Emerging diversified construction companies’ revenues to grow 9-11% in FY25: Crisil

Emerging diversified construction companies1 will continue to see steady growth this fiscal, with revenues growing 9-11% compared with ~15% compounded annual growth rate in the five fiscals through 2025, Crisil ratings has said in its latest note. Healthy order books, driven by the timely execution of projects, supporting their credentials, have resulted in the continued scale-up of operations. However, limited ability to pass on the impact of sharp commodity price fluctuations and stronger competition will limit the operating margins to 10-11%.

While the working capital requirements of emerging construction companies will be higher on-year, it will be funded mainly by better cash flows and risk management practices, thus limiting fund-based working capital bank borrowings, the report by the ratings agency says. Timely execution of sizeable order book will also entail debt-funded capex for equipment purchases. Nevertheless, strong cash flows will ensure leverage levels are under control, thereby supporting the credit profiles of companies.

An analysis of ~200 emerging diversified construction companies, with estimated aggregate revenue of ~Rs 1 lakh crore last fiscal—about a tenth of India’s total infrastructure spend—indicates as much. Revenue visibility for the segment remains adequate, with the order book at around 2 times of fiscal 2025 revenues. Moreover, the order book is diversified, with ~40% in civil construction and urban infrastructure, ~34% in roads, ~12% in railways and ~10% in water-related projects.

In the roads segment, these companies have increased exposure to both engineering, procurement and construction (EPC) and hybrid annuity model (HAM) projects over the past two fiscals. Also, increased spending in railways, buildings and other government-funded infrastructure projects has helped further diversify order books, thereby partially insulating the segment from a slowdown in the roads segment as reflected in lower awarding of contracts in fiscals 2024 and 2025.

“The government’s thrust on infrastructure and better access to funding continue to support the growth of emerging corporates in the diversified construction industry. Diversity in order book should enable these players to log another year of steady revenue growth. However, profitability will remain flat on-year as competition within the segment intensifies and subcontracting charges remain in check,” says Rahul Guha, Senior Director, Crisil Ratings.

To be sure, aggressive bidding and increasing competition have already kept profitability rangebound for these companies over the past two fiscals. That said, improving risk management practices should support profitability and cash flows going ahead. While half of the current road order book is from central counterparties, civil construction and urban infrastructure projects are split equally among state and private counterparties, with a lower share of central projects. "This is driven by healthy state spending in buildings and other urban infrastructure development projects that are mostly pre-funded."