surge in private-sector capital expenditure.
Binani said, "The neutral sector outlook is backed by an expectation of 10 per cent-12 per cent yoy revenue growth in FY25. Order inflows are likely to pick up in 2HFY25, led by supportive government budgets along with the expectation of acceleration of the private sector's capex. Margins are expected to modestly pick up with credit metrics improving further."
Despite the ongoing emphasis on capital expenditure by the central government and the anticipated resurgence in state and private spending, the pace of order execution within the EPC sector is likely to moderate in FY25, particularly in the first quarter due to elections.
The Centre's own capex is projected to grow at 17 per cent in FY25, following the trend of reduced spending in an election year.
Ind-Ra's analysis, excluding Larsen & Toubro Ltd, indicates that revenue growth in FY24 exceeded expectations, likely reaching 17 per cent-18 per cent compared to the estimated 14 per cent-16 per cent.
The civil construction, power (especially transmission & distribution), water, and metro sectors are expected to lead revenue growth in FY25, while growth in roads and railways may be sluggish.
Ind-Ra expects a modest margin expansion of 30-50 basis points year-on-year in FY25, with further recovery anticipated in credit metrics due to increased profitability and a stable working capital cycle.
New order inflows are anticipated to begin in late 2QFY25, following the conclusion of elections.
Despite the significant growth in tender awards in FY24, the upcoming elections may slow down tendering activities in 1QFY25, with momentum expected to pick up from June 2024 onwards.
The liquidity profile of EPC sector entities in FY25 is predicted to remain adequate, supported by improvements in cash flow from operations and proposed capital expenditure financing.
However, increased working capital requirements due to the withdrawal of exemptions provided under Atmanirbhar Bharat could pose challenges.
Banks are expected to maintain cautious lending practices to EPC players, with tightened sanctioning terms and increased collateral requirements due to sector volatility.
Nonetheless, Ind-Ra observed some improvement in liquidity profiles in 9MFY24, with rising recoveries and an increase in non-fund-based limits across the sector. (ANI)