ICRA?s analysis reveals that the aggregate order book-to-sales ratio of its sample set of companies remained stable at 3.3x as of March 2024, indicating healthy revenue growth prospects. According to ICRA, the sector is projected to achieve a double-digit growth rate of 12-15% in FY2025. This stability is attributed to the consistent government spending on infrastructure, which has supported order books between 3.3x and 4.0x of operating income over the past five years.

"The aggregate order book-to-sales ratio of ICRA's sample set of companies remained stable at 3.3x as of March 2024 (3.4 times during March-2023), thereby indicating healthy revenue growth prospects over the medium term," said Chintan Lakhani, Vice President and Sector Head - Corporate Ratings, ICRA, "Certain construction entities have witnessed pressure on road sector related order inflows in FY2024, in the backdrop of muted order awarding from the Ministry of Road Transport and Highways. However, diversification into other segments like drinking water, metro segment, or railway station development has helped them sustain their order book. ICRA expects the revenue growth to remain healthy at 12-15% in FY2025".

While the outlook for the construction sector is positive, challenges such as intense competition, rising steel prices, and the elongation of the cash conversion cycle need to be monitored. The steel prices have started itching upwards and could be a spoilsport in the current fiscal. The intense competition in engineering, procurement & construction, and hybrid annuity model projects awarded by the NHAI / the Ministry of Road Transport and Railways continues to remain high; however, it is relatively moderate in segments like sewage and drinking water. Notwithstanding the heightened competition, the operating margins, supported by operating leverage benefits, are expected to largely remain stable at around 11% - 25bps in FY2025 end.

?ICRA expects the cash conversion cycle to elongate, with no further extensions in Atma Nirbhar Bharat scheme-related relaxations beyond Mar-2024. Consequently, the debt levels are expected to increase to support the enhanced working capital requirements. However, the corresponding operational leverage benefits are anticipated to keep the interest cover at ~4.0 times in FY2025e,? Lakhani added.

About ICRA Limited:

ICRA Limited was set up in 1991 by leading financial/investment institutions, commercial banks and financial services companies as an independent and professional investment Information and Credit Rating Agency. Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited Company, with its shares listed on the Bombay Stock Exchange and the National Stock Exchange. The international Credit Rating Agency Moody's Investors Service is ICRA's largest shareholder.