The debt burden of the key road construction companies is likely to double to ₹30,000 crore in the next two years from the current levels of ₹17,000 crore due to the combined effect of the “sizeable” equity commitments and rising working capital needs of the firms for under-construction projects, according to a CRISIL Ratings analysis.

The analysis, which studied 18 engineering, procurement and construction (EPC) players, which account for 70% of the sectoral revenue, points out that the revenue growth, too, will remain high in the two fiscals driven by strong awarding execution. “With the leverage level low at present, developers have headroom to borrow, which would keep their credit risk profiles stable. Asset monetisation will be crucial to rein in debt at comfortable levels,” said CRISIL Ratings.

“Total equity commitment towards under-construction public-private partnership (PPP) projects is estimated at over ₹21,000 crore by fiscal 2025. Further, the working capital requirements are expected to increase with expected strong revenue growth of 10-15 percent over the next two fiscals and rollback of liquidity support provisions under the Atmanirbhar Bharat package,” said Mohit Makhija, senior director, CRISIL Ratings Ltd. 

“Accruals will fund 45% of these incremental outflows, while the balance is expected to be funded through asset monetisation and debt. Consequently, the debt of the sample set is expected to inch up to ₹30,000 crore as of March 2025 from ₹17,000 crore as of March 2022.”

CRISIL pointed out that working capital requirements are expected to rise with strong revenue growth expected over the medium term, reflected in a healthy order book-to-revenue ratio of 3.0 times. “Further, the government had taken various steps under the Atmanirbhar package1 to mitigate the impact of Covid-19. The scheme is set to expire on March 31, 2023, unless extended. This may further add to the overall working capital requirements,” the CRISIL research said.

“Besides internal accruals, the road contractors will have to rely on other funding sources such as asset monetisation, equity raise or incremental debt to bridge the funding requirement. Current low leverage (as reflected in total outside liabilities (TOL) to tangible net worth (TNW), the ratio of 1 time as on March 31, 2022) will ensure headroom to borrow without any material impact on the credit risk profiles of players. Even after factoring in the increase in debt from current levels, the ratio is expected to remain comfortable below 1.2 times,” Says Anand Kulkarni, Director, CRISIL Ratings Ltd.

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