High raw material prices to hit operating profitability of road EPC contractors: Crisil

New Delhi: Aggressive bidding and high raw material prices will hit drag down the operating profitability of road EPC contractors by 200-250 basis points to a decadal low this fiscal, rating agency Crisil said on Thursday.

However, the report said the credit profiles of road EPC (Engineering, Procurement and Construction) players will remain stable, supported by deleveraged balance sheets, prudent working capital management, and steady cash accrual, with strong awarding in the past two fiscals supporting revenue growth.

According to the rating agency, the National Highways Authority of India (NHAI) awarded 6,300 kilometres of road projects last fiscal, up 30 per cent on-year, of which 55 per cent was under the Hybrid Annuity Model (HAM).

Relaxation in bidder financial and technical capacity criteria led to peak HAM awarding of 3,500 km of road projects in fiscal 2022, up from 2,600 km in the previous fiscal, Crisil said.

To fast track construction by awarding to a larger pool of players, Crisil said package sizes were pruned 30 per cent in the past two financial years compared with order sizes during fiscals 2016-20.

As a result, mid-sized regional players won 40 per cent of HAM awards in fiscals 2021 and 2022, vis-à-vis  25 per cent during fiscals 2016-20, it said.